Argentine Traders Brace for Default After Bond Swap Offer
Economy Minister Axel Kicillof said, “Everyone stay calm. This has been studied...Read More
Argentina is heading for a technical default as it searches for ways to skirt a U.S. court ruling obligating it to make good on old liabilities, trading in the credit-default swaps market shows.
The upfront cost to buy protection against a default for one year with credit-default swaps more than doubled this week to $4,322 on $10,000 of debt, the world’s most-expensive rate.
The country’s restructured bonds tumbled a third day following a proposal announced last night by Economy Minister Axel Kicillof to swap securities subject to New Yorklaws into local debt. While an exchange would allow Argentina to avoid complying with a judge’s order that holders of defaulted bonds are paid in full when interest is due on the restructured debt, traders drove up the cost of debt insurance on concern that Argentina wouldn’t be able to pull the swap off fast enough, or get full bondholder participation, to avert a technical default that would trigger payout of the swap contracts.
“The bonds are reacting to a substantially higher probability of default,” Hernan Yellati, the head of research at BancTrust & Co, said in a phone interview from Miami. “The risk of a technical default will come from whether the court interprets that Argentina isn’t willing to pay. That’s reflected by the lifting of the stay.”
A federal appeals court in New York lifted a stay today on the judge’s order that Argentina pay the holdout bondholders if it seeks to pay its restructured debt. The stay had been in place pending a decision by the U.S. Supreme Court. The U.S.’s highest court rejected the appeal on June 16, sparking the bond rout.
Court Conference
U.S. District Judge Thomas Griesa set a conference today at 2 p.m. in New York with lawyers for Argentina and holdout creditors to discuss the U.S. Supreme Court’s decision not to hear the appeal.
Officials overseeing South America’s second-largest economy say the nation doesn’t have sufficient reserves to pay what they estimate could be $15 billion of claims from holders of defaulted bonds that didn’t participate in two debt exchanges following the country’s 2001 default.
Disobeying the court order could cause a technical default and further isolate a country that’s already experiencing slow growth and high inflation, said Mauro Roca, a senior Latin America economist at Goldman Sachs Group Inc.
“Of the possible scenarios, this was the most adverse,” Roca said in a telephone interview from New York.
The nation’s restructured debt due in 2033 sank 2.67 cents to 70.53 cents on the dollar at 1:43 p.m. in Buenos Aires, a three-month low. The extra yield investors demand to own Argentine debt over Treasuries widened 0.27 percentage point to 9 percentage points, the highest in emerging markets after Venezuela.
Congress Talks
Cabinet officials met with lawmakers today to discuss debt restructurings and will await news from the New York court conference before giving further comments, Cabinet Chief Jorge Capitanich said.
Following the record $95 billion default 13 years ago, Argentina in 2005 offered to exchange its defaulted securities with bonds worth about 30 cents on the dollar and made a similar proposal in 2010. Owners tendered about 92 percent of the outstanding debt. The holdouts, including billionaire hedge-fund manager Paul Singer’s NML Capital, fought for full payment in court.
An interest payment of $907 million on restructured notes is due on June 30. To avoid suspending payments, Argentina will ask bondholders to swap debt sold under New York law into securities governed by Argentine legislation and therefore not subject to U.S. court orders.
‘Legal Risks’
If the government doesn’t make the interest payment on the restructured notes this month, the bonds will be in default after a 30-day grace period.
“Argentina officials continue to signal a workaround solution on the difficult logistics to negotiate with holdouts,” Siobhan Morden, head of Latin America strategy at Jefferies, wrote in a report today. “Most important to bondholders is how they resolve the legal risks to attract high participation from conversion of New York to local-law bonds.”
Kicillof said that complying with the U.S. ruling would jeopardize the country’s ability to honor the restructured debt, since paying the plaintiffs the $1.5 billion they say they’re owed would trigger demands from other holdout creditors for similar terms. The estimated $15 billion in claims amounts to more than half Argentina’s international reserves.
International Reserves
Central bank reserves, which the government uses to pay its debt, have fallen 25 percent in the past year to $28.8 billion. In March, Argentina’s economy contracted for the first time since September 2012 as the government implements policies to stem a drain on central bank funds. Consumer prices rose an accumulated 12.9 percent in the first five months of the year.
Standard & Poor’s yesterday downgraded Argentina to CCC-, nine levels below investment grade, citing the court ruling.
“A default or a distressed debt exchange pertaining to currently-serviced debt appears to be inevitable within six months,” S&P said in an e-mailed statement yesterday.
Argentina’s plan to meet with Griesa is a sign that the government may still be considering a negotiated settlement with the holdouts, according to Alejo Costa, a strategist at Buenos Aires-based brokerage Puente Hermanos Sociedad de Bolsa SA.
“Kicillof showed willingness to negotiate, but not willing to pay the $1.5 billion in cash,” Costa wrote in e-mailed comments. “If the court proposes an alternative plan perhaps there will be a negotiated solution.”
Kicillof said the government wouldn’t allow hedge funds to sabotage its efforts to rebuild the country after the debt crisis in 2001. He referred to the holders of defaulted bonds as “vultures” because they seek to profit by buying distressed assets.
“Some people say that we need to negotiate with the vultures,” Kicillof said. “The vultures are vultures because they don’t negotiate. The vultures are vultures because they go to court to get the full total of their claims.”
To contact the reporters on this story: Charlie Devereux in Buenos Aires atcdevereux3@bloomberg.net; Camila Russo in Buenos Aires at crusso15@bloomberg.net
To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.netDaniel Cancel
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