Argentine default looms

Last-ditch negotiations between Argentina and a small group of US hedge funds did not solve a comparatively small financial dispute that threatens to put an entire country in default.

Ratings agency Standard & Poor's had already anticipated the deadlock and downgraded its rating for Argentina to "selective default" before Argentine Economy Minister Axel Kicillof announced that the negotiations did not bear fruit.

The negotiations were necessary to circumvent a New York court order stopping the Argentine government from servicing its other debts before reaching a deal with so-called "hold-out" investors still holding government bonds from its last default some 12 years ago.

When the talks broke down, the court-appointed mediator in New York said that an Argentine default would therefore follow.

"Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default," Daniel Pollack said in a statement. "The full consequences of default are not predictable, but they certainly are not positive."

Kicillof questions default status

Argentina's latest installment of debt repayments, totalling some $539 million (402 million euros), was due by midnight Thursday in New York (0400 UTC). However, Economy Minister Kicillof insisted the country would not go into default, saying that the money was waiting to be transferred, as soon as Judge Thomas Griesa's ruling blocking the transfer was lifted.

"That money is there. Obviously, if there were a default, the money would not be there," Kicillof said. "Argentina paid. It has money. It is going to continue to pay. The one who is responsible for this situation is Judge Griesa."

Kicillof also said that his delegation had offered the "hold-out" hedge funds an improved deal that was refused, without elaborating on the details. Argentina has argued that hedge funds NML Capital and Aurelius Capital Management were unreasonable in now demanding full repayment on government bonds they picked up for a knock-down price after Argentina's last default dating back to 2001. The government in Buenos Aires had taken to calling the funds "vulture funds," suggesting they were stripping the country's economic carcas.

The "RUFO" catch-22

With interest, the hedge funds hold old Argentine bonds worth the comparatively small sum of $1.3 billion, but Buenos Aires argues that paying the money would run the risk of other former creditors requesting billions more.

In deals brokered in 2005 and 2010, the vast majority of Argentine creditors accepted a write-down on the government bonds. However, a clause in the deal stipulated that those who accepted the cut-price rate of repayment would be entitled to improved terms should Argentina cut a better deal with other bondholders. President Cristina Fernandez had said this "RUFO" (rights upon future offers) clause meant her government could not comply with Judge Griesa's ruling and pay the funds in full, because a flood of claims from old creditors could then follow.

S&P was the only ratings agency on Wednesday night to declare Argentina in "selective default," cautiously noting as it did so that this status could be lifted immediately if a repayment agreement was found.

msh/pfd (AFP, dpa, Reuters)