June 29, 2014 1:35 pm

Argentina in default as contest with holdouts enters endgame

Argentine Vice Economy Minister and YPF's vice auditor Axel Kicillof presents a report of the Argentina's oil company YPF since the intervention, accompagnied by Federal Planning Minister and YPF's auditor Julio de Vido (not in picture) in Buenos Aires on June 1, 2012. Argentine President Cristina Kirchner on May 4, 2012 signed a bill expropriating 51 percent of YPF's stock from Spanish Repsol, its majority shareholder, arguing Repsol had failed to make agreed investments needed to expand domestic production. AFP PHOTO / JUAN MABROMATA (Photo credit should read JUAN MABROMATA/AFP/GettyImages)©AFP

Axel Kicillof, Argentine economy minister

Barring a last minute deal with holdout creditors, Argentina will on Monday enter technical default for the second time in 15 years. But a 30-day grace period means it can still avoid formal default and most investors believe that, eventually, the country will settle in order to regain access to international markets.

Argentine “authorities continue to provide mixed signals about [their] willingness to negotiate”, said Gordian Kemen, head of Latin America fixed income research at HSBC. However, said the bank, its “base case continues to be a negotiated solution . . . [as] the costs associated with a default largely exceed the costs of a settlement”.

Monday’s deadline comes as Argentina’s 12-year legal battle with holdouts, led by NML Capital, the New York hedge fund, has entered an aggressive endgame that has also seen US regulations spill over into international markets not governed by New York law.

The acrimonious battle reached a climax on Friday after the New York judge presiding over the case ruled that the $832m payment due on Monday that Argentina had made to holders of the country’s restructured bonds was illegal as it did not also include a $1.5bn payment to the holdouts, as required under a controversial prior ruling.

Furthermore, Judge Thomas Griesa ruled that a payment by Argentina to holders of a euro-denominated restructured bond was also illegal, even though the particular bond is denominated under English law.

Axel Kicillof, the economy minister, earlier described the ruling as “capricious” and “absurd” and the court as “biased”. NML responded by calling Argentina’s failure to pay it “a brazen step in violation” of court orders. Judge Griesa urged both sides to negotiate. “It would be desirable, if possible, to have a settlement,” he said.

Investors have so far shrugged off the legal too-ing and fro-ing as they believe Buenos Aires’ actions and rhetoric are largely for domestic political consumption. With the economy in recession, they mask Argentina’s underlying desire to regain access to international credit to fund development of the country’s huge shale gas reserves and also avert another financial crisis.

To that end, the government has this year settled claims with the Paris Club of creditor nations and with Repsol, the Spanish oil company, whose subsidiary it renationalised. Argentine restructured bonds due in 2033 have rallied 17 per cent this year, despite the prospect of Monday’s default.

“I think there is a lot of negotiation behind the scenes and that the government is, meanwhile, using the well-worn tactic of turning up the fan,” said one Buenos Aires analyst who asked not to be named. “Look at the Repsol, Paris Club deals. In the end, payments are proportional to the loudness of the inflammatory speeches.”

The case has sparked intense debate about whether it is “morally fair” for the holdouts to be paid in full when 93 per cent of bondholders took stiff writedowns following Argentina’s $95bn default in 2001. Mr Kicillof made the argument forcefully in a speech to the UN last week.

“This has been a very difficult process for [Argentine] President Cristina Fernández as not paying the holdouts has been one of her strongest beliefs,” said Daniel Kerner, head of the Latin America practice at Eurasia, a risk consultancy. Although she wants “to be the moral winner . . . her government is on a path to paying the holdouts given the lack of alternatives”.

A June 12 survey found 54 per cent in favour of the government’s position while a national poll in September found 74 per cent thought Argentina should negotiate

The case has also raised broader questions about whether it will make future sovereign debt restructurings harder, as it may reduce the incentives for creditors to participate – especially for bonds issued under New York law.

That in turn has raised questions about the continuing relative attractiveness of New York as an international financial centre.

“For any sovereign considering a New York law bond issuance, NML is an obvious red flag. It gives sovereigns reason for pause,” said Tim Samples, professor of legal studies at the University of Georgia.

A senior European banker also grumbled this week about the confusing international consequences of the NML ruling. “I would not want to choose New York over London,” he said. “It is a question of attitude to contracts and law.”

Meanwhile, there are more pressing issues at hand, such as whether Argentina will settle and on what terms. Eurasia gives a 60-70 per cent chance of an eventual settlement. Argentines appear similarly divided.

“The government wants to play the victim,” said Horacio Vázquez, an unemployed electrician who 14 years ago ploughed his life savings into Argentine bonds and has since sought full repayment. “What it needs to do is to go to the court and work out a way to pay what it is obliged to.”

Hugo Pérez, 45, a former professional footballer who represented Argentina in the 1994 World Cup, takes a different view. He also bought Argentine bonds, but then accepted a restructuring that paid about 30 cents on the dollar. “I resigned myself to stop fighting and look ahead,” he said.

Local polls give a similar impression. A June 12 survey found 54 per cent in favour of the government’s position while a national poll in September found 74 per cent thought Argentina should negotiate. More than half also said their image of Ms Fernández would stay the same if she negotiated, while a little more than a third said it would improve.

“I hope we don’t default,” said Mr Vázquez. “But I am afraid it might happen.”


Letter in response to this report:

Law has a hard time in abnormal circumstances / From Mr Kees van Ravenhorst

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