BUENOS AIRES A decade after staging the biggest sovereign default in history, Argentina faces another possible debt crisis after a U.S. court ordered it to pay $1.3 billion to holders of defaulted bonds.
About 93 percent of Argentine bondholders agreed in 2005 and 2010 to swap defaulted debt from the 2002 default for new paper at a steep discount. So-called "holdout" creditors who rejected the swaps continue to battle for full repayment in international courts.
In a ruling late on Wednesday, U.S. District Judge Thomas Griesa told Argentina to deposit funds to pay the holdouts by December 15, lifting a previous order stalling payments to the bondholders and raising fears of a technical default on the restructured bonds if Argentina does not pay.
Griesa's ruling is a sharp blow for Argentina's combative president, Cristina Fernandez, who has refused to pay the holdouts such as Elliot Management Corp's NML Capital Ltd and Aurelius Capital Management.
Her government's strategy of isolating the holdouts has come under intense pressure since late last month when a U.S. appeals court upheld Griesa's decision that Argentina violated equal-treatment provisions for all creditors when it chose to pay exchange bondholders and not holdouts.
An eventual technical default - with U.S. courts seizing payments to holders of restructured bonds to compensate the holdouts - would further dent investor confidence in Latin America's third-biggest economy.
That could exacerbate a sharp economic slowdown, but the impact would be less serious than in 2002 due to the country's relative isolation from global financial markets.
Argentina has stayed out of international credit markets since the 2002 debacle, partly due to fears the holdouts could block a new issue. It relies instead on the central bank's foreign reserves to pay debt and borrows from state agencies.
Here are possible scenarios in the decade-long legal battle:
ARGENTINA CHALLENGES RULING IN APPEALS COURT
Griesa's latest decision must still pass to the 2nd Circuit Court of Appeals, so he ordered that Argentina should deposit the money in an escrow account by December 15 rather than pay the plaintiffs directly.
Argentina swiftly pledged to appeal. If Griesa's ruling holds -- which legal specialists think likely -- and Argentina still refuses to pay, U.S. courts could block debt payments to creditors who took part in the debt swaps out of consideration for those holdout investors who rejected Argentina's terms at the time.
That would trigger a technical default on approximately $24 billion worth of restructured debt. Argentine bond prices were battered on Friday by fears about $3 billion in debt payments due next month could be subject to court.
The decision by Griesa came in response to a request from the appeals court for him to detail how the holdout creditors should be paid and clarify the role of third parties.
Late last month, the appeals court backed a February ruling by Griesa that Argentina had discriminated against the holdouts and Argentina has already requested a rehearing before the tribunal's full panel of 13 judges.
However, legal analysts think the so-called en banc rehearing is unlikely to yield a different result and say the 2nd Circuit will probably refer Monday's planned appeal aimed at getting the payment stay reinstated back to Griesa.
ARGENTINA TURNS TO THE U.S. SUPREME COURT
Economy Minister Hernan Lorenzino said Argentina will exhaust all judicial channels and could take the holdouts case to the U.S. Supreme Court.
The government could contest the appeals court's equal treatment ruling by arguing it did not discriminate against the holdouts because they could have tendered their defaulted bonds in the two restructurings.
The U.S. Supreme Court gets about 10,000 appeals requests a year but only agrees to hear 75 or 80 cases.
Some legal experts think the country's highest court could choose to weigh in on this case, however, since it has wider implications for debt restructurings.
U.S. government lawyers backed Argentina's position on pari passu, or with equal treatment. They argued in April that Griesa's orders "could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises".
If the Supreme Court agreed to take on the case, it would have to consider whether to freeze current proceedings. That might end up buying Argentina more time.
The government lawyers said a similar ruling in a Belgian court that disrupted Peru's debt restructuring in 2000 "was viewed with almost universal consternation by international financial markets".
The 2nd Circuit downplayed any impact on other countries, noting that many newer bonds, including the ones issued by Argentina in its 2005 and 2010 debt swaps, have collective action clauses that force potential holdouts to accept a restructuring if the vast majority of other creditors do so.
Argentina will probably need to garner more support from Washington and U.S.-based banks to get the Supreme Court to intervene. If the court did agree to hear the case, a ruling might not be issued until 2014.
If Argentina won the appeal, its troubles could be over. But the uncertainty leading up to the ruling would likely weigh on Argentine bond prices and hurt liquidity regardless.
Alternatively, the Supreme Court could either refuse to hear the case, letting the appeals court ruling stand, or it could hear the case and affirm that ruling. This would force Argentina to comply with - or openly violate - the order to pay holdouts every time it services its restructured debt.
ARGENTINA IGNORES COURT RULINGS
If Argentina loses its court battle at any point, the country could flout Griesa's payment orders to deposit funds for the holdouts.
This is seen as a real possibility since Argentina has systematically fought every court decision in favor of the holdouts and has refused to pay them court-awarded damages.
Argentine officials, including the economy minister and the president herself, have said the country will not negotiate with the "vulture funds" and will never pay them.
They say their responsibility to restructured bondholders ends when payment funds are deposited in a Buenos Aires account of the country's payment agency, Bank of New York Mellon. Argentina will make that transfer at all costs to avoid an outright default and reduce the political cost.
The government argues that when those funds are transferred to New York, they are already the property of creditors and therefore cannot be embargoed by U.S. courts.
Griesa, however, said all third parties involved in the payment of the bonds are responsible for ensuring his orders are fulfilled.
ARGENTINA PAYS HOLDOUTS
Although it seems unlikely, Argentina could end up paying the holdouts, either by making separate, proportional payments to them to comply with the court order or by agreeing to some kind of settlement. This could potentially prompt lawsuits by the creditors who accepted the swaps, however.
To pay the holdouts, it would first have to suspend or scrap the so-called "lock law", which requires prior congressional authorization for any kind of settlement with creditors who rejected the restructuring. The law also bars the government from reopening the debt swaps without legislative approval.
The government might want to change that law regardless since the appeals court cited it as key evidence that Argentina discriminates against the holdouts.
So far, officials have rejected that option, however.
Besides, the terms of the restructured bonds prevent Argentina from making better offers to creditors before December 31, 2014.
Even if the lock law were overhauled, this would not put an end to Argentina's legal woes since the holdouts would almost certainly refuse to agree to the swap terms and continue to sue for full repayment on their defaulted bonds.
Lawyers advising the holdouts say Argentina may be approaching a point of no return like the one Peru faced in 2000, when it ended up settling with the holdouts for $58 million to move forward with its debt restructuring.
The price tag for Argentina would be much higher, though, with holdout creditors owning a total of roughly $11 billion in defaulted debt, according to private estimates. That is equivalent to about a quarter of Argentina's foreign reserves.