Default then deal? Argentina hits payment deadline with distance left in talks

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(C) Reuters. FILE PHOTO: Argentine one hundred peso bills are displayed in this picture illustration

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By Cassandra Garrison, Adam Jourdan and Hugh Bronstein

BUENOS AIRES (Reuters) – Argentina was set to miss $500 million in already delayed bond interest payments on Friday, which would push the country into a ninth sovereign default amid ongoing restructuring talks with creditors.

The Argentine ambassador to the United States wrote in a letter obtained by Reuters that the country would miss the Friday bond payments given the “prospect of reaching an agreement with its creditors on new terms for their bonds.

“Argentina will postpone this payment until an agreement is reached with creditors and new terms are agreed upon on the interests to be paid on said bonds,” Ambassador Jorge Arguello wrote.

Argentina’s Economy Ministry said in a statement attributed to Economy Minister Martin Guzman that the interest payment was part of wider restructuring discussion “and we expect it to be addressed in the broader agreement that we are pursuing.”

Reuters could not immediately reach officials at the Argentine embassy in the United States for comment.

The likely default on three bonds occurs in the context of negotiations to revamp around $65 billion in foreign debt with a new deadline for a deal delayed on Thursday to June 2 amid signs the two sides may be warily edging closer to an accord.

Argentina and its creditors, which have traded proposals over the last month, have indicated they are eager to avoid a messy default that could spark years of litigation and lock the major grains-producing country out of global capital markets.

Guzman told Reuters late on Thursday the government planned to amend its offer to creditors and that talks were on a positive course, though there remained an “important distance” to reach a deal.

“These are critical times. What’s achieved now will affect the lives of millions of people and will likely have spillover effects on an entire class of assets,” he said.

‘ACTIONS LOUDER THAN WORDS’

Creditors also have shown signs of flexibility and indicated they are unlikely to take immediate action against Argentina over any default, as long as talks are on the right course.

A major creditor group holding around $16.7 billion of Argentina’s international bonds said on Friday that while failure to pay would trigger defaults on various bonds, it recognized Argentina was seeking a comprehensive deal.

The Ad Hoc Bondholder Group, including names like Ashmore, BlackRock (NYSE:BLK) and AllianceBernstein (NYSE:AB), cautioned that it wanted more engagement from Argentina, which it said was still lacking.

“The Group welcomes Argentina’s expression of an intent to work with creditors, but actions speak louder than words,” it said in a statement. “Over the last month, Argentina has had virtually no substantive engagement with its creditors.”

The Argentina Creditor Committee, another of the main groups, said on Friday it objected to Argentina’s decision to default on its international bonds, though it remained committed to seeking a successful restructuring deal.

“This latest default, if not promptly resolved, will prevent access to the international capital markets needed for the recovery of the Argentine economy and therefore will be detrimental to the Argentine people.”

The Economist Intelligence Unit’s regional director for Latin America and the Caribbean, Fiona Mackie, said in a note that a default would make reaching a deal even more pivotal for Argentina’s economy, already stuck in recession for two years.

“Without it, Argentina faces a troubling outlook not just this year, but for several years to come,” she wrote, adding that fears of losing access to credit markets would spur the government to strike a deal.

“The alternative is grim, and includes the growing risk of a hyperinflationary spiral all while economic activity remains subdued by financing constraints,” she said.