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Argentina's bond default won't repeat 2001 crisis

Argentina's bond default won't repeat 2001 crisis

Posted by Juan Gavasa on August 02, 2014

Argentina's default this week on interest payments on one of its bonds was unavoidable and does not mean the country is set for a re-run of the 2001 crisis, according to a leading Latin American fund manager.

Charles Biderman, the Citywire AA-rated manager of the Comgest Growth Latin America fund in Switerland, told our sister website Citywire Global the situation was completely different to the problems Argentina faced in 2001, when all bank accounts were frozen and withdrawals from US dollar-denominated accounts were stopped.

‘Unfortunately, the odds were high that history repeats itself and Argentina defaults again. However, the game is completely different compared to 2001 given the relevance of the country in the region and the current state of its economy,’ said Biderman.

The aftermath of the 2001 crisis led the country into an even bigger debt, which has spawned the on-going disputes between hedge funds holding out for full repayment on bonds on which Argentina defaulted in 2002. Standard & Poor's placed Argentina's credit rating on 'selective default' this week after the country failed to pay $539 million of interest on one of its bonds.

Failure to reach a deal with the holdout investors means Argentina can't make payments to other investors who agreed to a debt restructuring a few years ago. Economy minister Axel Kicillof denounced the 'vulture funds' who had rejected a compromise offer from the government.

News of the deadlock hit the Argentine peso and saw the country's bonds fall heavily. It came as the Latin American markets came under pressure over fears of an early US interest rate rise triggered by strong employment data.

Politics will be pivotal

Even though the situation appears to be grim, Biderman still sees positive long-term opportunities for Argentina. His funds would not feel the negative outcomes of this default and the impacts would remain limited to the Argentina region, rather than entire Latin America.

‘We do not own any Argentinean local assets. Argentina has been downgraded by MSCI as a frontier market, so the country is no longer part of the MSCI Latin America or of the MSCI EM. The impact of such an event would be limited for the region’, Biderman said. The focus next year should really be the presidential election, which could lead to more sustainable economic policies, he said.

Biderman said Argentina's president Christina Kirchner has been talking tough, further putting off foreign investors. Even with a potential crisis on the cards, Biderman does not see a danger of ‘Cacerolazos’, a form of popular protest that happened on a big scale during the 2001 depression.

‘Despite the short-term pain for Argentina’s economy, namely in relation to the asset prices, inflation and access to international funding, we should not see ‘Cacerolazos’. The real driver for Argentina will be the next presidential elections.’

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