RaboResearch - Economic Research

Argentina defaults again

Economic Comment


This week, Argentina was unable to reach an agreement with the holdout creditors from the 2001 default. In effect, this means that the sovereign has now defaulted on its debt obligations for the second time this century. The  default will complicate an already difficult economic situation, with the economy already in recession, to a large extent due to years of economic mismanagement. As a more rapid devaluation and higher inflation are now likely, a balance of payments crisis may ensue while the economy may contract even more sharply this year . According local economists, a full default (considered unlikely at this point) would shave off a couple of percentage points of GDP. Contagion to other emerging markets is not expected, as Argentina is considered a special case by investors.


In 2001, Argentina defaulted on USD 95bn in sovereign debt, the largest default in history. In two separate rounds (2005 and 2010), the country tried to force a significant haircut on its creditors. 93% of the creditors accepted the terms, the remaining 7% became known as the holdouts. Argentina has bound itself to these agreements by stating – by law – that the holdouts cannot be offered better terms, at least not until 1 January 2015 (RUFO clause).

The holdouts now mainly consist out of hedge funds (called “vulture funds” by Argentina) that have bought Argentine debt at a significant discount after it was defaulted upon. The holdouts have successfully claimed full payment through pari passu treatment under New York law. Under the ruling, Argentina can only pay their dues to the creditors that have accepted the previous terms, if it is also paying the hedge funds. As Argentina has no wish to pay these vulture funds, the country has now entered into selective default, as it is still able to fulfill its obligations under other jurisdictions. The current default is thus directly related to the former.

What's next?

Talks are likely to continue between the Argentine government and the hedge funds as Argentina will want to end the default status. A full default scenario will also be disadvantageous to the holdouts. To protect itself from the RUFO clause, Argentina will have to refrain from accepting any agreement until 2015. Another option would be that Argentina accepts the terms of a court-enforced deal, thus being able to avert the dangers from the RUFO clause as a deal would not be able to be considered voluntary.

Effects on the Argentine economy

The  exact economic impact of a default is difficult to assess and depends on the duration of the default. We note that the Argentine economy seems better prepared for a sovereign default than in 2001, and the overall effects on the economy are likely muted, also as Argentina’s access to foreign finance was already very limited before this latest default. If a deal will not be forthcoming soon, further devaluation, higher inflation and a deeper recession are likely. What is more, as long as the government continues to finance its deficit through monetary financing, the vicious cycle of high inflation and devaluation is unlikely to be broken. Relieving the economy of the high inflation is probably only possible through an even more severe recession. While the economic policies of the Argentine government have become somewhat more sustainable in the past year, the current government, which will remain in power until late 2015, is unlikely to make the necessary adjustments. Argentina’s overall economic outlook therefore remains uncertain and negative. 

Figure1: Economic growth
Figure1: Economic growth Source: EIU & M&S Consultores (from 2008 on)
Figure 2: Inflation
 Figure 2: InflationSource: M&S Consultores


Jeroen van IJzerloo
Rabobank KEO
Herwin Loman
Rabobank KEO
+31 30 21 62666

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