Argentine bonds posted the biggest two-day loss since 2012 after comments by government officials spurred speculation a deal to resolve its debt crisis might take longer than previously expected.
Benchmark notes due in 2033 sank 2.98 cents on the dollar to 85.78 cents as of 9:42 a.m. in New York, bring losses over the two days since the country missed a deadline for a $539 million interest payment to 9.8 cents. President Cristina Fernandez de Kirchner denied the country defaulted and said in a televised speech yesterday that though she’s open to further talks, defending the nation’s interests is her top priority and a settlement could trigger additional claims and ruin Argentina.
While Argentine bond prices have been supported by wagers that a deal with holders of debt from the country’s last default was imminent, days of negotiations with the so-called holdout creditors has yet to produce an accord. A U.S. judge has blocked Argentina from paying its debt until the hedge funds led by Elliott Management Corp. get their money. Standard & Poor’s declared the country in default and Moody’s Investors Service placed its rating on negative outlook.
The government’s “rhetoric is not just denial but openly contradicting the prospects of a negotiated solution,” Siobhan Morden, the head of Latin America Fixed Income Strategy at Jefferies Group LLC, said in a report.
As optimism fades about a direct deal between the government and holdout creditors who won a $1.5 billion verdict, JPMorgan Chase & Co. (JPM) and other international banks have been in discussions about a solution to allow the country to resume debt payments, according to a person familiar with the matter.
The group of banks have met with Elliott and other creditors to propose buying the securities they own and settling the dispute, according to a bank official who asked not to be identified because the information is private.
Argentina’s Economy Minister Axel Kicillof said yesterday that the government wouldn’t object to a third-party solution to its dispute.
“Argentina doesn’t oppose if privates want to negotiate with vulture funds using their own money,” Kicillof told reporters in Buenos Aires yesterday. “But the state can’t put its own money because that would mean breaking the law. It would be a fraud.”
Argentina can’t participate in a settlement with the hedge funds because doing so would require the country to similarly sweeten terms for the 93 percent of investors who went along with the country’s debt restructurings in 2005 and 2010, Kicillof said. Those investors got about 30 cents on the dollar.
The requirement, known as the RUFO clause, could trigger claims of more than $120 billion, dwarfing the country’s $29 billion of reserves, he said. The clause is set to expire at the end of 2014.
“By the way they keep mentioning a third-party agreement, it looks like they’re putting more pressure on banks to take them out of the mud,” said Jorge Piedrahita, chief financial officer of Torino Capital LLC.
JPMorgan declined to comment on the speculation about a deal, as did Danielle Romero-Apsilos, a Citigroup spokeswoman.
Aurelius Capital Management LP, which won the lawsuit along with Elliott, said in a statement yesterday 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, declined to comment.
The International Swaps & Derivatives Association said it will rule on whether the missed bond payment means credit-default swaps have been triggered on Argentina’s $29 billion in overseas securities. A committee of 15 dealers and investors will meet at 11 a.m. in New York today. A ruling that a failure-to-pay credit event has taken place will trigger an auction which will ascertain sellers’ liabilities.
“Many investors are losing faith an agreement can ever be reached,” Alejo Czerwonko, a strategist at UBS Wealth Management in New York, said by e-mail. “All eyes are focused on a private solution now.”
Fitch Ratings lowered Argentina’s foreign debt rating to selective default yesterday, following S&P’s decision to do the same a day earlier.
Moody’s yesterday affirmed Argentina’s Caa1 issuer rating, while placing the score on negative outlook because the default on foreign debt could increase pressure on Argentina’s official foreign-exchange reserves amid continued economic stagnation.
The U.S. judge overseeing the case scheduled a hearing in Manhattan federal court for 11 a.m. today. No additional information on the hearing was immediately available.
In the past year, Argentina has taken steps to restore its standing with international creditors after being locked out of credit markets since its $95 billion default in 2001.
Those include reaching an agreement with the Paris Club of creditors to settle $9.7 billion of debt and changing the way it calculated inflation after being faulted by the International Monetary Fund for flawed data.
In May, JPMorgan agreed to buy about $5 billion of government bonds that Argentina gave to Spanish oil producer Repsol SA as compensation for the takeover of its local unit in April 2012.
“I expect a solution for holdouts after RUFO expires, but I think the market is too optimistic about the time frame,” Lutz Roehmeyer, a money manager who helps oversee $1.1 billion of assets at LBB Invest in Berlin, said by e-mail today. “Expectations call for a short period of default with the end of negotiations in January 2015. I think it will take longer because Argentina has no incentive to speed up now that they are in default.”
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