A quick guide to Argentina's debt default

Argentina's President Cristina Fernandez de Kirchner (centre) speaks to supporters from a balcony inside the Casa Rosada Presidential Palace in Buenos Aires on July 31, 2014. Global stock markets ended a months-long winning streak this week, aft
Argentina's President Cristina Fernandez de Kirchner (centre) speaks to supporters from a balcony inside the Casa Rosada Presidential Palace in Buenos Aires on July 31, 2014. Global stock markets ended a months-long winning streak this week, after news that Argentina had defaulted on its debt once again. -- PHOTO: REUTERS

Global stock markets ended a months-long winning streak this week, after news that Argentina had defaulted on its debt once again.

In the United States, the Dow Jones Industrial Average blue-chip index dropped 1.88 per cent, wiping out its gains for the year in a single session. Most Asian bourses also closed lower on Friday.

While investors also had other concerns, such as an impending interest rate hike in the US, the Argentina default appeared to be the main trigger.

Not sure what’s happening in Argentina? We answer your burning questions.

What has Argentina done exactly?

The Latin American country has failed to make a payment to some investors of its government bonds, because the funds were blocked by a New York court order.

But although Argentina missed this payment, it has paid other creditors.

This prompted ratings agency Fitch to declare Argentina in “restricted default” and downgrade its sovereign rating for the country on Thursday.

The day before, Standard & Poor’s had labelled the country in “selective default” on Wednesday for the same reason. Argentina’s Economy Minister Axel Kicillof has insisted this episode is not a real default.

“Argentina paid, it has money, it will continue to pay the next installments because we want to do so and because the money is available,” he was quoted as saying. “This money is there. If it were a default, there would be no money."

Why did the New York court block the payment?

Argentina was actually prepared to make the payment on time. It had deposited the US$539 million (S$672.3 million) interest payment due to holders of its exchange bonds in a bank account when it was due at the end of June.

These exchange bonds are part of a restructuring deal struck with creditors after Argentina’s previous debt defaults.

But a judge in New York prevented the bank holding the funds from sending the payment on to the exchange bond holders, unless Argentina also paid two US hedge funds - Aurelius Capital Management and NML Capital - US$1.3 billion plus interest at the same time.

Unlike Argentina’s other creditors, the hedge funds had rejected the government’s proposals to restructure the debt owed to them.

Up until July 30, Argentine banks scrambled to put together a deal to buy out the hedge funds’ debt but talks fell through.

After the 30-day grace period for the exchange bond payment was up on July 30, Argentina was deemed to have defaulted on the payment.

“Previous debt defaults”? How many times has Argentina defaulted?

This will be the second time in 13 years, and eighth overall.

Argentina defaulted on US$100 billion of debt in 2002 - a record at the time - and has been isolated from global financial markets since.

Why can’t Argentina just pay the hedge funds?

Argentina says that as part of its agreement with the creditors who accepted its restructuring deal - and who hold about 93 per cent of its debt - the government cannot voluntarily give the hold-outs better terms on their debt without offering them to everyone else as well.

But some observers say a court-ordered repayment would not have been voluntary, and thus would not have violated the agreement.

What does this mean for Argentina?

Argentina is already in recession, and sliding into default again may cause investors to shun its currency and assets, hurting the Argentine economy which already has one of the world’s highest interest rates.

It is also a setback for the government, which will remain cut off from international credit markets, making it harder for it to raise funds.

Fortunately, Latin America’s third-biggest economy is in a better state now than it was during the last default in 2002, which precipitated an economic collapse.

Today the government is solvent, the banking sector is stable and the country has a trade surplus. Ordinary Argentinians are shrugging off the news of default and Argentine bond prices have actually risen as investors expect the government to reach a deal with its creditors.

But to maintain its economic health, the government needs to quickly resolve this impasse with the hedge funds.

Sources: Bloomberg, CNBC