Argentinan default, Credit default swaps in the news

Though credit default swaps have been in existence for a long time, I just happened to catch the news recently that Argentina is at the brink of defaulting again since the year 2001. I believe June 30th,2014  was the date by which Argentina had to pay $530 million in settlements. However, coming towards the end of the grace period of a month after the deadline, the amount to be paid to bondholders surpassed $1.3 billion.  Back in 2001, when Argentina faced a similar situation, it offered the bond holders to exchanged the outstanding debt for cheaper debt, meaning the interest payments paid would be smaller( a process known as a “haircut” in the bond world). Some hedge funds, however, were not willing to oblige with these terms; after all as hedge funds they are in a very competitive industry and want to perform well for their investors.  The dissidence between the so called “holdouts” and Argentina has called alot of unrest within Argentina as even the thought of paying on the bonds for the holdouts might lead to holders with haircuts to demand their entire share of payments as well.

A natural question that rises is that: “Does Argentina just not have the funds to pay back the interest on its bonds?”. With $30 billion in reserves and holding the title of Latin America’s 3rd largest economy, it certainly does not seem like the case. So why does Argentina not just pay from its reserves? One explanation might be the fact that those funds are meant to be used in a state of emergency or for some other reason. Whatever the  case may be, CDS holders may see over a $1 billion being received as Argentina heads to “sovereign default” again.  Something interesting to look at would be figuring out who was holding these CDS’s. Did they merely catch  a fluke and cashed in or was there something at the fundamental view that seemed alarming and led to the purchase of the insurance

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