Argentina's Congress gives go-ahead to open-ended debt swap

BUENOS AIRES, Sept 11 Wed Sep 11, 2013 11:19pm EDT

BUENOS AIRES, Sept 11 (Reuters) - Argentina's Congress approved a debt swap on Wednesday offering an unlimited time window for the remaining 7 percent of investors to restructure bonds left over from the country's 2002 default.

The exchange offer follows years of lawsuits stemming from a debt crisis 11 years ago that pushed millions of middle-class Argentines into poverty. Latin America's inflation-hit No. 3 economy remains vulnerable to legal fallout from the crisis.

Not all of the remaining holders will participate in the swap and opinion is divided on whether the legal showdown, which could end up before the U.S. Supreme Court, threatens to undermine future restructurings worldwide.

The terms of the swap are in line with Argentina's 2010 restructuring offer. In that and a previous 2005 debt exchange, 93 percent of holders swapped their defaulted bonds for new paper offering less than 30 cents on the dollar.

The 2005 and 2010 restructurings offered limited time periods for participation, a point that U.S. judges have complained about as they deliberate what to do with "holdout" investors suing for 100 cents on the dollar.

"A handful of speculators cannot go against the will of the Argentine people," lower house Chamber of Deputies member Carlos Heller said before it voted 192-33 to approve the debt swap. The bill had already passed the Senate and is now considered law.

The core holdout investors have signaled that they will not participate in the debt swap. Ignacio Labaqui, an analyst for emerging markets consultancy Medley Global Advisors, said the offer was a good move for Argentina nonetheless.

"The holdouts that have sued Argentina and may be getting close to a legal victory have little incentive to accept an offer cast in terms that they have already rejected," he said.

"But other holdouts might accept the proposal. This would increase the acceptance rate to above 93 percent and that would be positive for Argentina, although it is uncertain if it would strengthen the government's case in the U.S. courts," he said.

A U.S. federal court judge has ordered Argentina to pay $1.33 billion to the holdouts. Argentina is appealing and the U.S. Supreme Court will meet behind closed doors on Sept. 30 to decide whether to hear the case.

EQUAL TREATMENT

The holdouts' case rests on the principle of equal treatment, known as parri passu. The federal judge ruled holdouts should be paid at the same time as investors who restructured their bonds.

So if Argentina ends up losing in the U.S. courts and sticks by its pledge never to pay the $1.33 billion, it would likely be blocked from paying the 93 percent of investors who restructured their bonds in 2005 and 2010.

That would mean another default for Argentina at a time when its economy is already hobbled by inflation clocked by private analysts at 25 percent, one of the world's highest rates.

The International Monetary Fund has voiced worry that a ruling against Argentina would make it more difficult for other countries to restructure their debt in times of economic crisis.

Holdouts call that an exaggeration given the near universal use of collective action clauses in new bond deals saying that a minority of investors would not be able to holdout if a super-majority of creditors agree to restructure.

The defaulted bonds did not have collective action clauses, thereby allowing investors such as NML Capital Ltd, a unit of Paul Singer's Elliott Management Corp, and Aurelius Capital Management, to press for payment in full.

President Cristina Fernandez calls these holdouts "vulture funds," accusing them of exploiting Argentina's catastrophic 2002 financial crisis.

"They bought these bonds for almost nothing. Can anyone explain to me why they should be rewarded with such astronomical returns?" she said in televised comments on Wednesday.

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