Ruling Risks New Argentine Default as Monday Deadline Approaches

June 27 (Bloomberg) -- Bank of New York Mellon must return a $539 million deposit from Argentina intended for restructured bondholders, a U.S. judge ruled, calling the transfer an “explosive action” that disrupted potential settlement talks with holders of defaulted debt. Katia Porzecanski has more on "Bottom Line." (Source: Bloomberg)

Bank of New York Mellon Corp. must return a $539 million deposit from Argentina intended for restructured bondholders, a U.S. judge ruled, calling the transfer an “explosive action” that disrupted potential settlement talks with holders of defaulted debt.

U.S. District Judge Thomas Griesa in New York has ruled that Argentina can’t pay holders of its restructured debt without also paying more than $1.5 billion to a group of defaulted bondholders, raising the possibility of a new default as the South American nation approaches a June 30 payment deadline.

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Robert Cohen, a lawyer for hedge funds holding the defaulted debt, told Griesa that Argentina “defiantly and contemptuously” violated his court orders. The U.S. Supreme Court this month declined to disturb the judge’s rulings that both groups of debtholders be paid, setting off the latest fight. Griesa urged Argentina to negotiate with the bondholders.

“This payment is illegal and will not be made,” Griesa said today at a hearing in Manhattan federal court. He warned that any attempt to pay restructured bondholders would be in contempt of court.

Argentina, which defaulted on a record $95 billion in debt in 2001, has said it would face a second default if forced to pay both classes of bondholders. In a statement today, the country said Griesa’s ruling on the payment to BNY Mellon was an abuse of authority.

Photographer: Juan Mabromata/AFP via Getty Images

Argentine President Cristina Fernandez de Kirchner said June 20 that her government will seek a negotiated solution to the conflict over defaulted bonds. Close

Argentine President Cristina Fernandez de Kirchner said June 20 that her government... Read More

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Photographer: Juan Mabromata/AFP via Getty Images

Argentine President Cristina Fernandez de Kirchner said June 20 that her government will seek a negotiated solution to the conflict over defaulted bonds.

Argentina’s Economy Ministry said in an e-mailed statement that the decision was outside his jurisdiction because restructured bonds aren't part of court case, and that the judge is impeding Argentina from completing its debt obligations.

Scolded

During the hearing, Griesa scolded the nation’s lawyers for failing to file a proper application to stay the ruling, calling a letter sent to his chambers seeking a delay an improper application.

Billionaire Paul Singer’s NML Capital Ltd. said it is willing to agree to a delay that would permit Argentina to make the its bond payment by July 30, the end of a 30-day grace period, if sufficient progress is made in negotiations. The bonds will be in default if payment isn’t made by July 30.

“What was necessary, if anybody wanted to negotiate, was to figure out a way to maintain a status quo so there would not be a default,” said Griesa. “It doesn’t take a rocket scientist to figure out how to do that.”

Griesa expressed frustration several times at Argentina’s failure to engage in negotiations with NML as the payment deadline gets closer.

Photographer: Diego Levy/Bloomberg

Argentina's Economy Minister Axel Kicillof. Close

Argentina's Economy Minister Axel Kicillof.

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Photographer: Diego Levy/Bloomberg

Argentina's Economy Minister Axel Kicillof.

“Why haven’t settlement negotiations gone forward?” Griesa asked. “Why aren’t they going forward today instead of having us sit in court?”

Griesa on June 23 appointed a special master to aid settlement talks.

Complied

Argentine Economy Minister Axel Kicillof said the nation complied with its foreign debt obligations yesterday when it deposited the funds with BNY Mellon, the trustee under the bond agreements. An interest payment comes due June 30. In a statement to investors, the nation said it was now the bank’s responsibility to pay them.

Eric Shaffer, a lawyer for the bank, told Griesa the bank remains in compliance with his orders as it hasn’t passed Argentina’s money along to clearinghouses for payment to restructured bondholders.

“Your bank didn’t do anything wrong,” Griesa told Shaffer.

The defaulted bondholders, led by NML, rejected Argentina’s offers of new bonds, worth about 30 percent of the defaulted bonds, in debt restructurings in 2005 and 2010. NML, which is seeking to recover the full value of the bonds, asked Griesa to hold Argentina in contempt of court for disobeying his orders and transferring the money to BNY Mellon.

Negotiated Settlement

Carmine Boccuzzi, a lawyer for Argentina, told Griesa at the hearing that the country still hoped for a negotiated settlement. Jay Newman, a money manager at NML, said “we are hoping to have the opportunity to negotiate with Argentina.”

The price on Argentine bonds due 2033, whose coupon payments are being blocked, fell 1.55 cents to 83.69 cents on the dollar at 4:32 p.m. in New York, according to prices compiled by Bloomberg.

The extra yield investors demand to hold Argentine debt over U.S. Treasuries widened 0.04 percentage point to 7.62 percentage points, according to JPMorgan Chase & Co.’s EMBIG diversified index.

Holdout Battle

The dispute between Argentina and holders of its defaulted debt has reached a climax now after the U.S. Supreme Court on June 16 left intact Griesa’s ruling requiring the nation to treat defaulted bondholders equally with holders of its performing debt.

“Conventional wisdom is that this gets resolved before July 30,” said Marco Santamaria, a New York-based money manager at AllianceBernstein, which oversees $25 billion of emerging-market debt. “This may be the opportunity for Argentina to finally put to bed its issues with all external creditors.”

Last year, BNY Mellon had said Griesa’s order would force it to violate contractual obligations to investors.

Argentina deposited $539 million in its BNY Mellon account at Argentina’s central bank designated for payment of the international bonds. In total, including peso payments, more than $1 billion was set aside to pay the debt.

Ron Gruendl, a spokesman for BNY Mellon, declined to comment on Griesa’s ruling today.

Local Bonds

A payment of about $300 million is to be made to Citigroup Inc. for payment of local law bonds. Griesa said that disbursement may go forward if Argentina makes an expected payment to the New York-based bank. In a statement today, Citigroup said it was “an important decision” that allows the bank to fulfill its obligations to the bondholders while complying with Griesa’s rulings.

Griesa denied a request by holders of euro-denominated exchange bonds, who argued that his orders shouldn’t apply to those securities as their payments are made entirely outside of the U.S. The judge replied that his orders apply to payments made by Argentina, which agreed to U.S. jurisdiction when it issued the original bonds.

Griesa today also declined to sign orders requiring payment to five holders of defaulted bonds not involved in the NML case but with similar claims, saying he wanted to avoid further complicating possible settlement talks.

“Their rights aren’t going to go away,” Griesa said.

Carlos Abadi, chief executive officer of New York-based investment bank ACGM Inc., said in an e-mail that Argentina knew BNY Mellon was barred from distributing the $539 million to bondholders before it made the deposit.

“It’s not clear why they would put up such a show and waste precious time,” Abadi said. “It’s going to be incredibly complex to reach a comprehensive deal by July 30th and this sideshow makes the goal even harder.”

The case is NML Capital Ltd. v. Republic of Argentina, 08-cv-06978, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in federal court in Manhattan at rvanvoris@bloomberg.net

To contact the editors responsible for this story: David E. Rovella at drovella@bloomberg.net; Michael Hytha at mhytha@bloomberg.net; Brendan Walsh at bwalsh8@bloomberg.net Patrick Oster

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