Argentina’s Stumble to Default Caps Brutal Four-Year Decline

Argentina is on the verge of officially being declared in default just four years after a wave of optimism lured billions of dollars in investment.

The country’s ambassador to the U.S. said it wouldn’t make $500 million of overdue payments whose grace period expired today until it can reach a restructuring deal with creditors, likely marking Argentina’s ninth default on international debt in its 200-year history. Government officials had already said they didn’t have the money to pay and have been in talks with investors holding $65 billion of overseas obligations.

Argentina has suffered a severe fall from grace among international investors, a disappointment after President Mauricio Macri came to power promising sweeping reforms to normalize an economy with a history of boom and bust cycles overseen by leftist governments. His efforts lured pledges for billions of dollars of direct investment to the country while supporting a torrent of bond sales, including $2.6 billion of securities that didn’t mature for 100 years.

But Macri wasn’t able to accomplish what he promised, hampered by a combative congress and an inability to clamp down on inflation. The leftist Alberto Fernandez took over as president in December and began steps to restructure, eventually pushing for $40 billion of debt relief.

“The more things change in Argentina, the more they stay the same,” said Jared Lou, a money manager at William Blair Investment. “The idea that large external debt is a solution to fiscal problems in Argentina historically hasn’t worked out well for anyone.”

Argentina is demanding a three-year moratorium on payments, sharp cuts to interest rates and a reduction in the principal owed. After two months of negotiations and a deadline extension to May 22, the government and its biggest creditors couldn’t reach a deal. People familiar with the matter said there was a gap of about 20 cents on the dollar between what the government was offering and what creditors want.

“Argentina will postpone this payment until an agreement is reached with creditors and new terms are agreed upon on the interest to be paid on said bonds,” Jorge Arguello, the ambassador, wrote in a newsletter sent by the embassy.

Bonds were little changed Friday, with most securities between 30 and 40 cents on the dollar, as investors had largely anticipated that Argentina wouldn’t make the overdue interest payments. The Emerging Market Traders Association recommended that the country’s foreign law securities “trade flat” starting May 25 until further notice. The bonds had rallied from record lows in recent weeks on optimism creditors and the government could reach a deal.

Nothing may change immediately after the default. While bondholders have the option now of going to court to sue for full repayment, they’re likely to keep seeking a settlement as long as the sides don’t reach an impasse. Lawsuits are expensive, and Argentina has a track record of fighting to the bitter end.

But the missed payment does trigger cross-default clauses in its other bonds, and Argentina now has a two-month window to “cure” the situation before holders of those bonds will also get the chance to sue.

There’s some optimism an accord can be reached in coming days and weeks. Investors are resigned to a certain amount of losses, and the government has tried to keep things friendly by avoiding rhetoric that demonized creditors, a hallmark of the country’s default battle with hedge funds earlier this century.

Argentina said this week it would extend the deadline for creditors to consider its debt restructuring offer until June 2 as both sides need more time reach a deal. The government received two formal counteroffers from creditors last week.

One of Argentina’s three major creditor groups said Friday it objected to the government’s decision to default in a statement, calling it “detrimental to the Argentine people.” Still, the bondholders added they would continue to participate in talks.

“Given all these signals that all these things seem to be progressing, I don’t think anyone will litigate immediately,” said Alberto Ramos, the head of Latin American economics at Goldman Sachs Research. “There will be an understanding with bondholders and life goes on.”

— With assistance by Sydney Maki

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