September 2, 2014
Dual strategy: talks and BA bonds
Argentina is taking the necessary steps to restructure debt held by exchange bondholders to place it under Argentine law, Economy Minister Axel Kicillof said yesterday. The move would allow the government to continue servicing its debt despite adverse US court rulings.
One day after the United States Supreme Court declined to hear Argentina’s appeal and effectively ended its longstanding battle with holdout hedge funds, Kicillof began to outline the government’s strategy in a long-awaited speech that contained a clear two-pronged strategy: continue negotiations with the US courts while also getting ready to pay in Buenos Aires.
At the same time, Kicillof said he had ordered the government’s lawyers to launch talks with US District judge Thomas Griesa to review the decision against the country. If the ruling is implemented in the near future, compelling Argentina to pay US$1.5 billion, the country would be pushed into a new default, Kicillof said, because it would open the door to claims from other holdout bondholders worth US$15 billion.
“We can’t allow them to block us from paying our obligations to debt holders that took part in the previous debt swaps. That’s why we are starting to take the necessary steps to restructure the debt and pay it under Argentine law,” Kicillof said yesterday. “Griesa said he doesn’t want to send us into a new default, but I don’t see that (intent) in his ruling. Our lawyers will go to talk to him.”
The US Supreme Court surprised pundits on Monday by declining to hear Argentina’s appeal against holdouts who refused to take part in debt restructurings, a move that could topple the country into a new default. The court left intact lower court rulings that ordered Argentina to pay US$1.33 billion (now US$1.5 billion when interest is included) to the so-called holdouts who refused 2005 and 2010 debt swaps in the wake of its 2001 default on US$100 billion.
“Essentially he’s saying Argentina is going to ignore the ruling,” said Ignacio labaqui, an analyst for consultancy Medley Global. “This is a fairly risky move ... Still, they haven’t closed the door to negotiations.”
Kicillof asked everybody “not to worry” about a possible default, as “all measures to avoid jeopardizing the reconstruction of Argentina’s financial situation” have been taken. But at the same time he warned Griesa’s sentence “pushes the country” into a default, and claimed the Supreme Court’s decision in favour of hedge funds aimed to “tear down” the country’s debt restructuring process.
Negotiating with hedge funds was effectively ruled out by Kicillof.
“Vulture funds are vultures, because they don’t negotiate. They go to trial to obtain the total amount of their claims. If they wanted to negotiate, they would have done it in the previous debt swaps like the rest of debt holders,” Kicillof said.
The government has argued it cannot give holdouts preferential treatment over exchange bondholders, as many of them bought the debt at a massive discount. Paying holdouts could open the door to claims from the other 92 percent of holdouts, or the US$15 billion Kicillof referenced in his speech.
Argentina has to pay US$900 million on June 30 to bondholders that accepted the government’s previous debt swaps. According to Griesa’s ruling, the government will also have to pay US$1.5 billion to hedge funds. If only the US$900 million are paid and not the hedge funds, the money would be seized by the US judiciary, Kicillof explained.
“If we pay the US$1.5 billion and the US$900 million, then we would have to pay up other US$15 billion to holdouts and more than US$120 billion to bond holders that accepted the debt swap and who would probably ask for more money,” Kicillof said. “Paying hedge funds would lead to an endless chain of payments.”
Kicillof highlighted the government’s efforts to deal with the country’s debt, which represented 166 percent of GDP in 2002 and now 40 percent. This debt reduction was achieved after several agreements in the last decades, such as the 2005 and 2010 debt swaps, the payment to the International Monetary Fund (IMF) in 2006 and the agreement with the Paris Club earlier this month, the minister continued.
“Argentina has been paying all its debt deadlines since 2003 and wants to keep on paying. But now some people don’t want to allow us to pay. This government did not create this debt, we took office and normalized international financial relationships after the 2001 crisis,” he added.
The Economy minister said hedge funds found a “fissure” to try to “knock down” all the government’s efforts to restructure its debt and recalled they have been litigating against the government over the past 12 years, after buying bonds in 2008. “They have tried to seize several of the country’s assets, such as the Li-bertad frigate and the Central Bank’s international reserves, but all attempts were halted by foreign judges,” Kicillof said.
Kicillof’s conference came after an announcement on Monday night by President Cristina Fernández de Kirchner, who said she “wasn’t surprised” about the Supreme Court’s decision, and assured the country will continue to pay its restructured debt.
The government’s next step will be a visit by Kicillof, Cabinet Chief Jorge Capitanich and Legal and Technical Secretary Carlos Zanini to Congress today.