(Updates with Argentina seeking domestic probe into litigation,
court order on Euroclear and Clearstream)
By Joseph Ax, Nicholas Brown and Sarah Marsh
NEW YORK/BUENOS AIRES Aug 1 Argentina cannot
turn its back on negotiations with holdout creditors after
defaulting on its sovereign debt, a U.S. judge instructed on
Friday, just as the country's failure to service a June interest
payment was declared a "credit event."
In a stern tone, U.S. District Judge Thomas Griesa in New
York slammed the decision by Latin America's third-biggest
economy to defy his order to pay holdout investors in full and
instead default on $29 billion in debt.
As Griesa was speaking, a 15-member committee facilitated by
the International Swaps and Derivatives Association (ISDA) voted
unanimously to call the missed coupon payment a "credit event."
The move triggers a payout process for holders of insurance on
Argentine debt, which analysts estimate could amount to roughly
Argentina's economy ministry said later in a combative
statement that Griesa's attitude sought to favor "vulture
funds". It has asked Argentina's securities watchdog to
investigate whether the litigation against the nation by
holdouts was merely the "facade of speculative manoeuvre".
Griesa said: "Nothing that has happened this week has
removed the necessity of working out a settlement." He chided
Argentina for making public statements he characterized as
"The debts weren't extinguished. There's no bankruptcy, no
insolvency proceedings," Griesa said. "The debts are still
The veteran judge has been at the centre of Argentina's
drawn-out fight against the New York hedge funds suing it for
full payment on bonds they bought on the cheap following the
country's record 2002 default on $100 billion in debt.
The lead holdout investors are NML Capital Ltd, an affiliate
of Elliott Management Corp and Aurelius Capital Management.
Argentine bond prices slightly extended earlier losses after
In other markets, the blue-chip Merval stock index
pared earlier losses to trade down just 0.6 percent from
Thursday's close at 8,150.91. The peso currency traded
fractionally weaker on the black market at 12.700 per U.S.
Griesa told both sides to continue working with mediator
Daniel Pollack, a lawyer one senior Argentine government
minister had dubbed "incompetent" a day earlier.
Argentina's lead lawyer told the judge the Buenos Aires
government had no confidence in Pollack after he released a
statement after negotiations broke down, saying the case had
become "highly politicized."
"The Republic of Argentina believes ... it was harmful and
prejudiced to the republic and the impact on the market," lawyer
Jonathan Blackman said in an exchange that prompted Griesa to
tell the hearing that everyone should "cool down" about ideas of
In a separate procedural action, Griesa signed an order
allowing Euroclear and Clearstream, like Citibank, to make a
one-time payment with respect to certain U.S. dollar-denominated
bonds that were issued under Argentine law in the 2005 and 2010
RISK OF ACCELERATION
The Argentine government maintains it has not defaulted
because it had made a required interest payment to a bank
intermediary on one of its bonds. But Griesa blocked that
deposit in June, saying it violated his ruling that Argentina
settle its dispute with holdout investors first.
As a result, holders of exchanged Argentine bonds did not
receive the interest coupon payment by a July 30 deadline.
On Friday, the ISDA-facilitated Determinations Committee
declared that a "failure to pay" event had happened. It will now
hold an auction to settle outstanding credit default swap (CDS)
CDS reaction was muted as market participants waited for
ISDA's auction process to start and investment accounts remained
hesitant to take positions.
"The amounts are not very large. We estimate the amount of
CDS outstanding for Argentina at about $1 billion; it's not
something that's going to systemically affect financial
markets," said Jorge Mariscal, emerging markets chief investment
officer at UBS Wealth Management.
One of the lead holdouts, NML, has in the past denied
Argentine accusations that it wants to trigger a default to get
a windfall on its holdings of CDS.
Before Friday's hearing, Argentina's government had said it
expected nothing favourable to come from Griesa. It has
previously called the federal judge an "agent" of the New York
Argentina had argued it needed to await the Dec. 31
expiration of a legal clause barring it from paying better terms
to the holdouts than those accepted by restructured debt holders
before changing its negotiating terms, said Ander Faergemann,
senior emerging debt fund manager at PineBridge Investments in
Argentina's latest debt crisis is in sharp contrast to the
mayhem that surrounded its default in 2002, when the economy
collapsed around a broke government and millions of Argentines
lost their jobs. This time the government is solvent.
Asked how painful the default would be to the shrinking
economy, Rune Hejrskov at Jyske Invest said: "It really depends
if it's a 'default lite' (quick settlement) or a hard default.
Either way, there will be a toll on the macro backdrop."
Fund managers have generally said the market so far has
priced in an agreement within the next six months.
However, some have said the risk that bondholders would
accelerate their demands on the principal value and accrued
interest would grow if expectations of a deal waned.
"I would not be surprised if this drags on longer, which
would complicate the picture," UBS's Mariscal said when asked if
there would be an acceleration.
(Additional reporting by Richard Lough, Eliana Raszewski and
Walter Bianchi in Buenos Aires and Carolyn Cohn, Andrew
Winterbottom and Davide Scigliuzzo in London and Daniel Bases in
New York; Writing by Richard Lough; Editing by W Simon, Jonathan
Oatis, Simon Gardner and Ken Wills)