Provinces, companies seen taking hardest hit if Argentina defaults again

Argentina's provinces and companies that depend on external financing stand to suffer the most if the federal government defaults again next year, according to a report from Capital Economics. Fears of a new debt default by Argentina resurfaced last month as a US judge issued an order forcing the country to put into an escrow account by mid-December the US$1.33bn it owes to holdouts who rejected the restructuring deals that followed its 2001 default on nearly US$100bn. Shortly after, an appeals court ruling helped avert the issue of paying the holdouts until an appeals hearing set for February 27 next year - while ensuring that the restructured bondholders will get their next US$3bn installment, scheduled for December 15. Capital Economics said that it does not foresee a meltdown-style scenario like the one during the 2001-02 crisis since at the federal level Argentina has already been shut out from international markets for a decade. The government also has its current account in balance and internal controls have reduced the potential of massive capital flight, the London-based research firm noted. PROVINCES, CORPORATES COULD BE HIT HARD However, unlike the federal government, several of Argentina's provinces and companies do depend on overseas financing to a certain extent, and they could be hard hit by a default-driven spike in borrowing costs, said Capital Economics. "Indeed, given the parlous state of state of the public finances in many Argentine states, we wouldn't be surprised to see signs of distress emerge at the regional level in 2013." Capital Economics also noted that Argentina has become increasingly dependent on international grain prices - especially for its large soybean exports, and there is a "high chance of a fresh currency crisis" if those prices head south in the coming years.