U.S. Ruling on Argentine Bonds Raises Risk of Second Default, Citi Says

A U.S. court ruling that Argentina must pay interest on its defaulted debt by the time it makes payments on restructured bonds is raising the risk of another default, Citigroup Inc. said.

The Feb. 23 ruling by U.S. District Judge Thomas P. Griesa could put bond payments at risk, Citigroup said in an e-mailed report today. The decision, which has been suspended pending appeal, may not be enforceable, the report said.

“The recent ruling against Argentina by Judge Griesa poses a potential significant, although low probability, risk,” Jeffrey Williams, a Citigroup emerging market debt strategist, wrote in the report. “If the decision is not overturned by an appeals court, we believe payments on the current Argentina bonds could be at risk.”

Yields on Argentine dollar bonds due in 2017 rose 28 basis points to 9.08 percent at 4:51 p.m. Buenos Aires time, while the extra yield investors demand to own Argentine debt over U.S. Treasuries widened 11 basis points to 831, the highest among major emerging market economies after Venezuela.

‘External Financing’

“It clearly weighs on sentiment and creditworthiness,” Siobhan Morden, head of Latin America strategy at Jefferies & Co. Inc., said in a telephone interview from New York.

Still, it is unclear how enforceable the court’s decision is, Morden said.

The ruling is based on a clause in the bonds’ contracts that states that all bondholders should be treated equally, forcing Argentina to pay the full amount that is owed to NML when it makes a payment on its other bonds. If the decision is upheld, “nearly the entire payment” for Argentina’s dollar bonds would be redirected to NML until the fund is fully paid, Williams wrote.

“This ruling from Griesa has little legal basis,” Economy Minister Hernan Lorenzino told reporters in Buenos Aires yesterday. “Argentina’s payments on performing bonds will not be altered. There are no changes in Argentina’s payment obligations.”

Press officials at the economy ministry referred to Lorenzino’s comments when contacted by Bloomberg today.

Argentina is “permanently prohibited” from taking any action to evade the court’s ruling or render it ineffective by altering or amending how it makes payments on its bonds, Griesa said. NML owns a beneficial interest representing $132 million principal amount on certain floating-rate accrual notes issued by Argentina, according to court documents.

To contact the reporter on this story: Camila Russo in Buenos Aires at crusso15@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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