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What's next for Argentina's debt battle after latest court defeat?
June 16, 2014 / 10:45 PM / 3 years ago

What's next for Argentina's debt battle after latest court defeat?

NEW YORK/BUENOS AIRES (Reuters) - 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 future restructurings?

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 case itself.

“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 of holdouts.

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 January.

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 reserves.

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 decade-long litigation.

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

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