As deadline looms, Argentina moves closer to another default

Mon Jun 30, 2014 5:20pm EDT

NEW YORK, June 30 (IFR) - Argentina edged closer Monday to its second technical default in 13 years, with a 30-day grace period expected to kick in at midnight for payment on the country's restructured bonds.

The long-running and bitter standoff - pitting the government on one side and holdout creditors backed by the US courts on the other - looks set to come to a head barring any last-minute breakthrough.

Some observers see the onset of the grace period as the catalyst for forcing Argentina to come to the negotiating table, even though it has repeatedly said it will never pay what it calls the "vulture funds" who refused to join more than 90% of bondholders that agreed to restructuring in the first default.

Arturo Porzecanski, professor of international economics at American University, put the likelihood of revived discussions at 60%.

"The Argentine government will negotiate and reach a deal with the holdout creditors before end-July, thereby forestalling a default," he said.

"All other scenarios would involve Argentina defaulting to its exchange bondholders. That would aggravate the country's already bad economic situation, like a larger gap between the official and unofficial exchange rate, deeper recession and faster inflation."

The default threat has hit the country's Boden 2015s over the past few weeks. Volatility subsided as the deadline approached, though the 2015s were down another 40ct Monday to 97.00-97.50, while its five-year CDS widened slightly to 1,595bp-1,692bp.

Its dollar-discount 2033s - on which the interest payment is due by midnight - were spotted at 84.00-85.50 in the morning after trading at 85.00 mid-market on Friday.

"Risks are priced in already," said a New-York based trader.

The saga, though, has severely dented investor confidence in the issuer, the trader said.

"Argentina is already a persona non grata and not welcome in the international capital markets."

Last week, US Judge Thomas Griesa ordered Bank of New York Mellon (BONY) not to process a debt payment of US$832m from Argentina to the holders of the restructured bonds, as the holdout creditors are also due payment at the same time.

The US Supreme Court last week refused to hear an Argentine appeal after it failed to win a stay from Griesa on June 16 against the payment to the holdouts.

"He needed to say [not to process payment] anyway in order to absolve BONY of legal risk from Argentina, but maybe he also did it because he senses that these futile gestures are just for domestic political consumption," a senior portfolio manager told IFR.

"That's the same benefit of the doubt that the market is giving the situation at the moment, but it leaves little room for miscalculation by the Argentines."

WIDE IMPACT

Many in the market insist the case will have wide-ranging impact beyond just the fate of Argentina's finances.

If Argentina were to pay the holdouts at whole value - while those who accepted the restructuring receive much less - it would likely lead the restructured bond holders to go back to court and demand full payment themselves.

More broadly, it could set a precedent for future sovereign debt restructurings that could expose nations more widely to creditors intent on recouping their losses by, among things, trying to snap up valuable national assets on the cheap.

"A technical default wouldn't necessarily be catastrophic, providing it were coupled with a demonstrated willingness to negotiate," said a portfolio manager in London.

"If one assumes that a technical default can only happen - i.e. at the end of July - under conditions of demonstrated 'unwillingness to negotiate', then foreign companies operating anywhere close to the government's assets will need to watch their back as the plaintiffs turn up the temperature and seek to attach assets with Griesa's say-so."

Argentina had said it was willing to negotiate with the holdouts, including well-known funds NML Capital (Elliott Management) and Aurelius Capital - something the investors deny.

Jay Newman, a portfolio manager from Elliott Management, said the country has declined to come to the negotiating table thus far.

"There are no negotiations underway, there have been no negotiations, and Argentina refuses to commit to negotiations in the future," Newman said in a press statement. "Argentina's government has chosen to put the country on the brink of default. We sincerely hope it reconsiders this dead-end path."

Argentina previously defaulted on a whopping USD100bn of debt in 2001, after which it worked out a restructuring with 93% of bondholders for 25 cents and 29 cents on the dollar, respectively, on its 2005 and 2010 bonds. (Reporting by Joan Magee; Editing by Marc Carnegie and Natalie Harrison)

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