Could Argentina's Pending Debt Crisis Affect Metals Markets?

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argentina GDP growth and government bonds graphs

Source: Financial Times

You have to be careful, as a Brit, writing about Argentina.

Plenty stand ready to jump down your throat and shout “colonialist!” or something similar if you say one critical thing, but fortunately on this occasion the source of Argentina’s ire hails from New York – in the form of a judge, not the current protectorate of a bit of windswept South Atlantic rock.

With the markets swayed daily by news about the European debt crisis, another drama quietly unfolds in South America that could have something of an impact on investor sentiment and, therefore, metal prices.

According to the FT, an octogenarian New York judge named Judge Griesa has ordered Argentina to pay $1.3 billion to a group of bondholders caught by the record sovereign $100 billion default of 2001.

These bondholders, mostly hedge funds, did not agree to the haircut previously agreed with 93 percent of the other bondholders in 2005 and have held out for payment in full.

Argentina has categorically stated it will not pay one dollar to what they term as the vultures and yet if they do not comply with the judge’s ruling by Dec. 15 and try paying $3.4 billion to restructured creditors due at that time, they will be in contempt of court and will have assets seized.

If it doesn’t pay either group, which currently seems the most likely outcome, it will technically be in default and risks another sovereign default. Argentina also faces a rash of other litigation from exchange bondholders, and the ruling could also open the door to potential copycat suits from other holdouts. Economists estimate some $8 billion to $11 billion of Argentina’s debt remains in the hands of holdouts.

argentina GDP growth and government bonds graphs

Source: Financial Times

The economy is already in a rocky state. After good growth in the period following the 2011 default, the government of Cristina Fernández has recently presided over a rapidly deteriorating performance.

Inflation is running at 25 percent per year, and as the charts to the right show, GDP has nose-dived along with the value of government bonds. One of the holdout bondholders, NML, has rather embarrassingly seized an Argentinean Navy frigate, the Libertad, in Ghana, and is holding it in lieu of payment, a situation that adds to the government’s image of impotency.

To be fair to Argentina, without this court case the country had been managing its bond repayments relatively well in spite of the poor economic performance, but that will be of little comfort to the markets if Argentina is declared in default.

Fortunately for the metals markets, while Argentina is an exporter of a wide range of precious and base metals, it is not a critical supplier of any of them. But the country does need external financing and FDI to develop what many assess are the today's metal prices - MetalMiner IndXworld’s best resources of lithium-containing brine deposits — not an investment that is going to be so appealing in the event of Argentina being declared in default or facing a financial crisis.

In itself, an Argentinean default is not of high importance to the US economy, but the impact on market sentiment, particularly among investors supporting current metal prices, could be.

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