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Saturday, August 24, 2013

The Stage Is Set For Another Argentina Default

August 23, 2013 6:39 pm

Argentina loses appeal of ruling forcing it to pay bondholders

Argentina on Friday lost an appeal of a US court ruling that would force it to pay $1.33bn to bondholders that rejected debt restructurings after its milestone 2001 default on nearly $100bn.
The decision represents an important victory for what Argentina disparagingly calls“vulture funds”. It also revives market fears that the South American country could be moving inexorably towards its second default in just over a decade. The dispute also has important implications for future sovereign debt restructurings.

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The 2nd US Circuit Court of Appeals in New York said enforcement of the injunctions would be delayed pending resolution of an appeal to the US Supreme Court, which last year ordered Argentina to pay the so-called “holdout” bondholders. Earlier this year, Argentina asked the Supreme Court to review the caseas it continues its dispute with the creditors led by Elliott, a US fund, who bought debt cheaply after the 2001 default and have been suing to collect in full.
“This will take time to resolve, and the politics could change before it is. The final chapter of this saga hasn’t been written yet,” said a lawyer with knowledge of the case.
Important midterm legislative elections will be held in Argentina on October 27, after President Cristina Fernández de Kirchner’s party suffered a major defeat in primary elections earlier this month. Ms Fernandez is now unlikely to secure the two-thirds majority needed to reform the constitution and enable her to stand for re-election when her term expires in 2015.
Observers believe that the Supreme Court is unlikely to look at the case until late September, and since it will have an impact on sovereign relations, it is possible that the court may ask the Solicitor-General for its opinion. The lawyer said that there would be “a ferocious lobbying battle” in Washington over what the Solicitor-General might say.
The price of Argentina’s bond maturing in 2033, which is affected by the ruling, fell from 66.12 cents on the US dollar before the ruling to 62.5 cents by midday in New York. The bond is very illiquid, but this equates to a yield of 14.49 per cent.
“The court did what was politically correct: uphold New York Law by ruling against Argentina but granting a stay that had not been asked pending appeal at the Supreme Court. Thus, whatever impact this may have on the market, it will be on the shoulders of the Supreme Court,” said Marcelo Etchebarne, an Argentine lawyer who has been following the case closely.
The development follows the cancellation last month of plans by the International Monetary Fund to support Argentina’s push for a US Supreme Court review of the case, after the US made clear that it would not support the move.
The IMF’s planned intervention was driven by concerns about the implications for future sovereign restructurings, although some experts argue that Argentina’s case is so unusual that there would be no knock-on effects.
Argentina’s first bond restructuring took place in 2005. In that, and a second debt swap in 2010, Argentina restructured some 93 per cent of its defaulted debt with a steep writedown.
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  1. ReportGaspar-Victor Espada | August 24 2:28pm | Permalink
    If this is the law of NY, then it is a weird law, as it equates bonds issued in exchange of cash, for which pari passu makes sense, and bonds issued in exchange of defaulted bonds, for an original amount of cash well above the nominal value of the bonds. A logical pari passu interpretation would be to look at the original cash proceeds of the different bonds, taking into account the conversion ratios from defaulted bonds to newly issued bonds.
  2. ReportJonaz | August 24 5:40am | Permalink
    Better let Argentina default before the october 27 elections. That way Cristina will be stripped for absolutely all her domestic credibility and will have to endure 2 painful years as a lame duck before hopefully she'll end up in prision.
  3. Reportfiatsceptic | August 23 7:09pm | Permalink
    A piece like this simply can’t cover all sides of this issue cluster. Very good selection of info here, with a couple of new angles. I’ll mention one major quibble: “forcing it to pay” in the heading and lede is inaccurate; rather, the need to choose between paying holdouts and defaulting on restructured bonds now lies dead ahead.

    More FT coverage by JCotterill: http://ftalphavill...passu-upset-redux/