BUENOS AIRES Argentine bond prices rallied on Thursday after fears of an imminent debt default receded when a U.S. appeals court gave the country a reprieve in a legal battle with holdout creditors.
The 2nd U.S. Circuit Court of Appeals' decision on Wednesday to grant an emergency stay order gives Argentina more time to fight a ruling favoring "holdout" investors who rejected two restructurings of defaulted bonds and seek full repayment in the courts.
This delays a ruling on whether Argentina will have to pay $1.33 billion to the holdouts until late February at the earliest, quelling investor fears of a default next month when some $3.3 billion in payments come due on restructured debt.
"It's very positive because (the U.S. court) has pushed out the stay order until March and that means the government gets more time to see what it can do," said Kevin Daly, a portfolio manager at Aberdeen Asset Management in London.
The cost of insuring Argentine debt against default tumbled and bond spreads - measuring default risk against that of safe-haven U.S. Treasury paper - shrank 178 basis points, according to JP Morgan's Emerging Markets Bond Index Plus.
Sovereign bonds closed up 5.2 percent on average in local over-the-counter trading, while dollar-denominated GDP warrants shot 22 percent higher on the Buenos Aires Stock Exchange.
Last week, U.S. District Judge Thomas Griesa ordered Argentina to deposit $1.33 billion by December 15 to pay a group of holdouts, led by NML Capital Ltd and Aurelius Capital Management funds.
On the same day, about $3 billion comes due on the growth-linked GDP warrants, issued during the 2005 and 2010 debt swaps.
The ruling was a blow against Argentina's combative, left-leaning President Cristina Fernandez, who calls the holdout funds "vultures" and has vowed never to pay them.
It also raised fears of a default because, if Argentina had refused to pay the holdouts as expected, U.S. courts could have disrupted payments to the holders of restructured bonds.
Wednesday's appeals court postpones that possibility.
"The risk of the stay being lifted again in the near term seems low, in our view. We expect the stay to remain in place until the appeals court reaches its decision," investment bank Credit Suisse wrote in a briefing note.
"It is almost impossible to predict how long it will take the appeals court ultimately to rule on the appeal following the arguments."
According to Markit's credit default swap data, the cost to insure $10 million worth of Argentine debt, annually for five years, fell by a third in one day to $2.077 million on Thursday from $3.090 million on Wednesday.
Griesa ruled earlier this year that Argentina violated the "pari passu" bond provision requiring it treat all creditors equally when it paid the exchange bondholders without paying the holdouts. He said they should all be paid simultaneously.
His decision was largely upheld in a surprise ruling by the 2nd Circuit last month. Argentina has appealed and, separately, the 2nd Circuit still has to review some aspects of Griesa's payment order that it found confusing.
Argentina has said it will take its case to the U.S. Supreme Court if necessary.
"The attention refocuses back on the appeal process and whether Argentina can effectively seek an extended legal process that would allow them to build momentum to overturn the pari passu judgment," wrote Siobhan Morden, head of Latin America strategy at U.S. investment bank Jefferies & Co.
(Additional reporting by Sujata Rao and Carolyn Cohn in London, and Daniel Bases in New York.; Writing by Helen Popper and Hilary Burke. Editing by James Dalgleish and Andre Grenon)