As Argentina moves closer to default, having negotiated through the night and planning on engaging in additional talks today, two other smaller nations are watching the case carefully and could follow Argentina’s lead once the dust settles.

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Argentina has just begun to meet in earnest

As the negotiations come close to the end point, and Argentina has just begun to meet in earnest, speculation is the “holdouts” will be offered one last take it or leave it offer just before the deadline approaches, as we have previously reported in ValueWalk. [In a late development, Reuters is reporting that Argentina may offer to purchase the debt of holdout investors.]

Whatever the outcome, this case will have significant reverberations on the world economic system and may signal the rise of a new global financial power, and outcome not necessarily positive for the US.

Eric LeCompte: Repercussions for the financial system

“There will be repercussions for the financial system in New York that we will see play out over the next several months and years,” said Eric LeCompte, Executive Director of Jubilee USA, who said moves are already underway to execute sovereign debt agreements in other jurisdictions.  At issue are investors who purchase government debt after a default and then work to re-negotiate previous agreements between the bond holders and the government.

LeCompte, who speaks to the Vatican on an issue recognized to have global ramifications, sees this as a turning point. He notes that the US government filed court documents in the case siding with Argentina, claiming a ruling against the country could weaken the US dollar.  And it is here where insiders are most concerned.

Argentina’s relation with China

As Argentina has flaunted a closer relationship with up to China in the middle of the negotiations and the BRICs countries are planning on launching a world bank, the primary US threat that Argentina will be “frozen out” of the world financial markets carries less and less credibility.  In fact, it points to a diminishing world influence that could portend a challenge to the world reserve currency of choice.

At issue in the Argentina dispute is the narrow practice of hedge funds purchasing the debt of struggling nations after default and then demanding payment in full.  The US stands alone in ruling that the practice is legal.  “German courts have continually ruled against this kind of predatory behavior, LeCompte notes, “and other countries have outlawed or made the practice less profitable.”

Argentina is expected to play hardball in negotiations

The small countries of Grenada and the Democratic Republic of Congo, both of whom find themselves in similar straits, will watch carefully as Argentina is expected to play hardball in negotiations.  If the country does default, it could be a historical marker when a new economic alternative takes prominence on the world stage.

“Expect to see more global leadership on the issue in coming months,” LeCompte said, logic Argentina had used in court documents to ask for a stay.

Sources indicate the International Monetary Fund is prepared to release a white paper outlining a global path forward for world sovereign debt default, one that will take a dim view of investors who purchase debt after default and then try to re-negotiate terms