Argentina is struggling in last-ditch efforts to use the byzantine global payments system to distribute money to bondholders in defiance of a US court ruling.
Euroclear and Clearstream, the European-based central securities depositories, have been asked by the government to help pay interest due on Tuesday after Citibank Argentina, the local custodian bank, was permitted to process the payments.
However, both have indicated that investors are unlikely to receive the money.
Euroclear says it will comply with Argentina’s request to make payments only if given authority to do so by US courts, as it has on two previous occasions. Last week, a New York judge, Thomas Griesa, barred Euroclear from processing any debt payments by Argentina.
Clearstream confirmed on Monday that it had put a stay on ties with Citi Argentina after local markets authorities suspended Citi’s licences for its custody and brokerage businesses owing to the stand-off. Both Clearstream and Euroclear have already shut trading bridges on almost $10bn of Argentine bonds issued under local law.*
The dispute highlights how few options remain for Buenos Aires to avoid paying hedge funds on their bonds. It also shows how widely Judge Griesa’s ruling is being felt across international markets, with banks and market infrastructure operators caught in the middle of a fight over legal jurisdictions.
The protracted battle between Argentina and so-called vulture creditors dates back to 2001 when the government defaulted on $100bn of debt. Most bondholders accepted a swap on their investments in 2005 and 2010, losing money in the process. But a small group of hedge funds led by Elliott Management’s NML Capital are fighting for full repayment.
The “holdout” creditors took the case to New York, where Judge Griesa ruled in their favour, preventing Argentina from making interest payments on any bonds unless it also repaid hedge funds in full. The ruling led to Argentina’s default last July — its second in 13 years.
Since then, the Argentine government has been attempting to circumvent the ruling with limited success.
One route by which payments could still be made is to move funds in Citi Argentina to Euroclear’s account within a custodian bank.
From there, the payments could be transferred to European central securities depositories. These unglamorous market utilities finalise trades and hold securities on behalf of customers.
However, there are signs that the US court intends to prevent all bond payments by Argentina.
Earlier in March, Judge Griesa dashed government hopes of issuing new debt by declaring that Argentine bonds issued under local law and denominated in dollars were considered external debt and were covered by the injunction preventing payments. He ordered all participants in the payments process not to help Argentina in financial transactions.
There are now questions about whether this decision might affect the payment of Boden 15s, local law bonds, due in October.
Bondholders with Argentine debt issued under foreign law argue that their debt should not be included in the US court decision, but remain in stalemate. The High Court in London recently agreed that certain bonds were governed by English law, but did not rule that the bank handling payments should pay the bondholders.
* This article has been amended to clarify that Citi’s licences for its custody and brokerage businesses were suspended. The article previously said it was Citi’s domestic banking license.
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