What does the default in Argentina mean for my portfolio?

You might have spotted in the news this week that Argentina has defaulted on its sovereign debt, for the second time in only 13 years.

But just what does this mean for your investment portfolio?

Probably very little.

Argentina defaulted on debt repayments after talks with a group of bond investors in New York ended without reaching an agreement on a deal.

These ‘vulture fund’ bond holders were demanding a payment of $1.3bn (£766m), representing their entire holding. They bought this debt cheaply following Argentina’s economic crisis. 

The ‘hold out’ investors rejected an offer from the Argentine government, resulting in the Republic of Argentina being in a technical default.

We received a useful briefing note this morning from Steve Ellis, Portfolio Manager of the Fidelity Emerging Debt Fund, who believes this default will result in fairly limited contagion to other sovereign bond markets.

This is because the default in Argentina is based on a highly technical legal case and is a selective default.

Ellis commented: “Argentina was isolated from international capital markets for years so we don’t expect the default to distort any global capital flows.

“However, there will be remaining risks around a longer term default which would have negative impacts on the Argentine economy.

“At this stage, the market will likely price in a delay of payments should the government continue to deposit coupon payments until they can reach a deal with the holdouts in 2015, after the RUFO (Rights Upon Future Offers) clause expires.”

Investors will naturally be wary of any news about default in Argentina, after the events of 2001/02, when savings accounts were frozen in order to prevent a run on the banks and violent street protests led to dozens of deaths.

Despite ratings agency Standard & Poor’s downgrading the sovereign debt rating for Argentina to ‘default’ yesterday, the price of bonds has not reacted and Argentina has pledged to do what is necessary to deal with an ‘unfair situation’.

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