| BUENOS AIRES
BUENOS AIRES Argentina could face a credit crisis a decade after its $100 billion default due to a U.S. court ruling that says the country must pay creditors, who still hold defaulted bonds, every time it services its restructured debt.
About 93 percent of Argentine bondholders agreed to swap their defaulted debt for new issues in 2005 and 2010, but "holdout" creditors who rejected the swaps continue to press in courts worldwide for full repayment on the bonds.
Late last month, a federal appeals court in New York ruled that Argentina violated bond provisions to treat all creditors equally when it made payments to creditors who accepted the swaps while refusing to pay the holdouts.
The decision sparked a sell-off in Argentine bonds, sent the price of protection against an Argentine default sky-high, and prompted Standard & Poor's to downgrade the country's sovereign credit rating.
Argentina has stayed out of global credit markets since its 2002 debt debacle partly due to fears the holdouts could block a new issue. It relies instead on the central bank's foreign reserves to pay debt, but its efforts to safeguard those funds using capital controls and import curbs have worsened an economic slowdown.
Local officials say the litigating "vulture funds" will never receive a cent and they promise to keep paying the creditors who entered the swaps. It is not clear though how they could do that without changing the terms of payment on the swapped bonds, which might trigger a technical default.
The government will appeal this latest court ruling and try to stave off its implementation for as long as possible.
U.S. judges have already ordered that Argentina pay holdouts several billion dollars in compensation for the default. But the creditors have largely been unable to collect since most Argentine assets are protected by U.S. sovereign immunity laws.
The following are scenarios exploring what might happen next in this legal battle, in which the scales have tipped in favor of the holdouts - for now.
ARGENTINA APPEALS TO SUPREME COURT
The 2nd U.S. Circuit Court of Appeals in New York upheld District Court Judge Thomas Griesa's interpretation of the "pari passu" clause regarding equal treatment of creditors, but asked him to clarify the payment formula benefiting the holdouts and the role of intermediary banks in enforcing the judgment.
The appeals court could start reviewing Griesa's response within a matter of weeks to try to put the ruling into effect by December, when Argentina must make several billion dollars worth of payments on international debt.
The country will move to block this by requesting that the court orders remain on hold while it appeals, either to the entire 2nd Circuit or to the Supreme Court directly.
Argentina could also challenge the appeals court ruling while at the same time appealing the specific payment formula that Griesa devises. This would buy more time.
The U.S. Supreme Court gets about 10,000 appeals requests a year but only agrees to hear 75 o r 80 cases. Some legal experts think the country's highest court could choose to weigh in on this case, however, since it has wider implications for debt restructurings.
U.S. government lawyers backed Argentina's position on pari passu, arguing in April that Griesa's orders "could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises.
The government lawyers said a similar ruling in a Belgian court that disrupted Peru's debt restructuring in 2000 "was viewed with almost universal consternation by international financial markets."
The 2nd Circuit downplayed any impact on other countries, noting that many newer bonds, including the ones issued by Argentina in its 2005 and 2010 debt swaps, have collective act ion clauses that force potential holdouts to accept a restructuring if the vast majority of other creditors do so.
Argentina will probably need to garner more support from Washington and U.S.-based banks to get the Supreme Court to intervene. If the court did agree to hear the case, a ruling might not be issued until 2014.
If Argentina won the appeal, its troubles could be over. But the uncertainty leading up to the ruling would likely weigh on Argentine bond prices and hurt liquidity regardless.
Alternatively, the Supreme Court could either refuse to hear the case, letting the appeals court ruling stand, or it could hear the case and affirm that ruling. This would force Argentina to comply with - or openly violate - the order to pay holdouts every time it services its restructured debt.
This case, led by NML Capital Ltd and the Aurelius Capital Management funds, seeks repayment on about $1.4 billion in defaulted debt. Analysts note however that other holdout creditors owning another $9.5 billion or so of debt could seek compensation under the same equal treatment clause if it were upheld.
ARGENTINA IGNORES COURT RULING
If Argentina loses its court battle after a long appeals process, or the payment orders start to be enforced while the appeals are still pending, the country could flout those orders.
This is seen as a real possibility since Argentina has systematically fought every court decision in favor of the holdouts and has refused to pay them court-awarded damages.
Argentine officials, including the economy minister, the foreign minister and the president herself, have said the country will not negotiate with the "vulture funds" and will never pay them.
If the court stipulates that a portion of Argentina's debt payments should go to the holdouts, and Argentina refuses to increase the total amount of money paid to service its debt abroad, this could possibly trigger a default since owners of the swapped bonds would receive less than what they are owed.
Another option would be to try to change the way payments are made so that they are carried out entirely in Argentina and the funds would not be subject to seizure in the United States.
Several debt experts say this would be tantamount to a technical default as well. Argentina could try to get two-thirds of creditors to support a change to the bonds' terms, but most foreign investors would be reluctant to accept payment in Argentina.
One problem is that the government has imposed tough currency and capital controls in the last year, making it much more difficult to ensure seamless money transfers. Also, creditors would be giving up the legal guarantees they have in the United States if they agreed to full payment in Argentina.
Another key issue in this case is the extent to which third parties, and intermediary banks specifically, would be obligated to enforce the court ruling.
Argentina's agent bank, Bank of New York Mellon (BK.N), distributes the country's debt servicing payments through clearinghouses such as DTCC, Euroclear and Clearstream - none of which would relish being at the center of a bitter legal struggle.
ARGENTINA PAYS HOLDOUTS
Although it seems unlikely, Argentina could end up paying the holdouts, either by making separate, proportional payments to them to comply with the court order or by agreeing to some kind of settlement. This could potentially prompt lawsuits by the creditors who accepted the swaps, however.
To pay the holdouts, it would first have to suspend or scrap the so-called "lock law," which requires prior congressional authorization for any kind of settlement with creditors who rejected the restructuring. The law also bars the government from reopening the debt swaps without legislative approval.
The government might want to change that law regardless since the appeals court cited it as key evidence Argentina discriminates against the holdouts.
So far, officials have shown no interest in pursuing that option, however.
Even if the lock law were overhauled, this would not put an end to Argentina's legal woes since the holdouts would almost certainly refuse to agree to the swap terms and continue to sue for full repayment on their defaulted bonds.
Lawyers advising the holdouts say Argentina may be approaching a point of no return like the one Peru faced in 2000, when that country ended up settling with the holdouts for $58 million to move forward with its debt restructuring.
The price tag for Argentina would be much higher, though, with holdout creditors owning a total of roughly $11 billion in defaulted debt, according to private estimates.
The Peru case rested on a similar interpretation of the "pari passu" clause and was spearheaded by Elliott Associates - NML's parent company.
NML also won a court order in Ghana last month to seize an Argentine military training vessel as part of its drive to collect $300 million on defaulted bonds - indicating the legal wrangling is far from over. [ID:nL6E8LBQKQ] (Additional reporting by Alejandro Lifschitz and Daniel Bases in New York; Editing by Theodore d'Afflisio)