Word: default
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Scrambling to fill the leadership vacuum, Congress prepared to name provincial governor Adolfo Rodriguez Saa as acting President until an election is held on March 3. But Argentina's collapsing finances demand urgent attention. Default on the country's $132 billion debt seems inevitable--especially since last week's popular rage was fed by the government's preoccupation with servicing debt in the midst of an economic meltdown. Unemployment has skyrocketed to more than 19%. Add to that a split in the opposition Peronist party, and it's clear that an end to Argentina's woes will not come soon...
...demonstrate that nobody in Washington need lose a minute's sleep over the land of tango. Argentina is hardly a stranger to economic queer streets; its economy is only the size of Ohio's. Besides (so we are told), Wall Street has long since "discounted" the prospect of a default on Argentina's sovereign debt, so there's no need to worry. On the other hand, in 1997 the collapse of the Thai baht (Thailand's economy is about as big as Tennessee's) sparked a financial crisis throughout Asia that, without decisive policy interventions from Washington, would have threatened...
...collapsed. At least 27 people died in street violence as police fired on rioters protesting new austerity measures. Economy Minister Domingo Cavallo, who also resigned, was largely blamed for the inept handling of the financial crisis, which has left Argentina on the brink of the biggest debt default in history. Congress' Peronist majority chose Adolfo Rodr?guez Saá to serve as President until new elections in March...
This pattern makes sense. Investors look ahead to recovery, when the default rate will drop and make the lush yields on junk bonds more secure. That leads investors to bid up junk-bond prices, resulting in a capital gain. "We've already seen some junk bonds rally," says John Fenn, head of high-yield investments at J.P. Morgan Fleming Asset Management. Next year, he believes, junk bonds will deliver on their eye-popping 12% yields and produce a capital-gain kicker worth an additional 5% to 10%--for a total return of about...
Junk bonds didn't get their name for no reason. If the recession worsens, default rates will continue to rise and returns will suffer. A period of widespread price deflation in goods and services, which some have argued is a risk, would be especially tough on companies struggling with hefty interest payments. Barring such developments, though, the bad news is already priced into the market...