Argentina’s sovereign debt crisis and possible default will have “minimal immediate impact” on global bond markets, but it could “shape how decisions are made in the longer term,” says the international investment strategist at one of the world’s largest independent financial advisory organizations.

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Argentina trying to avoid second default in 13 years

The observations from deVere Group’s Tom Elliott follow Tuesday’s unveiling of a controversial plan by the Argentine government aimed at avoiding Argentina’s second default in 13 years.  Under the plan, the country would swap its existing bonds governed by U.S. law for those that fall under its own jurisdiction, with the result that they would no longer be subject to the U.S. legal system.   The move comes after a string of adverse U.S. court rulings.

Mr Elliott comments: “The pressure is mounting on Argentina but I believe that there will be minimal immediate impact on the global bond markets. Argentina has been on ‘the naughty step’ for a long time, meaning very few international investors hold Argentinean debt.

“The flirting with another possible default is a case of ‘history repeating’ in many respects and, I suspect, it will be largely considered in the wider markets as a local issue.  For these reasons, I’m fairly sanguine that other markets will not be adversely affected by the actions of Buenos Aires.”

Fallout of Argentina’s debt crisis likely to shape investment decisions

He continues: “However, the fallout of Argentina’s debt crisis is likely to shape how investment decisions are made in the longer term.

“After the U.S. Supreme Court refused on Monday to overturn previous rulings which ordered Argentina to pay billions of dollars to some of its long-term creditors, investors will increasingly be noting, and pricing-in accordingly, the legal jurisdiction of debt. They will favor debt that offers recourse to investor-friendly courts.”

Taking a bird’s eye view of situation, Tom Elliott adds: “This is law vs capitalism, with ‘law’ winning.  The use of debt default and restructuring is a time-honoured way for debt-ridden countries to start again.

“Indeed, the liquidation of bad debt is a key point in any economic cycle that then allows an economy to grow again.  Creditors have to take it on the chin.  The U.S. court’s upholding of the ‘holdouts’ of Argentinean restructuring goes against this, making economic recovery harder to achieve.”

Argentina’s Possible Default Will Shape Future Investment Decisions by George Prior