The dust has settled and the International Swaps and Derivatives Association (ISDA) has formally declared the government of Argentina is in default of its bond obligations.

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ISDA the only officially sanctioned organization to declare Argentina’sdefault

Although other organizations such as Standard and Poors were reported to have said Argentina was in default, ISDA is the only officially sanctioned organization to declare such a default that results in a payment of Credit Default Swaps (CDS) insurance. Such CDS insurance is a significant concern among knowledgeable market participants because the large banks and major financial institutions have issued sometimes seven to ten times more insurance than the net worth of the entire world economy.

According to ISDA spokesperson Steven Kennedy, the process works by a market participant requesting that the ISDA determinations committee to make a determination on default.  The determination committee consists of 10 sell side and 5 buy side representatives, and 12 out of 15 votes is required to make a decision.

Kennedy says the European Commission received a default consideration request several weeks ago but decided not to take up the question because the default the issue “was not ripe,” meaning the default was in a prospective stage and the organization only rules on actual events.

A report in Bloomberg says the Swiss bank UBS AG (NYSE:UBS) requested ISDA to conduct a formal default consideration. The report said a total of $1 billion in CDS insurance on the bonds could be in the offing for those who took a long volatility position on a default event.

Argentina’s default is sure to create a firestorm of controversy

The default is sure to create a firestorm of controversy over the specific issue of allowing investors to purchase debt on the secondary market after a payment plan has been agreed to and then trying to change the terms of the contract.

In most other financial jurisdictions (London, Paris, Frankfurt) legislation has been passed to make the behavior less profitable or courts oppose the behavior.  As previously reported in ValueWalk, the International Monetary Fund is expected to come forth with a white paper questioning the US courts in their ruling in the case.

Repercussions are sure to follow. Eric LeCompte, executive director of Jubliee USA, who has been involved in international talks on the matter, notes contracts being currently written avoid the issue entirely. “The popular move among newer debt contracts is to include a collective action clause (CAC) that forces the buyer of this bond, if resold on the secondary market, to settle when bonds are restructured with the majority of bond holders,” he said in an interview. “If we had a sovereign bankruptcy process, as Adam Smith advocated for, we would not have defaults and hold-outs would always be forced to sit at the table.”