* Court declines to hear Argentina's case against holdouts
* May prompt default, delaying Argentine return to markets
* Argentine bonds, stocks dive, reversing recent rally
(Adds market reaction, analyst comment on wider implications)
By Lawrence Hurley and Sarah Marsh
WASHINGTON/BUENOS AIRES, June 16 The U.S.
Supreme Court declined on Monday to hear Argentina's appeal over
its battle with hedge funds that refused to take part in its
debt restructurings, an unexpected move that risks toppling
Latin America's No 3 economy into a new default.
The high court left intact lower court rulings that ordered
Argentina to pay $1.33 billion to the so-called holdouts who
refused 2005 and 2010 debt swaps in the wake of its catastrophic
2001-02 default on $100 billion.
This could open the door to claims from other holdouts worth
as much as $15 billion, a hefty sum for a slowing economy
struggling with rapidly dwindling foreign reserves.
The news triggered a nosedive in Argentine stocks and bonds
after investors expected the court to delay its decision and
give Argentina time to negotiate with holdouts or restructure
its exchange bonds outside of New York legislation.
The impact on global markets was muted given the country's
economic isolation since its default.
Argentina has previously refused to pay up. It argues it
does not have the funds and cannot give holdouts preferential
treatment over exchange bondholders after many of them bought
the debt at a massive discount and are claiming payback in full.
If it sticks to that position, U.S. District Judge Thomas
Griesa could prevent full payment to exchange bondholders even
though the country is able and willing to pay them.
This could result in a default by June 30, when payments are
due on discount bonds governed by New York, further setting back
Argentina's return to international capital markets.
"It's a very damaging scenario for Argentina," said Marco
Lavagna at Ecolatina consultancy, noting that how lower courts
implemented their rulings was key. "Maybe something could open
up there and allow for negotiation.
Argentina hinted last month it might consider negotiating
with holdouts but could not do so until December 31 of this year
when a clause in its debt swaps prohibiting it from offering
holdouts better terms expires.
Whether Argentina can keep stalling investors and U.S.
courts until that date remains to be seen.
Argentine stocks were down 7.3 percent by 1730 GMT,
while the U.S. dollar-denominated benchmark 2033 Discount bonds
fell 7.86 points in price to bid 75.010. Siobhan
Morden, New York-based head of Latin American strategy at
Jefferies LLC, said the market reaction was relatively mild as
investors waited to see how the government would respond.
The government was not immediately available for comment on
Monday but state-run news agency Telam said President Cristina
Fernandez would deliver a televised address on Monday night.
The decision comes at an unfortunate time for Argentina
which has been trying to normalize relations with foreign
investors and creditors in order to regain access to
A DOUBLE BLOW
Argentina wants to avoid making full payment to holdouts led
by hedge funds Aurelius Capital Management and NML Capital Ltd,
a unit of billionaire Paul Singer's Elliott Management Corp,
that Fernandez has slated as "vultures".
Creditors holding about 93 percent of Argentina's bonds
agreed to participate in the two debt swaps in 2005 and 2010,
accepting between 25 and 29 cents on the dollar.
Some groups such as the IMF, the Washington-based global
lender, have said they are worried a ruling against Argentina
will make it more difficult for other countries to restructure
their debt and put financial calamity behind them.
"This is surprising because it is giving a precedent for any
'vulture fund' to go against any country, so any country is
vulnerable in a restructure," said Sebastian Centurion at ABC
Others say collective action clauses that are now broadly
used now in sovereign debt issuance should prevent Argentina's
particular case becoming a precedent. Emerging markets did not
react to the news of the Supreme Court decision.
In a double blow to Argentina on Monday, the U.S. Supreme
Court also ruled that creditors can seek information about
Argentina's non-U.S. assets in a case about bank subpoenas that
is part of the country's decade-long litigation with holdouts.
The question was whether NML could enforce subpoenas against
Bank of America and Banco de la Nacion Argentina. The court's
ruling may nonetheless have limited impact in part because of
Argentina's limited assets around the world.
NML has in the past pursued Argentine assets aggressively in
its fight to get full repayment for its bonds, in 2012 even
seizing an Argentine navy ship in Ghana.
On the issue of paying bondholders, Argentina had said in
its most recent court filing that the government would struggle
to pay the bondholders in full while also serving its
In that scenario, "Argentina will have to face, objectively,
a serious and imminent risk of default," the filing said.
The bondholders dispute that assessment, saying in their own
court filing there was evidence presented in lower courts that
Argentina could afford to pay.
"We are reviewing the decisions from the Supreme Court today
and what the next steps might be, but we have no other comment
at this time," a spokesman for NML told Reuters.
(Additional reporting by Daniel Bases in New York and the
Buenos Aires bureau; Editing by Howard Goller, Kieran Murray and