A decade since it staged the biggest sovereign default in history, Argentina faces a stark choice between depositing $1.3 billion before December 15 to pay “holdout” creditors who rejected two debt restructurings, or jeopardizing payments to all its bondholders.
About 93 percent of bondholders agreed in 2005 and 2010 to swap defaulted debt from the 2002 default for new paper at a steep discount.
But U.S. District Judge Thomas Griesa last week ordered Argentina to pay the holdouts, led by Elliott Management Corp’s NML Capital Ltd and Aurelius Capital Management, who rejected the swaps and are fighting for full repayment in the courts.
The ruling was a huge setback for Argentina’s combative, left-leaning President Cristina Fernandez, who calls the holdout funds “vultures” and has vowed never to pay them.
It also dismayed investors who took part in the two debt swaps and fear the G20 country will now enter into “technical default” on about $24 billion in restructured debt.
Fernandez’s decision to vilify holdouts – who are loathed by most Argentines – makes payment a difficult prospect, and a local law prohibits offering a better deal than that given in the swaps. Doing so might expose Argentina to lawsuits from creditors who tendered their paper.
On the other hand, another default – albeit a technical default – would tarnish Fernandez’s record on managing the economy, deepen Argentina’s isolation from global financial markets and hit investment at a time of sluggish growth.
Some analysts fear the case’s implications could stretch far beyond Argentina and its creditors, hampering future debt restructurings and the operation of global payment systems.
The Argentine government is due to pay exchange bondholders at least $3.3 billion in principal and interest in December. But if Griesa’s demand for payment of the $1.3 billion into an escrow account for holdouts is upheld by an appeals court and Argentina still refuses to pay, U.S. courts could embargo payments to the creditors who accepted the debt restructurings.
Like Argentina, those creditors are preparing to appeal Griesa’s ruling, which reflected his growing frustration with feisty statements from Fernandez and other government officials. “These threats of defiance cannot go unheeded,” Griesa said in his order, which hit Argentine bond prices.
As part of the long legal battle, NML won a court order in early October to seize an Argentine naval vessel during a visit to Ghana, and the ship remains stranded. NML has more outstanding court judgments against Argentina that are not included in this case but it is willing to negotiate and would still consider a combination of cash and bonds to settle the dispute, a source familiar with its position said on condition of anonymity.
The hedge fund denies Argentine accusations that it wants to trigger a default to get a windfall on its holdings of credit default swaps (CDS), derivatives used to insure against default. (reuters)