The WSJ reports,"Argentina teetered on the brink of its second default in 13 years after talks with bondholders collapsed late Wednesday.
The setback, after glimmers of hope in recent days that a last-minute agreement could be reached, immediately sent Argentine stocks plunging in after-hours trading.
Still, there remained the possibility that talks could resume and a deal could eventually be reached.
At a press conference after talks with a court-appointed mediator ended Wednesday, Argentine Economy Minister Axel Kicillof, who had led the country's delegation to New York, said "we won't sign an agreement that would compromise Argentina's future." A spokeswoman later said negotiations would continue, without giving a timetable.
"Default is not a mere 'technical' condition, but rather a real and painful event that will hurt real people," said Daniel Pollack, the mediator, in a statement late Wednesday. He added, "The full consequences of default are not predictable, but they certainly are not positive."
The development is the latest turn in a years long battle between Argentina and a small group of hedge funds that have demanded full payment for bonds the country defaulted on in 2001. Argentina has refused to pay, despite an order by a U.S. District Court judge requiring it to pay the hedge funds. The issue came to a head Wednesday as Argentina missed a deadline to make a payment it owed to other bondholders, because the court order had prevented such a move.
Mr. Pollack, who had been trying to broker a deal between the two sides, said the country would "imminently" be in default. Standard & Poor's Ratings Services had earlier Wednesday declared Argentina in default on some of its bonds.
A default would pressure an economy already mired in recession, potentially leading to higher inflation and a weaker currency. The breakdown of negotiations also complicates President Cristina Kirchner's efforts to stabilize the economy ahead of elections next year.
Wednesday marked the end of a 30-day grace period for Argentina to make a $539 million interest payment to the holders of $29 billion of the country's restructured bonds that was due on June 30. A ruling by U.S. District Judge Thomas Griesa prevents Argentina from paying its restructured bondholders until the hedge funds, also known as the holdout creditors, are compensated. The holdout creditors are owed about $1.5 billion.
Mr. Kicillof hinted on Wednesday that a private-sector solution was a possibility, apparently referring to a proposal by a group of Argentine banks to offer a $250 million guarantee to the holdouts. The idea would be to give the hedge funds a financial incentive to ask Judge Griesa to suspend his ruling until the end of the year and allow payment of holders of the other bonds.
A default could shave as much as one percentage point off growth this year, said Martin Redrado, former governor of Argentina's central bank. Analysts said it would also fuel inflation, which some economists already estimate to be close to 40%, and deepen the country's recession. It could roil the country's financial markets, ending a period of relative calm in the peso's exchange rate and Argentine bond prices.
The immediate impact to debt markets outside Argentina is expected to be limited. Argentina has been relatively isolated from global financial markets since its default in 2001, and the country's legal battles with its creditors are unprecedented and have dragged on in U.S. courts for years. In 2001, the country's bonds made up 20% of J.P. Morgan Chase & Co.'s widely followed emerging-market debt index. Now, they are only 1.3% of the index, signaling little chance that another default would rattle the global economy.
However, the case has raised questions about the power of U.S. courts to adjudicate cases involving sovereign nations and their creditors.
The concerns stem from the controversial 2012 ruling made by Judge Griesa, who has presided over disputes between Argentina and its creditors for more than a decade. He ruled that Argentina isn't allowed to pay the bondholders who accepted the country's restructuring offers since its 2001 default, unless it also pays the holdouts, who have refused those offers.
Lawyers said the ruling marked the first time a U.S. judge had issued such an injunction on the so-called "pari passu" clause, which states that all bondholders must be treated equally.
The U.S. government has called Judge Griesa's ruling "impermissibly broad" and said it could undermine U.S. foreign relations. The International Monetary Fund warned that Judge Griesa's ruling could make it easier for a handful of creditors to disrupt other debt restructurings. "There is a cost to the world," IMF Chief Economist Olivier Blanchard said last week.
Analysts say Wednesday's developments will likely rock Argentine markets on Thursday, as the country's stocks and bonds had rallied this week on hopes that the two sides would reach a deal and avert default. Investors said they had been encouraged by marathon talks on Tuesday and Wednesday between Argentine officials and a court-appointed mediator, as well as a proposal by Argentine banks to pay the holdout creditors.
"The market reaction won't be positive," said Brian Joseph, head trader at local brokerage Puente. "There were big expectations of a deal. This isn't good news.""
