September 23, 2014
Stay: crucial incentive for investors
Argentina last week began talks to settle US$1.33 billion of debt to holdout bondholders following a US court order for it to be paid, and will seek to avoid a new default.
To negotiate with the holdouts, the country asked District Judge Thomas Griesa to temporarily suspend his ruling by implementing a stay.
The pressure lies in the country having to reach an agreement with the holdouts in order to be able to service its debt to bondholders who did enter restructurings in 2005 and 2010. As things stand, the latter group will have been fully repaid by 2038.
Griesa is now analyzing whether to impose a new stay so that negotiations can advance without the lurking threat of embargoes.
Here are some of the scenarios that may come about as a result of the negotiation process:
First phase: US Judiciary rejects stay request
If Judge Griesa rejects the request for a new stay, Argentina will enter default with its restructured creditors a month after June 30, when bond coupon payments are scheduled, as US banks would be legally barred from carrying out the transaction, which the Argentine government says totals some US$900 million, and the funds would be confiscated.
The negotiations with holdouts will probably fail, because the country will have no incentive to negotiate under such circumstances.
Taking into account previous comments by Griesa, who has affirmed that he is not seeking for the country to enter default, it is unlikely for the judge to follow this path.
US Judiciary grants stay, but asks for guarantees
The US Judiciary could grant a temporary suspension of the payment order for Argentina to negotiate without fear of embargoes, but the judge could demand a minimum deposit as a warranty of payment.
This appears to be the most probable outcome for analysts, especially after Griesa said he did not trust Argentina’s alleged willingness to pay.
Negotiations could be stumped by the amount of any warranty.
Second phase: Negotiations advance and holdouts accept offer
If Judge Griesa grants the temporary suspension of his ruling, and if Argentina agrees to his terms, the door will be opened for the country to sit down and negotiate with the holdouts.
Due to the Rights Upon Future Offers clause agreed with holders of restructured Argentine debt from the 2001-02 default, Argentina cannot willingly offer holdouts better terms of payment to holdouts until January 1, 2015.
Although the clause expires at the end of the year and the government could seek to delay a payment to the holdouts until 2015, it’s possible that the latter, mainly hedge funds, may want to seal an agreement before December 31 following several years of litigation, especially considering that President Cristina Fernández de Kirchner ends her term in office next year.
Details of the offer to be submitted by the country are unknown, but analysts agree that the most likely proposal will consist of a short term cash payment and the rest of the US$1.33 billion in bonds with yield dates over several years.
Other combinations are possible, but less likely, including a single cash payment, or a cash payment plan with several installments.
Other creditors file claims after holdout agreement
If the holdouts accept an Argentine offer, the country says it runs the risk of triggering complaints over close to US$15 billion — the total amount of defaulted bonds — by the rest of holdouts who did not enter litigation, rejected the 2005 and 2010 restructurings and were awaiting a definitive decision from the US judiciary.
In that case, Argentina could not front its obligations because the amount represents more than half of the country’s international reserves, meaning that a default would be likely.
A default unfolds
If the holdouts reject the offer or Argentina decides to withdraw from negotiations in the face of rigidity from the funds, it will be very difficult for the country to avoid a default.
Nonetheless, the default would not be as catastrophic as that of 2001-02, when the economy crumbled amid a grace social and political crisis.
The country would see its access to foreign credit lines restricted, and the limited income of dollars could derive in a forced devaluation of the peso, but analysts say this would be perceived as a transition situation.
Important sectors of the economy would not suffer great consequences: grain export firms would not face problems in securing loans for their shipments, and experts do not foresee paralysis for the shale oil and gas formation of Vaca Muerta, which requires strong investment.