South America Calling
Alastair Stewart South America Correspondent

Wednesday 06/18/14

Argentine Debt Default and Farmers

Soccer-mad Argentines have been avidly following the World Cup in neighboring Brazil, but a U.S. Supreme Court decision Monday grabbed their attention.

The court refused to overturn a U.S. district court ruling that the South American country has to pay all sovereign debt holders, raising the possibility of another default at the end of June that would be a hammer blow to the already unstable economy.

Argentine farmers are already storing soybeans as a hedge against instability amid runaway inflation and the possibility of devaluation, and farmers will likely initially go on lockdown if default occurs.

Farmers have grain stocks worth $19.1 billion, after selling $10.1 billion for export this year, according to the Argentina Cereals Exporters Center. Sales are well below average as the soybean and corn harvest comes to a close as farmers seek protection against a major devaluation of the peso.

The Argentine government is rushing to try to avoid the default, meeting Wednesday with hedge funds that are seeking billions of dollars in sovereign debt payments.

The issue dates back to 2002 when Argentina defaulted on its debt and devalued its currency in a basically successful bid to kick-start the economy.

It then restructured that debt in 2005 and 2010, offering to resume payments at a discount. But not every bondholder accepted. Holdout funds, led by billionaire Paul Singer and his hedge fund, Elliot Management, sued in the New York courts as a means of obtaining full payment.

U.S. courts can't force Argentina to pay, but much of global finance runs through New York, and the holdouts obtained a ruling that bars U.S.-based finance institutions from paying non-holdout bondholders until they agree to pay the holdouts in full.

Since President Cristina Fernandez has stated on numerous occasions that there is no way she will pay the defaults, on a matter of principle, default is a possibility.

Economy Minister Axel Kicillof on Tuesday announced a plan to swap the bonds for debt issued in Argentine jurisdiction, thus sidestepping the U.S. court ruling. But there are considerable issues with such a move, economists say.

Disorderly default would be bad for the Argentine grain industry, further restricting the availability of international finance at a time when operating credit has become scarce.

One possible positive from the situation is that it could hasten the devaluation that farmers are waiting for. But that would only be beneficial to agriculture, if solutions are also found to the crisis currently enveloping the Argentine economy.


Posted at 5:04PM CDT 06/18/14 by Alastair Stewart
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