The US financial services company Standard & Poor's Ratings (S&P) declared Argentina in default the afternoon of July 30 after last-minute negotiations failed to produce an agreement between the country and a group of creditors who insisted that they be paid in full for the $1.5 billion in Argentine bonds they own. This was Argentina's second default since an economic collapse in December 2001 brought on by a decade of extreme neoliberal austerity and privatization measures. Opinions were divided on how the new default would affect the country, which was already entering a recession. "The ordinary Argentine citizen will be the real and ultimate victim," Daniel Pollack, the mediator appointed by a US federal court in New York, said in a statement. But Argentine Economy Minister Axel Kicillof was defiant. "We aren't going to sign any agreement that would jeopardize the future of Argentines," he said at a news conference after the negotiations ended on July 30.

The holdout creditors were led by US billionaire Paul Singer; two of his companies, Elliott Management and a subsidiary, NML Capital; and Aurelius Capital Management. NML and Aurelius are hedge funds of the type known as "vulture funds" for their practice of investing in weak debt that the debtors are likely to default on. These hedge funds bought up cheap Argentine bonds after the 2001 collapse. From 2005 to 2010 Argentina's government negotiated settlements with the other bondholders, who agreed to accept exchange bonds at a 70% discount for the debt they were holding; this is a fairly standard arrangement for defaults by countries, like bankruptcy proceedings for a company or an individual. But Singer and his associates held out for full payment and took the case to a US federal court. In 2012 New York District judge Thomas Griesa ruled in Singer's favor. He held that when Argentina paid the discounted exchange bonds, it also had to pay the holdouts in full. Argentina tried make a payment to the holders of the exchange bonds this June, placing $539 million in the Bank of New York Mellon, but the bank couldn't pay out the money: Judge Griesa had ruled that any financial firm that distributed payments to the bondholders would be in contempt of court. Argentina turned to the US Supreme Court, but the justices rejected the appeal.

Estanislao Malic, an economist at the Scalabrini Ortiz Center for Economic and Social Studies in Buenos Aires, told the New York Times that the "default is not a drastic change." "Argentina has been living in a default reality for over 10 years" since the earlier default, he explained. But there are implications for the global financial system, where exchange bonds have been a mechanism for resolving financial crises in the absence of any international bankruptcy procedures. "The danger here is all too easy to see," British journalist Larry Elliott wrote on July 31. "The legacy of the financial crisis of 2007-08 is that many countries find themselves saddled with big budget deficits. In the event of another financial crisis, something that seems all too likely, there would be a wave of sovereign debt defaults." The administration of US president Barack Obama appeared to agree on the seriousness of the threat: the US attorney general in New York, Preet Bharara, filed a brief in an appeals court in 2012 supporting Argentina against Judge Griesa.

Joseph Stiglitz, a former World Bank chief economist and now a Columbia University professor, called the US courts' decisions in the case "America throwing a bomb into the global economic system." "We don't know how big the explosion will be—and it's not just about Argentina," he said. (New York Times, July 30; McClatchy DC, July 31; BBC News, July 31; The Guardian, UK, July 31)

From Weekly News Update on the Americas, August 3.