As the countdown begins before a potential new debt default, the markets reacted warily yesterday to the President Cristina Fernández de Kirchner administration’s suggestion that it has yet to prepare a team to go to New York to negotiate with holdout bondholders

Friday, June 20, 2014

Default countdown: talks are in doubt

Cabinet Chief Jorge Capitanich talks to the press at his regular morning briefing yesterday.

Opposition politicians urge government to take more conciliatory stance in fight with holdouts

As the countdown begins before a potential new debt default, the markets reacted warily yesterday to the President Cristina Fernández de Kirchner administration’s suggestion that it has yet to prepare a team to go to New York to negotiate with holdout bondholders.

Meanwhile, the opposition began to splinter slightly as it responded to concerns about the government’s strategy while also insisting on criticizing Judge Thomas Griesa’s actions in the case.

After a rollercoaster day of news in which Argentina’s lawyer in New York first said the country would negotiate with holdout creditors before the Economy Ministry warned the country would not be able to service the US$900 million in debt payments due on June 30, Cabinet Chief Jorge Capitanich said there was nothing planned for a high-level government trip to New York.

“There is no delegation prepared for a possible trip to the United States,” Capitanich said in his morning briefing, although he also did not rule out negotiations.

A government source later told Reuters that Capitanich was referring to a lack of detail about who would travel and when, but that he wasn’t saying talks wouldn’t take place.

Yet the hedge funds the government likes to call “vultures still” have not been contacted by the Argentine government to launch negotiations.

“We still have not launched a dialogue with Argentina,” Stephen Spruiell, a spokesman for the law firm representing the funds, told the EFE news agency yesterday.

Negotiations between the government and hedge funds leading the group of holdouts could resolve the crisis but the two sides appear to be far apart and the country is running out of time.

While the debt payment is due on June 30, the government has a grace period of 30 days before falling into default.

Back-and-forth

The dizzying nature of the country’s response reveals the crux of the problem for the government: it needs to settle with holdout creditors from the record-breaking 2001 default to avert triggering another debt debacle that would impair the country’s return to international markets, yet is short on the cash needed to pay up.

A settlement with the holdouts that have won rulings in their favour in US courts could unleash demands from other holdouts, who together have potential claims totalling as much as US$16 billion, according to Citigroup. That’s equal to more than half the country’s US$29 billion of foreign reserves.

Fernández de Kirchner has said she is open to negotiations while also accusing the holdouts of “extortion” and implying that her government might try to skirt the US court rulings by bringing the debt under Argentine law.

The tough talk may be a bid to bolster Argentina’s power at the negotiation table but it risks further angering Griesa, who has ruled consistently in favour of the holdouts and has harshly criticized Fernández de Kirchner’s public comments.

The holdout creditors are led by NML Capital Ltd., a division of billionaire Paul Singer’s Elliott Management Corp., and Aurelius Capital Management, chaired by Mark Brodsky.

The 2nd US Circuit Court of Appeals ruled on Wednesday that Argentina can’t continue to pay creditors who agreed to restructure their bonds after its 2001-02 default on US$100 billion in debt unless it also pays $1.33 billion to the holdouts demanding full payment.

Politicians speak out

Amid the apparent mixed messaging yesterday, opposition politicians began to distance themselves from any kind of confrontational strategy with the holdouts and warned against triggering a default. Nonetheless, they mostly continued to insist on decrying the decisions by Judge Thomas Griesa that have left Argentina in a legal quandary.

The Broad Front-UNEN reacted first to the indications that the government may take a harder line against the holdouts, urging that negotations be the chosen strategy going forward. Radical Party members such as Senator Gerardo Morales and Lawmaker Ricardo Alfonsín lambasted once again Griesa’s previous rulings, calling them “unenforceable” and “irresponsible” respectively.

The Buenos Aires City mayor and leader of the centre-right PRO party Mauricio Macri favoured the most pliant stance before the creditors, telling Radio Mitre that “now we have to sit in Griesa’s courtroom and whatever he ends up deciding, we must comply. If not, we enter into a default... we have to go there and pay up.”

Perhaps seeking to soothe nervous watchers, key government figures such as Lower House Speaker Julián Domínguez spoke of Argentina’s willingess to give “equal treatment to all creditors” and to “intelligently and responsibly” engage with the holdouts.

Griesa ruling

Griesa said yesterday that adopting another payment mechanism of the kind proposed by Kicillof would violate the orders of his court.

Holding back a negotiating party from New York may be a way for the country to avoid violating the Rights Upon Future Offers (RUFO) clause included in the offer made to bondholders who accepted a 70 percent discount in restructurings in 2005 and 2010, according to Carlos Abadi, the chief executive officer of New York-based investment bank ACGM Inc.

While the clause guarantees exchange bondholders that the nation won’t voluntarily make any better offers until December 31, using attorneys from its law firm Cleary Gottlieb Steen & Hamilton may provide a workaround, he said.

Markets down

Although analysts largely agreed the government was playing out a strategy, the markets seemed to agree it was a risky one. Stocks and bonds took a tumble, with commercial banks bearing the brunt of the losses.

The Merval benchmark index was down 4.9 percent yesterday — and 8.7 percent since Friday of last week.

The peso was stable yesterday in trading at 8.15 pesos to the US dollar, but the illegal “blue” dollar depreciated slightly by 10 cents to 12.40.

Herald with Reuters, Bloomberg, AP, DyN