Argentina’s Fernandez Denies Default Ruling as Bonds Sink

Aug. 1 (Bloomberg) -- Josh Rosner, managing director at Graham Fisher and Company, and Michael Spence, professor at NYU Stern School of Business, discuss what a default by Argentina’s government means to the global economy, especially in the context of recent geopolitical risks. He speaks on “Bloomberg Surveillance.”

Argentina’s President Cristina Fernandez de Kirchner denied the country defaulted on its debt in her first public comments since Standard & Poor’s said the nation had done just that for the second time in 13 years.

Fernandez said in a televised speech yesterday that while she’s open to further talks with hedge funds that successfully sued her government for $1.5 billion, she must defend the nation’s interests. Paying them could trigger additional claims and ruin Argentina, she said. While the country had posted a $539 million interest payment for bondholders prior to the July 30 deadline, a U.S. judge said it couldn’t be distributed because the hedge funds also had to be paid.

Argentina’s bond prices tumbled yesterday along with the country’s benchmark stock index after S&P said the blown deadline was enough to constitute default on about $13 billion of debt. Moody’s Investors Service placed the country’s rating on negative outlook. Officials have distinguished the episode from the $95 billion default in 2001 that took place amid four straight years of economic contraction. Fernandez said a blocked debt payment doesn’t constitute a default.

“This situation isn’t even contemplated in bond contracts,” Economy Minister Axel Kicillof said yesterday in Buenos Aires, after returning from talks with the hedge funds in New York before a court-appointed mediator. “Argentina has all legal recourses to show that this isn’t a default,” he said, adding that arguments to the contrary amounted to “atomic silliness.”

Photographer: Daniel Garcia/AFP via Getty Images

Argentinian President Cristina Fernandez de Kirchner speaks during a ceremony at governmemt house in Buenos Aires on July 31, 2014. Close

Argentinian President Cristina Fernandez de Kirchner speaks during a ceremony at... Read More

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Photographer: Daniel Garcia/AFP via Getty Images

Argentinian President Cristina Fernandez de Kirchner speaks during a ceremony at governmemt house in Buenos Aires on July 31, 2014.

Hearing Today

U.S. District Court Judge Thomas Griesa, who has presided over the case, called a hearing for today at 11 a.m. At the same time, the International Swaps & Derivatives Association determinations committee, which makes official rulings on whether defaults occurred, will meet to rule on whether payouts should be triggered on loss-protection contracts over a net $1 billion of debt.

Argentina’s notes due in 2033 -- the ones with the missed payment -- fell 6.8 cents yesterday to 88.75 cents on the dollar. The bonds had rallied 11.7 cents the previous two days on speculation an agreement would be reached. The Merval stock index fell from a record, plunging 8.4 percent.

While the government has said it’s open to continuing negotiations with the holdouts led by Elliott Management Corp., it won’t budge on a vow to offer the same terms accepted by 92 percent of creditors in restructurings that took place following the 2001 default.

RUFO Clause

A possible third-party solution, where banks buy the hedge funds’ securities, would make sense, Kicillof said. Any government involvement is off the table because of a so-called Rights Upon Future Offers clause, or RUFO, that entitles other creditors to any sweetened terms offered to the hedge funds, he said.

A group of international investment banks, including JPMorgan Chase & Co., met with Elliott and the other so-called holdout creditors, according to a bank official who asked not to be identified because the information is private. The official said talks would continue.

“Given the government’s concern over the RUFO clause, the government cannot say that they’re playing any role in this,” Daniel Kerner, an analyst at Eurasia Group, wrote in a note. “But any solution that emanates from the private sector would likely be the government’s preferred outcome, and is likely one they are silently encouraging.”

JPMorgan declined to comment on the speculation about a deal, as did Danielle Romero-Apsilos, a Citigroup spokeswoman.

Refusing Solutions

Aurelius Capital Management LP, which won the lawsuit along with Elliott, said in a statement that while it has been approached by private parties, no acceptable offer was made. Elliott’s NML unit, which has been battling Argentina for years in an effort to win payment on its bonds, declined to comment.

NML said in an e-mailed statement yesterday that Argentina refused to seriously consider the court-appointed mediator’s “numerous creative solutions” for resolving the dispute.

The economy, headed for its first annual contraction since 2002 with inflation estimated at 40 percent, will suffer in a default scenario as Argentines scrambling for dollars cause the peso to weaken and activity to slump, according to Hernan Yellati, the head of research at Banctrust & Co.

Fitch Ratings and Moody’s yesterday joined S&P in declaring that Argentina had defaulted.

“The Argentine economy is already in recession, and this is likely to worsen as the default event affects confidence and potentially further constrains foreign exchange flows to the country,” Fitch said in a statement.

Moody’s said in a statement that the “non-payment of debt obligations to creditors after a grace period has expired is a default.” A “negative outlook” was assigned to the country’s credit rating, currently Caa2.

“The default is likely to exacerbate the economic contraction, increase pressure on the exchange rate and push inflation even higher,” Moody’s said.

To contact the reporters on this story: Daniel Cancel in Buenos Aires at dcancel@bloomberg.net; Camila Russo in Buenos Aires at crusso15@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Stephen Kirkland

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