Argentina in default, says ratings agency

The choreography was confusing yet potentially perfect. Argentina has now used up the one-month grace period granted by a US judge to reach a deal with hedge funds demanding $1.5 billion in payment on bonds they bought after Argentina’s 2001 default.

In fact, the government of Cristina Fernández de Kirchner never seemed very concerned about the possible consequences of a second default.

After a six-hour meeting on Wednesday with these “holdout” funds inside the New York office of Daniel Pollack, the court-appointed mediator, Argentina’s economy minister, Axel Kicillof, walked out and gave the thumbs-up.

But then ratings agency Standard & Poor’s immediately announced that Argentina was going into “selective default.”

At a press conference at the Argentina consulate in New York, Kicillof’s reaction was: “Who believes in the ratings agencies anyway?”

We will not sign any agreement that could compromise the future of Argentineans” Axel Kicillof, economy minister

Meanwhile, Pollack issued his own statement on Wednesday evening: “Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default.”

The mediator added that regular citizens of Argentina will be the ultimate victims of the lack of agreement, and that while the consequences of default are not entirely predictable, “they are certainly not positive.”

As soon as Kicillof’s press conference ended, however, the Argentinean financial daily Ámbito Financiero ran a story claiming that the country’s banks have already reached their own private deal with the “vulture funds,” as the government calls them. Under this deal, banks will pay the holdouts the full amount owed, making the country’s default a very short-term situation.

As it is an agreement between private parties, if true, it would mean that the Argentinean government would not be legally bound if other creditors show up in future demanding that their bonds be repaid in full as well.

This is an important point, as Argentina had the obligation to pay $539 million to other bondholders who had accepted significant reductions on amounts owed them during earlier debt restructuring processes, as opposed to the hedge funds who refused the reduction. This payment was due by June 30.

Daniel Pollack, mediator

Argentina wired the $539 million to the Bank of New York Mellon in an attempt to meet that payment, but Judge Thomas Griesa of the Federal District Court in Manhattan blocked it until the two holdout funds, NML Capital and Aurelius Management, received their own $1.5 billion.

But Argentina is keeping in mind something called the RUFO clause, which entitles restructured bondholders to demand better payment if Argentina voluntarily offers better conditions to other creditors – in this case, the hedge funds. The RUFO clause expires in 2015.

“I want to be very clear about what we are going to do: we will not sign any agreement that could compromise the future of Argentineans,” said Kicillof in his press conference. “We will take all necessary steps based on our contracts and international law so that this unprecedented situation does not get prolonged. We will seek a fair and legal solution for 100 percent of our creditors.”

On Thursday, Argentina’s daily La Nación reported that the deal with banks appeared to be stalled, but not necessarily cancelled.

Argentina’s carefully choreographed moves could turn out to be perfect – as long as the deal with the private banks works out, the selective default is truly short-term, and millions of citizens are not left in the lurch.