UPDATE 4-Argentina economy minister tells diplomats nation being pushed to default

Wed Jun 25, 2014 6:26pm EDT

(Adds Kicillof comments to diplomats in NY, details on special master's statement on conversations with counsel for both sides)

By Daniel Bases and Rodrigo Campos

UNITED NATIONS, June 25 (Reuters) - Argentina's Economy Minister Axel Kicillof warned United Nations diplomats on Wednesday the country is being pushed toward a new default after a U.S. Supreme Court decision favored holdout creditors seeking payment on bonds it defaulted on in 2001-2002.

Referring to those creditors as "vulture funds," Kicillof said the June 16 decision by the top U.S. court to deny Argentina the chance to appeal a lower court ruling means it faces an insurmountable payment to all bondholders, given it has just $28.5 billion in foreign currency reserves.

"So probably this is going to push us into a technical default," Kicillof said through an interpreter. "Whichever way you look at it this ruling is forcing Argentina towards the risk of economic crisis."

The holdouts are led by Elliott Management's NML Capital and Aurelius Capital Management.

"Once these funds get recognition of 100 percent of the value of their bonds, which were purchased under vile conditions of having paid only 30 cents on the dollar, there could be more demand from other holders who did not participate in the restructurings," Kicillof said.

He was speaking to members of the Group of 77 plus China meeting at the U.N. in New York. It was not clear if he would meet with holdout creditors while in the city.

U.S. District Judge Thomas Griesa of the Southern District of New York had ordered Argentina to pay the holdouts $1.33 billion plus accrued interest, at the same time it pays the 93 percent of bondholders who accepted the terms of the sovereign restructuring in 2005 and 2010.

Argentina is due to make a $900 million coupon payment on June 30, but has a 30-day grace period in which to come to an agreement with the holdouts. They have written to Judge Griesa saying they would discuss an accommodation with Argentina if good progress is made in any talks.

Daniel Pollack, the court-appointed special master in the dispute, issued a statement on Wednesday confirming a Reuters report that he had met with lawyers from both sides on Tuesday.

"No resolution has been reached," the statement said, adding that he also spoke with both sides in phone calls in the last 48 hours.

While in New York, Kicillof will also meet with lawyers for the Argentine government a government source in Buenos Aires told Reuters on Tuesday, but it is unclear whether he will meet with holdout investors.

Attempts to contact the holdout investors on Wednesday were unsuccessful.

DEADLINE LOOMS

Argentina says it is being ordered to pay the holdouts $1.5 billion while the holdouts contend that by June 30th the figure will have risen to $1.65 billion because of accrued interest.

Argentine officials, including President Cristina Fernandez, have said the country will not pay these investors, arguing it could face potential demands for up to $15 billion from other holdouts not involved with the case - an amount representing more than half of the government's $28.5 billion in foreign currency reserves.

The United Nations trade agency, or UNCTAD, weighed in on the case on Wednesday, echoing concerns voiced by the United States as well as the International Monetary Fund that the ruling in favor of holdouts erodes sovereign immunity and is a setback for the debt restructuring process.

However, investors and legal advisors alike note changes to the covenants in bond contracts have adapted to avoid such disputes and the legal battle with Argentina is so unique that chances for a repeat situation have been dramatically reduced.

One indication that bonds issued under New York law are not being shunned, at least not so far, is last week's well-received 10-year issue by Ecuador. This came after Ecuador selectively defaulted on its debt in 2008, calling debtholders "monsters," and saying that the debt issued by past governments contained "illegalities."

"It is kind of ironic that the day after the Supreme Court came with this decision, we had not Peru, not Colombia, not Mexico, not even Brazil; we have freakin' Ecuador coming to the market with a $2 billion (bond) with a yield of less than 8 percent, and the deal was absorbed very well and the bond is flying now," Javier Kulesz, emerging market credit analyst at Nomura Securities, said at a recent forum in New York.

Despite the tough public stance, markets believe the parties will eventually negotiate a solution.

The price on Argentina's U.S. dollar-denominated 2033 discount bonds last traded at 87.5 cents on the dollar, yielding 9.93 percent. That is little changed on the day, but just off Monday's high when it hit its best levels since August 2011.

When the threat of a possible default rose one week ago, the price of those bonds slid to about 73.4 cents.

The cost of insurance against a default on the country's debt has dropped in recent days. The annual cost to insure $10 million in bonds was about $1.397 million, down from $2.805 million last week.

(Reporting by Daniel Bases, Rodrigo Campos, Joseph Ax in New York, Jeremy Gaunt in London and Tom Miles in Geneva; editing by G Crosse, Chizu Nomiyama, Meredith Mazzilli and Richard Chang)

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Comments (2)
GermanHoldout wrote:
President Kirchner’s decision, reconciliation and negotiations with the holdouts, as we see, improves Argentina’s ratings, makes cheaper credit possible, initiates a firework of investments and enables also cheaper credits for argentine companies.

The whole world would be very pleased, if this since 2002 ongoing NIGHTMARE-DEFAULT finally had been finished!

Under the review of Judge Griesa, Argentina and the Holdouts may come together, to end this HORROR-Default, with endless suffering for tens of thousand holdout creditors and their families worldwide.

THE PROCESS COULD BE FOLLOWING:

The “RUFO” clause (Rights Upon Future Offers) expires as of December 2014. That means, that from 01/01/2015 Argentina can make a better offer to the Holdouts, than it made in 2005 and 2010.

Argentina and the holdouts make NOW A BINDING AGREEMENT with respect to the “time after” (end of the “Rights Upon Future Offers (RUFO) clause in December 2014), seizure risks and a technical Default would be immediately averted. Argentina could immediately return to the capital market and thus Argentina could refinance the payments to the holdouts, without using reserves.

In practice the negotiations could look like this:
Argentina should enter into good-faith negotiations with the holdout creditors – all of them –via the offices of NML Capital. A firm deadline should be set to reach an agreement, say January 2, 2015, two days after the expiration date of the Rights Upon Future Offers clause.

HOW COULD BE THE CONDITIONS FOR THE REPAYMENT?

Argentina owes to today about 230% to the Holdouts (since 2002 Argentina has not repaid anything to the holdouts)
Possibilities e.g.:
1,
at the latest, on 02/01/2015 (end of RUFO clause) Argentina (or investment banks, funds) make a buyback offer to the holdouts in cash of about 140-150% (for owing capital+ accrued interest between 2002-2015).
(Argentina owes to today about 230%, a cash buyback of 140-150% would so mean for Argentina already a debt relief of about 80-90%)

2,
- at the latest, on 02/01/2015 (end of RUFO clause) Argentina would repay in CASH 100% of the nominal value of the defaulted bonds, which became due before 2015.

- For the accrued interest between 2002-2015 (until now about 130%), Argentina would emit new bonds in worth of about 80-100% (means about 30-40% Discount), and with a maturity of 5-7 years.

Jun 25, 2014 2:52pm EDT  --  Report as abuse
GermanHoldout wrote:
If Argentina promises a good faith negotiation with the Holdouts, than judge Griesa and the Holdouts would presumably agree with a “stay” until the expiration of the RUFO clause in December 2014.

Jun 25, 2014 4:50pm EDT  --  Report as abuse
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