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How will Argentina's default affect global markets

On July 31, Argentina was recognized formally insolvent state. This happened after unsuccessful negotiations of the government with hedge funds which owned restructured national debt since 2001. On the eve of Standard & Poor's agency has assigned the rating of Selective default to this debt.


How will Argentina's default affect global markets


Many analysts have pointed out that the current default is a direct consequence of the previous, announced in 2001, but by nature the current one is fundamentally different from previous. Last time Argentina was unable to pay its debts after the failure of the IMF's new tranche. The amount of outstanding government debt totaled about $95 billion, and it was a world record.

Already in 2005, Argentina was able to restructure it at a substantial discount – up to 80%. While 7% of securities holders of Argentina refused to cooperate on these conditions, among them – NML Capital and Aurelius Management funds.

Now Argentina, theoretically, could pay $1.3 billion to the two funds. But the government considered such a move set a dangerous precedent, after which it can wait for bills from other creditors and the government does not agree to the terms of debt restructuring. At the moment, the fate of another $10 billion is solved in various legal instances.

However, global markets are not providing any significant reaction to the incident largely because financiers were ready for such developments, experts informed. This default was expected, and markets had discounted the information. It will likely mean the closure of foreign markets for Argentina, even though they have not been opened particularly. Argentina is in economic chaos, so the default may not occur additional pressure for peso.

The root of the problem is the populism of the Argentine authorities in this situation. They went the way of populist reaction and explain to their constituents that the situation is almost stable, the government pays for the debt, but around there are a lot of enemies around: the capitalists, Americans and so on.

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