What Argentina's fight with holdout creditors is all about

BUENOS AIRES Fri Feb 22, 2013 4:33am EST

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BUENOS AIRES (Reuters) - For the last decade, Argentina and its holdout creditors have sparred in U.S. courts over the country's 2002 debt default. The creditors are suing to be repaid in full after spurning two debt swap offers accepted by about 93 percent of bondholders.

The battle only really heated up late last year, when two courts said Argentina was discriminating against the holdouts and must pay them whenever it services the restructured bonds - raising fears of a fresh default if Argentina refused to comply.

Argentina appealed and a hearing has been set for February 27.

The rulings gave hope to the holdouts, including U.S. hedge fund Elliott Management, who have won several billion dollars in court-awarded damages but collected very little since Argentina refuses to pay and U.S. sovereign immunity laws protect most foreign assets from seizure.

Argentine President Cristina Fernandez, a combative center-leftist, vows to never pay the holdouts but will honor the bonds issued to other investors in the 2005 and 2010 restructurings.

Her government says it will take the case as far as the U.S. Supreme Court, if necessary.

Uncertainty over how the case could play out sank Argentine debt prices in November and could roil markets again if investors believe it faces another default.

Here are some facts about the disputes in the complex case:

EQUAL TREATMENT

Last year, U.S. District Judge Thomas Griesa ruled that Argentina violated the "pari passu" bond provision requiring it to treat all creditors equally when it paid investors who accepted the debt swaps while refusing to pay the holdouts.

He said they should all be paid simultaneously. The ruling favored plaintiffs including Elliott affiliate NML Capital Ltd and the Aurelius Capital Management funds, who had sued over an estimated $1.33 billion in defaulted bonds.

Argentina appealed and was widely expected to prevail but in October, the 2nd U.S. Circuit Court of Appeals largely upheld Griesa's decision and asked him for clarification on two points.

Argentina's lawyers say the ruling would be grossly unfair to creditors who got about 30 cents on the dollar in the swaps.

They warn it could spark a new debt crisis by jeopardizing payments on up to $24 billion of restructured debt if third party banks and clearinghouses are forced to disrupt the payments to comply with the court orders.

Argentina also argues it could undermine the ability of other governments to restructure debt in the future.

The U.S. government agreed, saying in a friend-of-the-court brief that Griesa's ruling could allow lone creditors to thwart internationally-backed restructuring plans and undermine efforts to encourage cooperative resolution of sovereign debt crises.

But the 2nd Circuit Court of Appeals rejected that, saying most new bonds include collective action clauses which eliminate the threat of holdout litigation by requiring that all creditors accept a restructuring if it is approved by a supermajority.

The court also contended that countries like Spain and Greece, plagued by debt problems, would not be affected by the ruling since they have no bonds issued under New York law.

The panel of three judges said Argentina has enough money - including over $40 billion in foreign currency reserves - to pay both the holdouts and the restructured debt. Argentina says its "Lock Law" passed in 2005 bars it from paying the holdouts without prior congressional approval, making compliance with the U.S. court ruling illegal under Argentine law.

However, in its latest filings, Argentina indicated it could propose amending the law if the court ruled the holdouts should be paid under the terms of the 2010 debt swap. Fernandez's allies control both houses of Congress and could likely ensure quick passage of any changes to the law.

EXPEDITED APPEAL

In February 2012, Griesa first issued payment orders obligating Argentina to pay the holdouts when it next paid the exchange bondholders. But the following month he agreed to stay, or halt, the orders pending Argentina's appeal.

On November 21, however, he revised them and lifted the stay, arguing that Argentine officials had made comments showing they had no intention of complying with his ruling. He ordered that Argentina deposit the $1.33 billion owed to holdouts in an escrow account by December 15, the day Argentina was due to pay more than $3 billion on GDP warrants issued during the debt swaps.

The appeals court reinstated the stay on November 28 and said it would consider an expedited appeal of Griesa's orders. It set a tight timeline for briefing and scheduled the February 27 hearing.

It later agreed to allow exchange bondholders and Bank of New York Mellon Corp (BK.N), which acts as their trustee, to participate in the case. They will explain their opposition to Griesa's orders during oral arguments.

The appeals court's decision to halt the orders ended fears that Argentina could default in December. The holdouts said it was too lenient and gave Fernandez's government more time to plot a way around the court rulings.

Argentina's next payment on restructured debt is on March 31, when it will pay $180 million in interest on its Par bonds.

THIRD PARTIES

On October 26, the appeals court asked Griesa to explain more precisely which third parties would be required to uphold the rulings if Argentina refused to comply.

The judges said there was confusion about how the payment orders would apply to third parties and to intermediary banks specifically, which they said should not be subject to court injunctions under U.S. law.

Argentina seized on this concern when asking the appeals court to halt Griesa's order, saying it would cause "extreme harm" to third parties, including BNY Mellon.

The financial institutions that help process Argentina's payments to exchange bondholders do not want to be placed in the middle of this dispute since it could be costly for them and could compromise their commitment to clients.

In his November 21 opinion, Griesa named different institutions on the payment chain used by Argentina to service restructured debt. He said intermediary banks would be expressly excluded.

The appeals court will review Griesa's clarification on this point in the context of Argentina's appeal of the orders.

PAYMENT FORMULA

The appeals court also asked Griesa to clarify how the "ratable" or proportional payment that he ordered would work.

It said his formula did not make clear whether the holdouts should be paid 100 percent of what they are owed when Argentina pays 100 percent of what it owes to exchange bondholders on any given day, or if they should get paid a smaller percentage if exchange bondholders are getting a small fraction of the debt owed to them.

Griesa replied that Argentina should pay 100 percent of what it owes holdouts - about $1.33 billion - if it pays all of what it owes to exchange bondholders on a given day - even if the sum is much smaller. The appeals court is reviewing his response.

(Editing by Kieran Murray and Andrew Hay)

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