Argentina has now defaulted, again. It’s an unusual case, but a good reminder of the kinds of political risk you face when you invest in a country. To paraphrase Walter Wriston’s famous comment, “countries don’t go bust, they simply decide not to pay their debts.”
Argentina issued bonds in New York in the distant past, and then defaulted. They came to an agreement with most of the bondholders to accept a massive haircut, exchanging their bonds for new ones worth roughly 30% of the originals. The investors who accepted this deal are referred to as the “exchange bondholders.” But some bondholders refused to settle. The current owners of those bonds (the “holdouts”) are going after the Republic of Argentina and its assets in courts around the world. Their most effective ploy has been to go after the coupon payments made to the exchange bondholders through a bank in New York, on the grounds that the bonds say they will be treated equally with other creditors.
Yesterday, Argentina faced a choice of (i) coming to agreement with the holdouts or (ii) missing an interest payment on the exchange bondholders. By choosing (ii), it defaulted on the bonds it issued to replace those it defaulted on in 2002 [correction, 2001]. Presumably negotiations are ongoing with all three parties: the holdouts, the exchange bondholders, and the Republic of Argentina.