September 21, 2014
Following the us supreme court’s decisionTuesday, June 17, 2014
Options fizzle down to three
President Cristina Fernández de Kirchner’s administration — and Economy Minister Axel Kicillof in particular — has two weeks to make a deal that could be critical to the country’s economic future.
The US Supreme Court decision to reject Argentina’s appeal against lower court rulings commanding full repayment of bonds worth US$1.33 billion to creditors who have refused all previous efforts to restructure the country’s defaulted debt caught almost everyone off guard.
“There are two options: pay everything or pay no one,” according to Marco Schnabl, from Skadden, Arps, Slate, Meagher & Flom, which represented the local Puente brokerage in its amicus submission in support of the government.
In the last writ filed to the Supreme Court, Argentina said it would respect whatever the final ruling was, warning that it would face a new default if it was ordered to pay holdouts in full.
“The ‘technical’ in ‘technical default’ is bullshit, it’s like saying you’re technically pregnant. I assume it’s a term made up in Argentina to say: ‘Hey we’re willing to pay, but we can’t.’ It’s a default, period,” Schnabl said emphatically.
Indeed “all legal steps have been exhausted,” he emphasized, and to avoid default, — “other than paying all that the US court asks to be paid — is to negotiate with the holdouts and ask for a postponement of the order past the end of June if negotiations are progressing smartly.”
Argentina has payments worth US$900 million of Discount bonds governed by New York law due June 30, and as of yesterday, the country cannot legally pay any bondholders without also paying the holdouts.
Asking the Supreme Court to review its decision to dismiss Argentina’s appeal is an option, but it would not bring any benefits in terms of delaying the case, as the lower courts’ verdicts against the country would stand regardless.
Ignacio Frechero, a specialist researcher at the CEIPIL, an international relations think tank, agreed, adding a further alternative was to offer restructured bondholders a later payment date, so as to not trigger a default by the end of the month.
With regard to out-of-court negotiations with hedge funds, “which have been latent in recent months, led by Gramercy and Fintech,” he continued, NML recently communicated it would be willing to accept a similar offer to the one given to the Paris Club, that is, part in cash, and part in new bonds.
Puente head strategist Alejo Costa told the Herald he expects Argentina to “ask Judge Griesa for additional time to reach an agreement with the holdouts.” There is hope that Griesa, who pronounced the first ruling against Argentina in the District Court for the New York Southern District, “will decide to extend the duration of the stay and give Argentina more time, but we can’t know that,” he added.
Richard Samp, Chief Counsel of the Washington Legal Foundation, was sure “a request for the extension of the stay won’t be granted, it will be denied.”
Despite the government’s longstanding position of refusing to negotiate with the holdouts, which President Cristina Fernández de Kirchner refers to as “vultures,” Costa considered that “Argentina’s authorities seem more willing to negotiate than before.”
The country has three concrete strategy options, according to Costa:
1) Argentina could negotiate with plaintiffs to reach a settlement.
2) The country could face a default on foreign-law bonds, ceasing payments to all exchange bondholders, to later on negotiate once the RUFO clause expires. In the meantime, payments to an escrow account could be made to show willingness to pay.
Argentina hinted last month it might consider negotiating with holdouts but could not do so until December 31 of this year when a clause in its debt swaps prohibiting it from offering holdouts better terms expires.
3) It could face a default on foreign-law bonds, to later re-structure all of its debt.
A restructuring to local-law could violate the injunction, leaving Argentina in contempt of court. This process would require the approval of the majority of bondholders, as well as congressional approval, but would remove Argentine debt from the sphere of US law.
IDESA economic consultancy director Jorge Colina told the Herald he expects Argentina’s strategy to hinge around “requesting the suspension (of the stay) to be dragged out until the end of the year, in order to be able to comply with the adverse rulings next year without encountering problems with the (other 92 percent of) bondholders who took up restructuring” offers in 2005 and 2010.
Argentina says it doesn’t have the resources to pay what ultimately could amount to US$15 billion in holdout claims while also servicing the restructured bonds. If unequal payments are made this year, a flood of litigation would probably land on the country’s doorstep, as restructured bondholders would likely seek full repayment as well.
No surprises here
The move certainly did not surprise Schnabl, who insisted to the Herald that the Supreme Court takes on very few cases, so that even if the case was more interesting than others “the odds were still 15 percent.”
“It was an easy call to make, because I told everyone, even if the case was 10 times more interesting, the odds were still at 15 percent that they would take it, so as a lawyer it was an easy prediction to make, he said, adding “it was like saying it’s going to rain in England in the winter.”
Asked why there was such expectation that the Court would request the opinion of the US Executive, he replied: “You’re asking a lawyer in the US a psychological question. People were looking for a lifeline, that’s why things got distorted.”