By Sarah Marsh
BUENOS AIRES (Reuters) - Argentina's main government bond, stock market and peso currency dropped on Thursday after Latin America's No. 3 economy defaulted for the second time in 12 years following the failure of last-ditch talks with holdout creditors.
And another shoe could fall after Wednesday's default: the declaration of a damaging "credit event" for Argentina. The cost of insuring the South American country's debt surged on Thursday.
The default came after Argentina failed to strike a deal in time to meet a midnight U.S. EDT (0400 GMT) payment deadline set by a U.S. judge in New York.
Argentina has waged a long legal battle in the United States with U.S. hedge funds, which had rejected its debt restructuring following a 2002 default and which the South American country has characterized as "vultures."
Even a short default would raise local companies' borrowing costs, pile more pressure on the peso, drain dwindling foreign reserves and fuel one of the world's highest inflation rates.
Thursday's market moves reversed a strong rally from the previous day when investors had widely anticipated a last-minute deal. Argentina's dollar-denominated Par bond fell 7.6 percent to a bid price of 52.00 in early trading, then held its ground. The peso fell 2.3 percent to 12.55 per dollar on the black market in early afternoon trading after paring losses.
The Merval stock index .MERV fell 6.3 percent. Shares traded locally in Argentine energy company YPF YPF.BA were down 6.6 percent at 365.95 pesos per share. The default is likely to raise borrowing costs for YPF, which issued a $1 billion, 10-year global bond in April.
But there was no rout in the markets. Market participants said they still expected either the government or third parties to reach a deal eventually with the holdout investors.
As to whether Argentina had suffered a credit event, the International Swaps and Derivatives Association (ISDA) said it had received its first request regarding the issue, according to the ISDA website.
A determination that a credit event had occurred would trigger a series of insurance payments to creditors and would give most of Argentina's current bondholders the right to demand their money back immediately.
Swiss bank UBS asked the ISDA-facilitated Determinations Committee to consider whether a "failure to pay" credit event had occurred. The bank cited a missed deadline to deliver interest payments to creditors holding so-called exchange bonds: debt exchanged for bonds on which Argentina defaulted in 2002 with greatly reduced yields on the new paper.
If the request is accepted, the committee will vote on whether a payment on Argentine credit default swaps (CDS) contracts, or insurance on the debt, can be triggered.
The panel could make a decision as soon as Friday, market participants said, although the process of declaring a credit event could take longer. The deadline for action is Monday, according to analysts.
Credit Suisse earlier said CDS were "likely to be triggered."
Emiliano Surballe, fixed-income analyst at Bank Julius Baer said: "It is still not clear whether the credit default swap of the country will be triggered. The situation that generated the default was a lawsuit, not the failure of the country to transfer the proceeds to pay existing debt."
Prices on Argentine CDS surged on Thursday. An investor wanting to insure a $10 million trade for one year would need to spend $4.04 million as an upfront cost plus an additional $500,000, according to data provider Markit. At the start of July the upfront cost was $2.77 million.
BANKS
U.S. District Judge Thomas Griesa, whose ruling that Argentina must pay out in full to the holdout creditors resulted in Wednesday's deadline, scheduled a new hearing in New York for Friday at 11 a.m. EDT (1500 GMT). It was not immediately clear why.
In a parallel move, Argentine banks had scrambled on Tuesday and Wednesday to put together a proposal to buy out the non-performing debt held by hedge funds and avert the default. But that attempt at a deal also collapsed.
Some Argentine newspapers reported that JPMorgan Chase & Co JPM.N and other banks might be involved in a private-sector deal with the holdouts to help resolve the default. A JPMorgan spokesman said the U.S. investment bank had "no comment" on the reports.
One of the lead holdouts, hedge fund Aurelius Capital Management, said it had received no proposals on a private-sector debt purchase "worthy of serious consideration."
In Buenos Aires, Argentine Cabinet chief Jorge Capitanich urged holders of Argentina's exchange bonds to demand their money from U.S. Judge Griesa, who blocked a June 30 debt payment, triggering the path to default. Capitanich also lashed out at U.S.-court appointed mediator Daniel Pollack, calling him "incompetent".
Even so, some holders of Argentine debt were optimistic the government would seek a resolution.
"It's probably going to be more a soft-default scenario where prices will slide a bit. There is confidence in what the government is going to do," said Rune Hejarskov, senior portfolio manager at Jyske Invest, which holds Argentinian debt.
The default could get a lot messier and take longer to clear up if creditors force an "acceleration" for early payment on their bonds. Some investors saw this as unlikely.
"I don't think at the moment there is a clear answer to whether bondholders will accelerate a deal. It's probably not something most bondholders would like to see," said Olivier De Timmerman, fixed income fund manager at KBC Asset Management in Luxembourg.
Even a short default would raise local companies' borrowing costs, pile more pressure on the peso, drain dwindling foreign reserves and fuel one of the world's highest inflation rates.
Argentina had sought in vain a last-minute suspension of a ruling by Griesa in New York to pay holdouts $1.33 billion plus interest.
Cabinet chief Capitanich insisted Argentina was not in default as it had honored a June 30 coupon payment. Those funds are stuck in limbo with trustee agent Bank of New York Mellon BK.N after Griesa blocked their onward transfer.
"Argentina paid," Capitanich said. "As such, the bondholders should demand their money. (To say) that Argentina is in a technical default is an absurd hoax intended to destroy the whole restructuring process."
"VERY PARTICULAR DEFAULT"
Argentina's latest debt crisis is a far cry from the mayhem following 2001-2002 when the economy collapsed around a bankrupt government and millions of Argentines lost their jobs.
This time the government is solvent. How much pain the default inflicts on Argentina, which is already in recession, will depend on how swiftly the government can extricate itself from its obligations.
"This is a very particular default, there is no solvency problem, so everything depends on how quickly it is solved," said analyst Mauro Roca of Goldman Sachs.
Buenos Aires had argued that agreeing to the hedge funds' demands to pay them in full would break a clause barring it from offering better terms than those who accepted steep writedowns in the 2005 and 2010 swaps.
The clause expires on Dec. 31, after which the government would also be able reach a deal with the funds. Many investors and economists hope for some solution after then.
"Our base case is that a default would be cleared by January 2015," said Alberto Bernal, a partner at Miami-based Bulltick Capital Markets. He projected that a default would cause the economy to shrink 2 percent this year compared with a previous market consensus for a 1 percent contraction.
Argentina's default is not seen unleashing financial turmoil abroad because it has been isolated from global credit markets since its 2002 default on $100 billion of debt.
It has foreign currency restructured debt worth about $35 billion, including $8 billion under local law, while its foreign exchange reserves stand at $29 billion.
(Additional reporting by Richard Lough and Eliana Raszewski in Buenos Aires, Spriya Srivastava, Marc Jones and Andrew Winterbottom in London, and Gernot Heller in Berlin; Editing by Jeremy Gaunt)
