September 19, 2014
In US Supreme Court we (also) trust
The World Cup begins today, with all the socio-economic paralysis that it implies, but the gaze of economy-watchers will rest northward, on Washington DC, at least for today, where the Supreme Court is expected to finally make a move on the most pivotal case in Argentina’s court battle with holdout hedge funds demanding the full repayment of debt from the record-breaking 2001 default.
The court’s nine justices deciding against hearing Argentina’s appeal could end up sending the country into a technical default, which would mark a setback for its recent efforts to restore credibility with international markets, including the agreement to repay the Paris Club, compensation to Spanish oil firm Repsol for the expropriation of its majority stake in YPF and the IMF-friendly reform of the methodology behind the INDEC national statistics bureau’s consumer price index.
A multi-party Argentine congressional delegation travelled to Washington DC this week for a series of meetings with their United States counterparts and officials at multilateral organizations, including the World Bank, during which they once again presented a unified position in what they considered to be a “national cause.”
The Supreme Court is widely expected to kick the can down the road today, as pundits believe the tribunal is likely to delay proceedings by requesting the opinion of Attorney-General Eric Holder, a move that would push litigation back another few months.
Both a request for Holder’s opinion and hearing the case would also mean edging closer to a crucial December 31 deadline. The Rights Upon Future Offers (RUFO) clause of Argentina’s bonds says the government cannot voluntarily offer better terms to holdouts than what was agreed upon with those who agreed to restructure the defaulted debt in 2005 and 2010 until January 1, 2015. In short, the RUFO clause means that as of next year, the government could technically pay the holdouts in full without undermining the restructurings of 2005 and 2010.
The prolongation of litigation would mean a more stable horizon for the peso against the dollar, and would send stock prices rising and decrease bond yields.
Regardless of the recognition that Paul Singer’s NML Capital and other holdout hedge funds are pursuing full repayment of debt of US$1.33 billion through valid legal avenues, financial and economic experts the Herald has consulted in recent months agree that ruling against the country would undermine jurisprudence for future international debt restructuring efforts.
“I foresee a positive scenario, either through the extension (of the case) or if it is heard,” Puente investment bank head strategist Alejo Costa told the Herald yesterday, adding that both developments would “open to door to the issuance of provincial and sovereign debt ... at significantly lower interest rates”
Costa explained that both decisions would “propel stocks, and more so if the case is heard.”
A New York-based trader recently told Reuters that “if there are more delays, the market could go up big time. But if they are forced into a technical default, bonds could drop 15 points.”
Eduardo Levy Yeyati, an economist, considers that the request for the attorney-general’s opinion would send the rate at which Argentina can issue debt below the eight-percent mark. YPF recently took on foreign debt at 8.75 percent amid high demand, a reference point for the government.
“I believe that Argentina will still be solvent if the Supreme Court decision favours the holdouts and Argentina has to pay these claims. From a macro standpoint the capacity to pay is there,” Alberto Ramos, who analyses the country for Goldman Sachs, told AP yesterday.
The benefits of ending the holdout cases are clear.
“If the (Argentine) authorities were able to put the issue of the holdouts to rest, they would benefit from broader access to more conventional and stable domestic and foreign financing sources,” Ramos added. “This and a bit of fiscal consolidation, which would also benefit the economy tremendously, would likely put Argentina in a position to honour the claims of the holdouts without necessarily sliding into another crisis.”
Greater problems would arise if restructured holdouts come back to demand full repayment as well, or if Argentina’s payment channels are frozen in New York.
The holdout case is seen as the final hurdle to what has been touted as a potential flood of foreign investment in the massive Vaca Muerta shale oil and gas formation in Patagonia, with a favourable resolution logically bringing risk ratings tumbling downward.
Nonetheless, a degree of apprehension was felt in the capital yesterday, with the Merval benchmark stock index edging down 0.98 percent, although that mostly reflected a decline in shares of banks as a result of a Central Bank regulation that put limits on the interest rates they can charge for personal loans.
Access to foreign credit lines has seemingly become a priority for the government in the face of a high budget deficit, although such loans would likely go toward specific infrastructure works rather than current spending.
The Treasury posted a 1.257-billion-peso primary budget deficit for the first quarter of 2014, closer to zero than the 1.458 billion in the red for the same period of 2013, although that was primarily due to a 12.361-billion peso injection from the Central Bank (BCRA).@franma1990