Argentina debt: IMF mulls costs of default

Argentina debt: IMF mulls costs of default

Thursday, July 24, 2014 11:51 pm

WASHINGTON (AFP) – The IMF’s chief economist warned Thursday that a default by Argentina in its battle with holders of its defaulted debt may hurt its economy and the global financial system.

“If it goes into default and doesn’t pay the holdouts, there might be substantial costs, being basically unable to access markets for some time,” said Olivier Blanchard, head of the International Monetary Fund’s team of economists.

Blanchard, speaking at a news conference on the latest IMF growth forecasts for the global economy, also emphasized that “there’s a cost to the world in the sense that we need resolution systems which work well when countries are in trouble.”

Under a US court order, Argentina has until next Wednesday to either pay certain hedge funds demanding full payment on defaulted bonds or risk being declared in default.

Blanchard said the Argentina case means “there’s much more uncertainty as to how we’ll be able to restructure debt for other countries in the future.

Argentina's Finance Secretary Pablo Lopez in New York to see Daniel Pollack, the debt mediator

Argentina’s Finance Secretary Pablo Lopez in New York to see Daniel Pollack, the debt mediator

“So this really tells us that we need to work on improving resolution mechanisms.”

The IMF proposed an international debt restructuring mechanism in 2003 but the plan was abandoned under pressure from the United States, the institution’s largest stakeholder, and the major emerging-market economies.

Argentina continues to face the fallout of its 2001 debt default, which plunged the country into an economic crisis it is still battling to overcome.

It has persuaded 92 percent of its creditors to accept write-offs of up to 70 percent, but is now facing a Catch-22: under the US judge’s ruling, it cannot pay its other creditors without also paying the hedge funds; and under the restructuring deal, it is supposed to pay all its creditors the same.

If Argentina pays the so-called “holdout” hedge funds — which it calls “vulture” funds — 100 percent of the $1.3 billion it owes them, it could be forced to pay all remaining creditors in full, as well.

The hedge funds, led by Aurelius Capital and NML Capital, bought up Argentine debt when it was already in default, then sued the country to stop it from carrying out its restructuring plan, with an initial payment of $539 million scheduled for last month.

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