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Of Course Argentina Defaulted

Author: Shannon K. O'Neil, Nelson and David Rockefeller Senior Fellow for Latin America Studies and Director of the Civil Society, Markets, and Democracy Program
July 31, 2014


On July 30, Argentina defaulted on its outstanding debt. The technical default ends a long saga. It began in 2001 when the country failed to continue payments on nearly $100 billion worth of obligations, continued through its 2005 and 2010 restructurings of over 90 percent of these bonds, bled into ongoing lawsuits with "holdout creditors" including Elliott Management and Aurelius Capital Management, and culminated in the June 16 decision by the U.S. Supreme Court to not hear Argentina's appeal of a 2012 ruling by New York Judge Thomas P. Griesa. This left in place a decision that not only bolstered the holdouts' rights to repayment, but also blocked Argentina and its U.S.-based banks from disbursing the next $539 million round of interest due on the restructured debt. Negotiations over the last month ended fruitlessly, leading to Wednesday's selective default, as defined by Standard & Poor's.

Many are bewildered as to why Argentina wouldn't come to some agreement in the eleventh hour, given the seemingly manageable amounts of debt in play. But the truth is that Argentina acted sensibly, especially given the limited maneuvering room it had to work with.

For starters, the effects of default at home, at least in the short term, are minimal. Argentina hasn't had access to international capital markets for well over a decade. This has made foreign currency often hard to come by, has led to big disparities between the official exchange rate and the unofficial "blue" market rate, and has more generally limited productive investment throughout the economy. But banks, companies, and consumers are now accustomed to this reality. So while the default keeps Argentina from re-entering international credit markets, it doesn't change day-to-day life for most Argentines -- ATMs still work, stores are still open, and business continues as usual.

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