Argentinean capital Buenos Aires at night. Photo: Luis Argerich/Wikimedia
By Caribbean News Now contributor
NEW YORK, USA -- Ratings agency Standard & Poor’s (S&P) declared Argentina in selective default on Wednesday afternoon after it failed to reach an agreement with American holdout creditors in a US lawsuit that could have negative implications for Grenada, which is currently in a similar debt lawsuit in New York with a Taiwanese bank.
A selective default occurs when a borrower fails to pay one or more of its obligations but continues to meet other payment obligations – a situation Grenada found itself in last year.
Buenos Aires has sufficient funds to pay the holders of restructured bonds after its default in 2001, but US District Judge Thomas Griesa ruled that the country cannot pay the restructured bond holders unless it also pays holdout predatory hedge funds in full – something Argentina has so far refused to do.
As a result, the country is now defaulted for the second time in 13 years.
Some debt market experts say that the legal battle may already have shifted the balance of power toward creditors in the debt markets that countries regularly tap to fund their deficits. Countries in crisis may now find it harder to gain relief from creditors after defaulting on their debt, they assert.
The International Monetary Fund noted that the court's ruling – and the US Supreme Court’s refusal In June to hear an appeal on the case – could make it more difficult for countries to restructure their debts by making it more attractive for creditors to hold out.
“One of the implications of this Argentina episode is that there is much more uncertainty as to how we’ll be able to restructure debt for other countries in the future,” Olivier Blanchard, the director of the IMF’s research department, told a news conference in Mexico City, according to an IMF transcript.
The case has ramifications for other countries to resolve restructured debt cases, said Eric LeCompte, the executive director of Jubilee USA Network, a religious financial-restructuring group in Washington that lobbies for poor nations.
"The impact of this case is global," LeCompte said, adding that it looks like Grenada, which is looking to resolve a year-old default on $193 million of bonds, may be the next victim.
On January 31, 2014, S&P maintained its selective default rating on Grenada and, in an update on March 6, said the ratings reflect the government's default in March 2013 on both foreign and local currency debt maturing in 2025.
The government of Grenada stopped servicing US$193 million in external debt and Eastern Caribbean dollar (XC$) 184 million in local currency debt. The defaulted debt was equivalent to 31% of general government debt in 2013. Net general government debt totaled 95% of GDP at the end of 2013.
At the time of its default, the government announced its intent to negotiate a comprehensive rescheduling of its large debt burden. A creditor committee, representing more than 75% of the 2025 bonds, formed in May 2013.
As part of the government's proposed comprehensive debt rescheduling this process, Grenada has worked out an agreement with the IMF, establishing a framework for future economic policies.
Official creditors hold 48% of the general government's debt (based on July 2013 figures). Multilateral financial institutions hold 25% of general government debt, including the Caribbean Development Bank (CDB) with 14% (three-quarters of which are concessional credits from the bank's soft loan window, International Development Association (IDA) of the World Bank Group with 6%, and the IMF with 3%. PetroCaribe loans from Venezuela form 11% of general government debt. The remaining bilateral creditors hold 12%, and among these, Paris Club creditors hold 1% of general government debt.
According to S&P, although Grenada has a stable political system, its political institutions and debt management capacity are weak, contributing to the likely prolonged debt rescheduling process. The government of the New National Party, which controls all 15 seats of the lower chamber of parliament, has a legislative mandate to negotiate debt rescheduling. However, Grenada suffers from limited bureaucratic capacity to implement reforms. Key to the success of any long-term recovery plan, and to the future rating on the sovereign's debt, is the ability to sustain economic growth, particularly private-sector growth.