REFILE-Argentine bonds fall after US court ruling

Fri Mar 1, 2013 11:37am EST

By Paul Kilby and Chris Spink

NEW YORK, March 1 (IFR) - Argentine debt prices sank this week after arguments in a US court Wednesday appeared to put the sovereign at the losing end of its battle with holdouts and raised the prospects of a technical default in coming months.

"My read of the hearing is that Argentina got spanked, badly," said one legal academic present in what was described as a packed courtroom.

Boden 2015s ended the day Wednesday at 83.50 after trading at 88.80 the day before. And while by Friday the bonds had recovered a touch the cost of paying for default protection had spiked considerably, with the five-year CDS being quoted at 3,629bp, according to one trader.

The ruling was designed to resolve two issues, namely to determine what the rateable formula should be to pay holdouts and whether third-party intermediaries such as the Bank of New York were bound by that injunction.

The three-judge panel's response to arguments over these points, and Argentina's defiance in the courtroom, left many analysts forecasting a negative outcome for the sovereign, though a final decision is not expected for at least another month. Some are predicting that a final ruling may even come before the next bond payment on March 31, while Citigroup analysts believe April or May is more realistic.

"The hearing was seen as negative for Argentina," said Stuart Culverhouse, chief economist at Exotix. "It didn't necessarily reveal anything new, but it doesn't seem that judges would reverse the decision or at least fine-tune it. That sort of hope seems to have been lost."

The judges' apparent dismissal of Bank of New York's arguments that it should not be bound by Judge Griesa's October injunction requiring Argentina to make a US$1.3bn payment to NML Capital and other associated plaintiffs may mean that the country will soon be forced into default.

"We reiterate our underweight recommendation on sovereign debt in light of the fact that if the orders are affirmed and BNY is enjoined as we feared, then technical default risk is likely to escalate once again," said JP Morgan analysts in a report.

Despite a sympathetic ear from some judges about determining a payment system for holdout claims, Argentina's all-or-nothing approach to its proposal of reopening the 2010 debt exchange and its refusal to pay holdouts in full, means that the two sides are unlikely to reach an agreement on this front, said analysts.

Argentina's lawyers told the court that the country, whose vice-president and economy minister were also present in the room, would not make such payments even if its appeal failed.

"We would not voluntarily obey such an order," said Jonathan Blackman, a lawyer for Argentina.

Citi does not rule out the less likely possibility that only Argentina, and not payment intermediaries, will be bound by the injunction. Under this outcome, Bank of New York would be free to pass on payments for exchange holders only, but the country would be held in contempt of court. However, enforcing such a ruling would likely prove impossible against a defiant sovereign government like Argentina.

The sovereign's options for further delay appear to be diminishing. The government has been granted a stay until the appeals process is over, but alternatives that afford more breathing space may be limited. An en banc appeal to a broader group of judges is seen as unlikely by many analysts and traders, while Citi assigns only a 25% chance that the case will be taken to the Supreme Court.

"Though this was a federal court hearing the case, many of the issues being decided are questions of New York state law," Richard Samp, chief counsel at the Washington Legal Foundation, said on a conference call before the hearing.

"That is important because the US Supreme Court almost never agrees to hear a case where issues are state law."

(This article will be published in the March 2 issue of International Financing Review, a Thomson Reuters publication; for more, see www.ifre.com)

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