What You Need to Know about Argentina's Debt Default

Buried among the top-tier economic headlines this week, such as the FOMC statement and the upcoming NFP release, is news of Argentina’s debt default. Although its government officials worked on negotiations until the very last minute, the South American nation ultimately had no choice but to officially announce that it would default on its international debt.

This isn’t the first time that Argentina defaulted on its debt, as it already failed to make $81 billion in bond payments back in 2001. At that time, the Argentine peso underwent a sharp devaluation, the country’s banking system failed, and the economy suffered prolonged unemployment and overall contraction.

In a bizarre twist though, this previous default is to blame for the latest one, as some creditors tried to seek full payment plus interest on the defaulted debt by taking the case to the U.S. Supreme Court.Businessman with the money suitcase

U.S. hedge funds Elliott Management and Aurelius Capital Management won a court order that would prevent Argentina from paying its current bondholders unless it is able to come up with the $1.5 billion in full payment plus interest to the hedge funds. With that, Argentina failed to meet the deadline to pay $539 in interest on its current debt due Wednesday this week.

It’s no surprise that Argentina’s government officials are blaming the U.S. for forcing the country into default. “This is the fault of the United States for not acting properly,” remarked Argentina’s Cabinet Chief Jorge Capitanich.

Moving forward, Argentina is not expected to suffer the same economic meltdown as it did when its first debt default took place 13 years ago. After all, the economy is on a much stronger footing this time and the banking system has adopted several measures to prevent another crash. However, the country still faces several concerns such as falling foreign investment and surging inflation, both of which could worsen if this debt situation is not resolved.

Market watchers are still hopeful that a resolution can still be made in the next few weeks, as Argentina’s government officials plan to take the case to the International Court of Justice at the Hague or the United Nations. For now, less than 25% of bondholders have demanded immediate payment, indicating that most creditors don’t see the default as a sign to panic just yet.

Although the news triggered a sharp selloff among several equity indices, it didn’t appear to cause a ruckus in the forex market then. Better keep your eyes and ears peeled for any updates as a prolonged default could eventually weigh on risk sentiment and spark fears of contagion once again.