March 31, 2013 5:13 pm

Argentina hints at payment rerouting

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Argentina has tacitly admitted it will seek to reroute payment on its US restructured debt abroad if, as is widely expected, a US appeals court rejects its Easter proposal to resurrect a bond swap for holdout creditors.

Amado Boudou, the vice-president, told a news conference Argentina would seek a “mechanism” to meet its commitments to creditors who exchanged defaulted debt for new bonds in 2005 and 2010. He said that “under any condition, in any instance, whatever the [court] result  . . . one way or another, Argentina is going to pay”. He gave no details.

Failure to do so could spark a technical default – a nightmare scenario for a country struggling to live within its means after defaulting on nearly $100bn in 2001, and a serious defeat for Cristina Fernández, Argentina’s president, who sees honouring the country’s debts as a cornerstone of economic policy.

Hernán Lorenzino, the economy minister, dismissed talk of default as a “fallacy” and an “invention” by speculators and Mr Boudou said it would be a “judicial absurdity to blockade payments by a country that has the capacity and willingness to pay”.

But Marcelo Etchebarne, an Argentine lawyer following the case closely, did not expect the Second Circuit Court of Appeal to endorse Argentina’s plan to pay holdout creditors only on the same terms as two previous debt swaps.

“The 2010 offer was more punitive than the 2005 and this 2013 offer is more punitive than the 2010. From a legal perspective the court cannot ‘cram down’ the plaintiffs … [this proposal] will most likely be rejected by the court after letting plaintiffs offer a response.”

Argentina’s dilemma stems from a ruling last year by Judge Thomas Griesa in New York who found the country had breached the pari passu or equal treatment clause in its defaulted bonds and ordered it to pay $1.33bn to holdouts led by Elliott, a fund which has been crusading for years through the courts seeking to collect in full.

The order prompted fears that sovereign restructurings would be hamstrung in future. Indeed, Axel Kicillof, the deputy economy minister, stressed “this suit is not happening on Mars in the year 3000” but at a time of international debt crisis.

To give his order teeth, Judge Griesa barred anyone from helping Argentina evade it, including the exchange bonds’ trustee, the Bank of New York Mellon – something Vladimir Werning at JPMorgan says could hamper any Argentine “Plan B”.

“This might be seen as feasible to many observers if it is assumed that a vote to change payment terms in the contract achieves a supra majority (the necessary proportion of bondholders) and crams down all holders to accept the payment elsewhere,” he said in a note to clients. “But we believe that this may still face difficulties as long as the intermediaries are affected by the order to not assist the process.”

Argentina criticises Elliott as a “vulture fund” that picked up bonds at practically a fifth of face value after the default and says paying it would be unfair to creditors who took steep haircuts to swap more than 92 per cent of the debt in default.

While Elliott has not commented publicly, no one expects it to entertain a swap it has already rejected twice. Nonetheless, Sean O’Shea, a lawyer for exchange bondholders, expressed the hope “that the plaintiffs will finally ... accept this fair and equitable offer and put this difficult period to rest”.

Eugenio Bruno, an Argentine lawyer and debt specialist at law firm Garrido, who is advising exchange bondholders, investment banks and holdouts that want an exchange, said the Second Circuit knew Argentina, under its so-called “lock law”, was barred from making a better offer to holdouts.

“The court of appeals is or should be aware of those limitations. That’s why I hope the [order to spell out a payment proposal] was not some kind of ‘judicial ambush’ - requiring something that they knew Argentina is prevented from offering …” he said. “Argentina could complain before the US Supreme Court if the appeal court rejects the Argentine payment proposal.”

Indeed, one way or another, Mr Lorenzino acknowledged that Argentina “understands an approach to the Supreme Court will happen”.

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