September 22, 2014
Default clock starts ticking tomorrow
The battle between Argentina and holdout investors escalated this past week as each side staked out its negotiating position before the clock starts ticking on Monday on a 30-day grace period that could end in default.
By depositing money on Thursday to make the required payment on the restructured bonds on June 30, Argentina said it was expressing a willingness to pay.
But some brinkmanship was also at work, as the sovereign knows that a US court ruling requires it to disburse funds to both holdouts and restructured bondholders if it wants to avoid a technical default.
Argentina has few cards to play but that is not stopping it from baring its teeth, with Economy Minister Axel Kicillof defending his government’s position at the UN in New York and garnering support from other Latin American countries in the process.
The United Nations Conference on Trade and Development also chimed in, voicing its disapproval of US court rulings that favour litigant investors over Argentina. The UN body called the recent rulings a setback for debt restructuring and warned that more holdout investors were likely to take an aggressive stance in snatching the assets of defaulted sovereigns.
“The rulings have made future debt restructuring much more difficult as debtors are left with only moral suasion and foreign relations as weapons to encourage creditor coordination,” the UN agency said. “They have also strengthened the hand of creditors even though their behaviour can be among the underlying causes of debt crises.”
The UN body was hardly alone in expressing its support for the country. British unionists, journalists, members of Parliament and academics submitted a joint letter to the Argentine Embassy in London in support of the country. A group of more than 100 British members of Parliament had also presented a similar letter of support at the embassy before the Supreme Court’s decision not to hear the Argentine case last Monday.
Meanwhile, this seemingly growing support for Argentina’s position comes at a time when President Cristina Fernández de Kirchner’s government also embarked on an aggressive ad campaign in the US and European papers, making its case against litigant holdout investors. One declared: “Argentina wants to keep paying its debt and they are not allowing it to.”
Despite the country’s efforts to gain support, US judges have been less than sympathetic, giving Argentina little room to manoeuvre and supporting holdout creditors that argued last week that a stay requested by Fernández de Kirchner’s administration was unnecessary.
“Although Argentina claims that a stay would facilitate negotiations, just the opposite is true,” lawyers representing the holdouts wrote in a letter to US District Judge Thomas Griesa.
“While granting a stay is not necessary for negotiation, it would serve to create more time for Argentina to develop evasion plans, which it has repeatedly demonstrated its willingness to do.”
In order to pay holders of the country’s restructured bonds without being in contempt of court, Argentina said it needed a stay to be issued by Griesa that would have temporarily suspended his order for the country to pay holdouts simultaneously. Nevertheless, the US judge declined the government’s petition.
The country’s hand was further weakened later in the week when a US federal court decided not to allow payment to restructured bondholders on Monday, and Judge Griesa told Bank of New York Mellon to return the money to Argentina. The government had deposited US$539 million in BNY Mellon’s account at the Central Bank intended only for bondholders who participated in two sovereign debt exchanges in 2005 and 2010.
The deposit was made, Argentina said, in order to meet a June 30 coupon payment deadline. There is a 30-day grace period, however, before a default can be declared if exchange bondholders do not receive their money.
“The money should be returned to the republic. Simple as that,” Griesa said, adding that Argentina should get back to the negotiating table. Griesa’s order says Argentina cannot pay exchange bondholders without also paying the holdouts at the same time under the pari passu, or equal treatment, clause in the original bond contract.
The country quickly fired back against Griesa on Friday.
Griesa “has abused his power and gone outside of his jurisdiction because the holders of restructured bonds are not the object of this litigation,” the Economy Ministry said after learning of Griesa’s decision to return the money. “The funds are not property of Argentina, they belong to third parties,” adding that the measure is “unheard of” because “a judge is trying to prevent a debtor from paying his obligations.”
All eyes are now set on how the negotiation between the holdouts and the federal government will continue over the next few weeks, with the deadline set at July 30 when the grace period ends. Both parties have said they want to negotiate in good faith yet substantive meetings are yet to take place.
Griesa appointed financial trial lawyer Daniel Pollack — a man who has represented some of the biggest names in the finance world — as a “special master” early in the week after Argentina indicated through its lawyers that it planned to negotiate for the first time with the holdouts. He said he believed some discussions had occurred and that there were talks about how to prevent Argentina from facing default on Monday.
In Friday’s meeting, however, Griesa expressed frustration several times at Argentina’s failure to engage in negotiations with NML as the payment deadline gets closer.
“Why haven’t settlement negotiations gone forward?” Griesa asked. “Why aren’t they going forward today instead of having us sit in court?”
Carmine Boccuzzi, one of the lawyers for Argentina, told Griesa at the hearing that the country still hoped for a negotiated settlement, while Pollack said he was “making every effort” to get the parties to the table.
Despite the looming possibility of default, investors are taking the deadlock in their stride. Bond prices barely budged this week as markets bet that the government would eventually cave into holdout demands rather than risk the economic, not to mention political, costs of failing to make a bond payment on its restructured debt.
Judge Thomas Griesa’s decision not to seize Argentina’s funds had a positive effect on the Merval benchmark stock index, which rose 1.1 percent on Friday and closed at 7,905 points with 151 million pesos traded. Shares of Argentina companies also registered increases in Wall Street, reacting positively to the news, while bonds in dollars and GDP bonds dropped.
Herald with Reuters