Thursday, June 26, 2014

Global Impact: Buenos Aires May Soon Find Itself in a Technical Default

According to The Latin American Tribune, US District Court Judge Thomas Griesa, who in 2012 ruled in favor of a group of hedge funds that refused to accept debt swaps and are demanding full payment on defaulted Argentine bonds, sided again with those litigating creditors.

A ruling by a federal judge in Manhattan could block Argentina’s ability to make a scheduled payment to holders of its restructured debt and catapult the country into a technical default.
 
Judge Griesa, who in 2012 ruled in favor of a group of hedge funds that refused to accept debt swaps and are demanding full payment on defaulted Argentine bonds, sided again on Thursday (June 26) with litigating creditors.

Judge Griesa again denied Argentina’s request for a stay of his ruling ordering the country to pay the holdout hedge funds in full at the same time that it makes its scheduled June 30 payment to the vast majority of investors who accepted steep haircuts in 2005 and 2010 debt restructurings.

The request is “not appropriate,” the judge said, adding that it does not go into effect unless Argentina makes the scheduled payment to its exchange bondholders. His court has no control over whether the country makes that payment.

That latest ruling is a setback for President Cristina Fernández’s administration, which minutes earlier had announced that Argentina had proceeded to pay $832 million in principal and interest to the holders of restructured bonds, including $539 million deposited in the Bank of New York Mellon’s account at Argentina’s Central Bank.

COMMENT: As I have said so often in the past, Argentina dug itself into a colossal hole largely as a result of its populist doctrine. Seemingly, the High Court has figured out Buenos Aires' "con job," and may soon force the country into a technical default, which could prohibit the country from using the US banking system in the future.

Argentina will be in technical default if US banks, in compliance with Griesa’s order, do not process its payments to the exchange bondholders.

In a message read to the media Thursday, Argentine Economy Minister Axel Kicillof criticized what he termed Griesa’s partiality and reiterated Argentina’s pledge to “honor its debt obligations to 100% of its creditors in a fair, reasonable and legal manner.”

He said the judge’s intention was to dismantle the debt restructurings that Argentina achieved after lengthy negotiations and which were accepted by 92.4% of its bondholders.

Kicillof said any effort to block Argentina’s attempts to pay the exchange bondholders was a clear violation of international law.

In his November 2012 ruling, Griesa ordered Buenos Aires to repay more than $1.3 billion in defaulted debt to a group of holdout hedge funds led by New York-based Elliott Management Corp.’s NML Capital Ltd unit. Including interest, the full amount owed to those litigating bondholders is roughly $1.5 billion.

Earlier this month, the US Supreme Court refused to hear the Argentine government’s challenge of that decision and also issued a separate ruling that enables NML and other bondholders to ask US courts to compel Argentina to reveal the locations of assets.

Denounced by Argentina as “vulture funds,” NML and other entities acquired risky Argentine bonds at high interest rates when Buenos Aires defaulted on roughly $100 billion in debt in December 2001, the largest sovereign default in world history, amid a financial meltdown and economic depression.

Implementation of Griesa’s order also would lead other holdout bondholders that were not part of the litigation to demand full repayment on the defaulted debt, according to Fernández’s government.

Argentina says those potential claims would bring the total owed to the holdouts to some $15 billion, equivalent to half of Argentina’s foreign-exchange reserves, and push the country into default.