Argentina is facing down its second default in 13 years and is mulling several legal options. What's the impact on global markets? WSJ's Nicole Hong discusses on Lunch Break with Tanya Rivero. Photo: Getty
Argentina's failure to pay its debts sent ripples through financial markets Friday as its bonds fell for a second day and an industry group ruled investors can collect on insurance that protects against a default.
The International Swaps and Derivatives Association ruled that sellers of the insurance, called credit-default swaps, must compensate buyers because the nation's failure to make an interest payment to bondholders by Wednesday qualified as a credit event that triggers the contracts. Up to $1.04 billion stands to change hands as a result of the ruling, according to the Depository Trust & Clearing Corp.
Argentina defaulted on some of its debt late Wednesday after expiration of a 30-day grace period on a $539 million interest payment. Earlier that day, talks with a court-appointed mediator ended without resolving a standoff between the country and a group of hedge funds seeking full payment on bonds that the country had defaulted on in 2001.
A quick resolution appears unlikely. In a hearing Friday, U.S. District Judge Thomas Griesa urged both sides to restart negotiations. However, a lawyer representing Argentina said the country had lost confidence in the mediator's ability to lead discussions. Neither side has announced a date for talks to resume. A spokesman for Daniel Pollack, the mediator, didn't respond to requests for comment.
The immediate impact on financial markets was largely limited to Argentina, though some traders in Europe and the U.S. said the default added to anxieties over other trouble spots, including financial problems at Banco Espírito Santo BES.LB -40.30% in Portugal. Citigroup C -1.66% also said Friday that it could lose up to $80 million if U.S. banking regulators at the Interagency Country Exposure Review Committee downgrade Argentina, potentially reducing revenue and raising funding costs.
Dollar-denominated bonds due in 2033 were trading around 86 cents on the dollar Friday, down from about 90 cents on Thursday and 96 cents before the default, according to traders. Trading was thin, the traders said. Argentine stocks rebounded, with the Merval Index ending up 1.7%.
Still, the losses for the bonds were mild, indicating many in the bond market expect Argentina to eventually resume payments. For investors, the main source of optimism remains the prospect of a bank-engineered deal to help Argentina pay off the debt it owes the holdout creditors and resume interest payments to other bondholders.
Judge Griesa has ruled that Argentina must pay the holdout hedge funds, including Elliott Management Corp.'s NML Capital Ltd. and Aurelius Capital Management LP, when it pays investors who accepted discounted bonds in restructurings in 2005 and 2010.
"I think everyone is thinking this is going to be a temporary default," said Kathryn Rooney Vera, a senior macroeconomic strategist at Bulltick Capital Markets. "Usually, when a sovereign defaults, you have a total collapse in prices."
Argentine bonds held steady after the ISDA decision, which affects buyers and sellers of credit default swaps, including banks, insurance companies and such institutional investors as hedge funds and pension funds.
'No to the debt payment—tax financial profit,' reads graffiti in Buenos Aires. Reuters

Argentina's Debt Standoff

ISDA said in a statement Friday that it would hold an auction to determine the size of the payout, though it didn't say when. Separately, some $682 million in contracts tied to a global emerging-market CDS index will need to be settled, according to J.P. Morgan Chase.JPM -2.06%
ISDA didn't immediately detail the reasoning backing up the panel's unanimous decision, but Argentina's bond documents say that the country can only be considered to have satisfied its obligations once bondholders get the money they are owed. While Argentina had deposited money with an intermediary, that money had not reached holders, thanks to a U.S. court ruling.
In the bond market, investors are more concerned with the status of negotiations with the holdouts. On Thursday, Economy Minister Axel Kicillof said the country "wouldn't oppose" a deal involving third parties.
However, prices could continue to drift lower the longer talks drag on, said Siobhan Morden, head of Latin America strategy at Jefferies LLC.
"Each day that time passes and there's no agreement, it shows that this is a long-term situation," Ms. Morden said. "If the market starts to believe there is no deal with the banks, we could hit south of [70 cents]" on the bonds.
—Dan Strumpf and Saabira Chaudhuri contributed to this article.
Write to Katy Burne at katy.burne@wsj.com and Leslie Josephs atleslie.josephs@wsj.com