| NEW YORK/BUENOS AIRES, June 16
NEW YORK/BUENOS AIRES, June 16 The U.S. Supreme
Court on Monday declined to hear Argentina's appeal seeking to
overturn an order to pay holdout sovereign creditors $1.33
billion, setting off a scramble in Buenos Aires on what it can
do now given its legal options are exhausted.
If Argentina cannot come to an agreement with the holdouts
and pay them at the same time it pays the bondholders who
participated in two prior sovereign restructurings, the South
American nation will enter a technical default. Exchange
bondholders hold roughly $24 billion worth of restructured debt.
The next payment due exchange bondholders is June 30, with a
30 day grace period.
President Cristina Fernandez is scheduled to address the
nation on Tuesday at 00:00 GMT (20:00 EST/21:00 ARG).
She has called the holdout investors "vultures" for buying
the debt at a steep discount and then demanding full payment in
the aftermath of the country's crippling economic crisis. The
holdouts, led by NML Capital Ltd, an affiliate of hedge fund
Elliott Management, and Aurelius Capital Management, counter
that they're just trying to hold Argentina to its obligations
and that the country has plenty of reserves to pay them.
Below are some key questions that now arise because of the
decision, which brings to a close just one of many cases brought
against Argentina since its then historic debt default in late
2001, early 2002 that at the time amounted to $100 billion.
Q: What are Argentina's next possible steps?
A: Argentina can ask the U.S. Supreme Court to reconsider
its decision and play for time before the next coupon payments
are due. Lawyers say Argentina's chance for success with that
motion is "slim to none."
Argentina can pay the holdouts what they have won in court
and remove a major impediment to the government's ability to tap
international capital markets and lower their borrowing costs;
Buenos Aires could refuse to pay the holdout investors and
default on the restructured debt because it would be blocked
from transmitting payments to exchange bondholders;
President Fernandez can start discussions for a negotiated
settlement with the holdouts, who remain open to sitting down
with the government.
An Argentine statute called Rights upon Future Offers
precludes voluntarily agreeing better terms with holdouts. It
expires Dec. 31, 2014, but lawyers following the case say the
fact that Argentina is being ordered to pay means it may not
apply and could offer the government a face-saving option to
strike a deal.
Argentina could attempt to pay the exchange bondholders by
restructuring their existing bonds to debt governed by Argentine
law and paid out in Argentina to bypass U.S. law and its
payments system. However, if they did so they would most likely
be found in contempt of an injunction specifically prohibiting
such a plan.
Q: What is the effect on global emerging market debt and
A: The U.S. Supreme Court's decision about Argentina sent
its bonds down sharply but hardly registered elsewhere.
Argentina argues a holdout win means future sovereign debt
restructurings would be much more difficult and New York would
suffer as bonds would be issued outside its jurisdiction.
The U.S. government argued in a friend-of-the-court brief
that a ruling against Argentina could make it much harder for
countries facing financial distress to get creditor support for
crucial debt swaps. The U.S. did not comment on the merit of the
"I think market reaction is a general shrug, in terms of
Argentina's assertions that this would discredit the New York
law bonds as a source of capital," said AJ Mediratta at Greylock
Capital in New York.
Mediratta said new bonds issued in the market take into
account the lessons learned from the Argentina case, including
clearer definitions of pari passu, or equal treatment clauses,
as well as collective action clauses which limit the influence
Moody's Investors Service said last year the sovereign
restructuring mechanism as it stands now, whereby creditors form
committees to negotiate with the governments for a reasonable
workout, seems to work.
"The case of Argentina is unique in the historical context,"
Elena Duggar, sovereign risk analyst at Moody's told Reuters in
Q: What would a default do to the Argentine economy?
A: The Supreme Court's refusal to hear Argentina's case
against bondholders makes a fresh default more likely but it
would be a default over a matter of principle, unlike in 2001-02
when it was over a matter of necessity.
Analysts say the effect on Latin America's No. 3 economy
would likely be limited, unlike last time when its record
default unleashed a financial and economic meltdown.
Argentina has already been cut off from global credit
markets for more than a decade. Its foreign debt represents just
13.2 percent of gross domestic product now.
Still, a default would delay the country's return to global
credit markets - a move it has been working towards over the
past few months, resolving long-running disputes with foreign
investors and creditors, in view of rapidly dwindling foreign
Corporate and public credit would become even more
expensive. Uncertainty about Argentina's economic outlook might
momentarily stall investment and consumption and trade could be
impacted by a shortfall of credit.
If, however, Argentina finds a way to negotiate with
holdouts, it could still achieve the goal of regaining access to
capital markets in the near to medium-term, finally resolving a
Q: What options do holdout investors have now?
A: The holdouts will continue to wait for Argentina's next
move. As one holdout, who spoke on condition of anonymity said,
"Argentina has lost in court before and we are still waiting."
In the past, NML, one of the lead holdout creditors that is
part of billionaire Paul Singer's Elliott Management Corp., has
said they remain open to negotiating with Argentina.
Creditors holding about 93 percent of the defaulted debt
agreed to participate in debt swaps in 2005 and 2010 that gave
them between 25 and 29 cents on the dollar. Holdouts might
consider whether they ask for all cash or a combination of cash
and bonds to settle their case.
(Reporting by Daniel Bases in New York and Sarah Marsh in
Buenos Aires, editing by John Pickering)