Argentina's Economy Minister Axel Kicillof gives a thumbs up Wednesday as he leaves the office of mediator Daniel Pollack during a break from the country's debt talks in New York. / Stan Honda, AFP/Getty Images
A breakdown in talks between Argentina and U.S. creditors late Wednesday has sent the country tumbling into its second default in 13 years and shifted focus to what effect that default could have on global financial markets.
Investors had already been bracing for bad news. And any remaining hopes for a last-minute deal were crushed when Argentina and the hedge funds holding its debt, including billionaire Paul Singer's Elliott Management, couldn't strike a deal with a court-appointed mediator in talks in New York, Bloomberg News reported.
Argentine Economy Minister Axel Kicillof said the country wouldn't swallow the demands of investors led by U.S. hedge funds. The Argentine government has a confrontational stance toward the investors who have been hoping for a payout, with Kicillof calling them "vulture funds." He also said paying the $1.5 billion owed to U.S. hedge funds would force Argentina to make similar payments to other bondholders, Bloomberg News says.
The breakdown wasn't a complete surprise. Debt rating agency Standard & Poor's already pronounced the South American country to be in technical default earlier Wednesday after it missed a $539 million interest payment on $13 billion in restructured bonds, Bloomberg reported. Argentina has about $200 billion in foreign-currency debt, a figure that includes $30 billion in restructured bonds, Bloomberg said.
The drama could hurt holdings in the debt of other emerging market countries, says Alan Skrainka, strategist at Cornerstone Wealth Management. He says Argentina and Venezuela together hold roughly a third of all emerging markets debt.
But few expect the situation in Argentina to spill over and hurt global financial markets, considering how little long-term effect other regional crises have had. "Greece wasn't a reason to sell U.S. stocks, and Argentina isn't either," Skrainka says. Most of the significant financial institutions have long known that Argentina debt wasn't worth the risk. "Most responsible investors got out of Argentina (debt) a long time ago," he says.
The iShares J.P. Morgan USD Emerging Markets Bond Exchange-traded Fund, which has a 1% weighting in Argentine bonds, fell 0.04% Wednesday, but is up 9.3% this year, says BlackRock. Argentina's Merval stock index closed 7% higher Wednesday ahead of the news.
Global investors will take the Argentina issue in stride because the default isn't about the ability to pay the interest, but rather, the willingness to do so, says Jack Ablin of BMO Private Bank. Investors get more unnerved when a country is in serious financial straits. It's really just the "hedge fund holdouts," who have been betting Argentine would pay off, Ablin says. "This seems more of a legal battle than a financial crisis," he says.
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