As Argentina's options narrow, investors bet against gov't

Fri Jun 27, 2014 1:41pm EDT

NEW YORK, June 27 (IFR) - The battle between Argentina and holdout investors escalated this week as each side staked out its negotiating position before the clock starts ticking on Monday on a 30-day grace period that could end in default.

By depositing money on Thursday to make the required payment on the restructured bonds on June 30, the South American nation said it was expressing a willingness to pay.

But some brinkmanship was also at work, as the sovereign knows that a US court ruling requires it to disburse funds to both holdouts and restructured bondholders if it wants to avoid a technical default.

Argentina has few cards to play but that is not stopping it from baring its teeth, with Economy Minister Axel Kicillof defending his government's position at the UN in New York and garnering support from other LatAm countries in the process.

The government also embarked on an aggressive ad campaign in the US and Spanish papers, making its case against litigant holdout investors. One declared: "Argentina wants to keep paying its debt and they are not allowing it to."

The United Nations Conference on Trade and Development also chimed in, voicing its disapproval of US court rulings that favour litigant investors over Argentina.

The UN body called the recent rulings a setback for debt restructuring and warned that more holdout investors were likely to take an aggressive stance in snatching the assets of defaulted sovereigns.

"The rulings have made future debt restructuring much more difficult as debtors are left with only moral suasion and foreign relations as weapons to encourage creditor co-ordination," UNCTAD said.

NO SYMPATHY

But US judges have been less than sympathetic, giving Argentina little room to manoeuvre and supporting holdout creditors that argued last week that a stay requested by the sovereign was unnecessary.

"Although Argentina claims that a stay would facilitate negotiations, just the opposite is true," lawyers representing the holdouts wrote in a letter to US District Judge Thomas Griesa.

"While granting a stay is not necessary for negotiation, it would serve to create more time for Argentina to develop evasion plans, which it has repeatedly demonstrated its willingness to do."

Griesa agreed and declined Argentina's petition for more time to negotiate. The sovereign's hand was further weakened later in the week when a US federal court decided not to allow payment to restructured bondholders on Monday, and Judge Griesa told Bank of New York Mellon to return the money to Argentina.

Despite the looming possibility of default, investors are taking the deadlock in their stride. Bond prices barely budged on Thursday as markets bet that the government would eventually cave into holdout demands rather than risk the economic, not to mention political, costs of failing to make a bond payment on its restructured debt.

By letting the country go into default and leaving the incoming government to clean up the mess, President Cristina Fernandez de Kirchner risks exposing herself to political attacks once she relinquishes power after the elections next year, said a New York-based trader.

"The political risks for Cristina are enormous," he said. "The view is that the incoming administration would go after Kirchner on allegations of corruption and she would end up in jail. There is zero political support for a default, given the very real pain suffered during the last one."

A version of this story appears in the June 28 issue of IFR Magazine

(Reporting by Paul Kilby; Editing by Matthew Davies)

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