Tags: Argentina | economy

Argentina to Sidestep US Ruling by Paying Bonds Locally

Wednesday, 20 August 2014 09:21 AM

Argentina plans to pay its foreign-currency bonds locally to sidestep a U.S. court ruling that blocked payments last month and caused the nation to default for a second time in 13 years.

The government will submit a bill to Congress that lets overseas debt holders swap into new bonds governed by domestic law with the same terms, President Cristina Fernandez de Kirchner said in a nationwide address yesterday. Payments will be made into accounts at the central bank instead of through Bank of New York Mellon Corp., the current trustee.

Holders of Argentina’s $30 billion of overseas bonds have been in limbo since U.S. District Court Judge Thomas Griesa blocked the nation’s attempt to pay $539 million in interest due by July 30. His ruling was meant to compel Argentina to resolve unpaid debts from its 2001 default. While most creditors agreed to provide debt relief, hedge funds led by billionaire Paul Singer’s Elliott Management Corp. refused and successfully sued for full repayment in U.S. court.

“The bigger picture hasn’t changed at all,” Will Nef, who helps manage $3.2 billion of emerging-market debt at Union Bancaire Privee in Zurich, said by phone today. “Argentina is still locked out of international credit markets because the issue with the holdouts remains unresolved.”

Argentina plans to create a separate account for the holdout creditors such as Elliott, who own 7.6 percent of debt from 2001 and didn’t accept the government’s previous debt swaps. Payments for holdouts would be deposited under the same terms as the rest of its restructured debt, regardless of whether they decide to accept the swap.

Creditors opting to keep their notes will also get payments locally under the plan, Fernandez said yesterday. Stephen Spruiell, a spokesman for New York-based Elliott, didn’t immediately reply to an e-mail seeking comment.

Daniel Pollack, a court-appointed mediator for the talks between Argentina and the holdouts, didn’t immediately return an e-mail seeking comment on the government’s proposal.

The International Swaps & Derivatives Association pushed back the date for the auction to settle Argentina’s credit- default swaps to after Sept. 2 from Aug. 21, according to its website. Argentina’s failure to pay interest on its bonds triggered a credit event and settlement of $1 billion of the default swaps, ISDA said on Aug. 1.

The country’s sovereign debt has lost 7 percent this month, the most among more than 50 developing countries in the Bloomberg USD Emerging Market Sovereign Bond Index. Argentina’s benchmark dollar-denominated bonds maturing in December 2033 climbed 1.28 cents on the dollar yesterday to 82.74 cents, above the five-year average.

U.S.-based investors may be wary of taking part in the swap over concern they will be held in contempt of court, according to Casey Reckman, an economist at Credit Suisse Group AG.

“We expect the market to respond negatively to this news,” Reckman said in a research note today. “Foreign-law exchange bonds could be dropped from the main emerging-markets bond indices if this operation is completed, a prospect that could lead some investors to sell their holdings.”

Fernandez first said the government was considering a local law swap in August 2013. Economy Minister Axel Kicillof mentioned the possibility again after the U.S. Supreme Court rejected the country’s appeal in the U.S. court case in June.

The president and her predecessor, her late husband Nestor Kirchner, persuaded about 92 percent of bondholders from the $95 billion default in 2001 to give up about 70 percent of their claims in debt swaps in 2005 and 2010. The restructuring allowed Argentina to exit a cycle of deepening indebtedness and fueled economic growth, Fernandez said yesterday.

The nation’s economy is poised to shrink 1 percent this year, the first contraction since 2002, according to the median of 22 estimates in a Bloomberg survey.

“When it comes to the sovereignty of our country and the conviction that we can no longer be extorted and that we can’t become burdened with debt again, we are emerging as Argentines,” Fernandez, who struggled to hold back tears, said in a speech at the presidential palace in Buenos Aires.

The bill will be sent to lawmakers immediately and Kicillof will hold a press conference today to provide more details, she said.

Attempts by private banks to negotiate a settlement to the decade-long debt dispute failed, Elliott and Aurelius Capital Management LP said last week. The hedge funds led a group of creditors that won a judgment from Griesa that entitles them to $1.5 billion in restitution.

Banks including Citigroup Inc., which discussed finding a buyer for at least a portion of the securities, couldn’t agree on a price, a person briefed on the meetings said. The talks also stalled because the government wouldn’t provide sufficient guarantees for a bond buyback, said the person, who asked not to be identified because the discussions were private.

Swapping the securities for new bonds will require the involvement of financial intermediaries and may be difficult given the legal constraints of the ruling, according to Daniel Kerner, the head of Latin America research at the Eurasia Group. Most of the overseas bonds were issued under New York law.

“It’ll be a messy situation, which won’t get resolved quickly,” he said.

Both Argentina and the holdouts have been ramping up efforts to sway public opinion with television, newspaper and online advertisements. American Task Force Argentina, a lobbying group partly funded by hedge funds such as Elliott, spent about $1 million in the past week in advertising, according to the group’s co-chair, Robert Shapiro.

The spots arguing Argentine pensioners and individual bondholders are being cheated out of what they’re owed have appeared in the U.S. on channels including CNBC, CNN, and Bloomberg Television, as well as websites for Politico, the New York Times and Bloomberg.

Argentina has taken out full-page ads in newspapers around the world to decry Griesa’s decision to block payments until it pays the hedge funds in full or reaches a settlement.

The Argentine president has argued that obeying the ruling by paying the holdouts would trigger a Rights Upon Future Offers clause in the exchange bond contracts that obliges Argentina to match any improved offer to all bondholders. That could trigger claims of at least $120 billion, according to the proposal.

“If I signed what they’re trying to make me sign, the bomb wouldn’t explode now but rather there would surely be applause, marvelous headlines in the papers,” Fernandez said. “But we would enter into the infernal cycle of debt which we’ve been subject to for so long.”

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Argentina plans to pay its foreign-currency bonds locally to sidestep a U.S. court ruling that blocked payments last month and caused the nation to default for a second time in 13 years.
Argentina, economy
Wednesday, 20 August 2014 09:21 AM
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