Monday, June 16, 2014

Argentina: A Very Bad Day for President Fernández, US Supreme Court Votes 7-1 Against Argentina

According to The Associated Press, President Cristina Fernández said Argentina can't comply with US court orders to pay $1.5 billion to winners of a decade-long legal battle over defaulted debt, the position her country was left in Monday (June 16) when the US Supreme Court refused to hear her government's final appeal.

Delivering a nationally broadcast address Monday night, Fernández expressed willingness to negotiate with the winners, but said there is simply no way that Argentina can pay in cash, in full, starting just two weeks from now, which is what the US courts have ordered.
 
"What I cannot do as President is submit the country to such extortion," Fernández said.

Under the US court order, Argentina must hand over $907 million to the plaintiffs before June 30, 2014, or lose the ability to use the US financial system to pay an equal amount to holders of other Argentine bonds. Fernández said the total owed, including interest, would be US$1.5 billion.
 
COMMENT: Paying the US court could mean defaulting on the vast majority of the country's performing debts, which are held by bondholders who agreed previously to provide debt relief that enabled Argentina to rebound from its economic crisis of 2001, she said.

Fernández said she has experts working on ways to avoid such a default and keep Argentina's promises to pay those bondholders. Yet, she added, her government will not make the court-ordered payments to NML Capital Ltd. and other investors she characterized "vulture funds."

The markets had expected Fernández to take a very hard position, which could be tough on the economy. Argentine stocks plunged as economists, analysts and opposition politicians practically begged her to comply.

The justices not only rejected Argentina's appeal without comment--they also ruled 7-1 that bondholders could force Argentina to reveal where it owns property worldwide. That could make it easier to collect on other debts that have gone unpaid since Argentina's economy collapsed.

Justice Antonin Scalia wrote that US federal law offers no shield to Argentina's assets. Justice Ruth Bader Ginsburg worried that this could expose even its embassies and military ships to seizure if the government doesn't pay.

Bowing to the US courts would force Fernández to betray a pillar of the government that she and her late husband and predecessor, Nestor Kirchner, have led since he won the presidency in 2003: That Argentina must maintain its sovereignty and economic independence at any cost.

Paying off the lawsuit winners in the way the courts have ordered also would encourage a long line of other creditors to seek similar recourse. Fernández said Monday night those creditors together hold $15 billion in defaulted debt, or more than half the Central Bank's remaining foreign reserves, and that paying it all immediately in cash "is not only absurd, but impossible."

Refusing to comply could win applause from her core supporters, because paying the plaintiffs 100% plus interest in cash would mean sacrificing the subsidies and populist programs that enabled her to win re-election by a landslide.

Argentina's Merval stock index dropped 11% after the court decision, its largest one-day loss in more than six months. 

Share prices for the state-run YPF energy company fell nearly 13% while the Edenor electricity utility plummeted 20%. The cost of insuring Argentine bonds against default soared, and the value of Argentina's currency plunged to 12 pesos to the dollar on the black market, implying a 33% loss to anyone needing to buy foreign currency legally.

Argentine analysts warned about the consequences of not complying with the US courts.

Fernández will pay a steep political price by paying off the winners, but doing so will lower Argentina's country risk, restore foreign reserves and prevent the recession from worsening, said Miguel Kiguel, a former deputy finance minister and World Bank economist in the 1990s who now runs the Econviews consulting firm.