Argentina’s bonds fell the most in a week and the cost to insure its debt against default surged after a U.S. court ruling ordered the South American country to pay $1.33 billion to holders of defaulted securities.
Argentina must pay so-called holdouts, led by a unit of billionaire hedge fund manager Paul Singer’s Elliott Management Corp., next month if it proceeds with scheduled payments of more than $3 billion to owners of its restructured bonds, according to a copy of the ruling by a U.S. judge obtained by Bloomberg News. District Judge Thomas Griesa in Manhattan ordered Argentina to pay the money into an escrow account while an appeals court considers his rulings in the case. The ruling couldn’t immediately be confirmed in online court records.
Argentine bonds have fallen the most in emerging markets this month after a Oct. 26 U.S. appeals court upheld an earlier ruling by Griesa that said holders of defaulted debt should be treated the same as investors who accepted two restructurings following the country’s record $95 billion default in 2001. Speculation Argentina will stop payments on its performing bonds rather than pay holdouts has made its debt the costliest in the world to insure against default.
“Argentina must pay the debts which it owes,” Griesa, 82, wrote in his ruling. “After ten years of litigation this is a just result.”
Economy Minister Hernan Lorenzino said today during a press conference in Buenos Aires that the ruling is “unfair,” violates local laws and will be appealed. Argentina will make a bond payment that falls due on Dec. 2 and is trusting in a favorable response on its appeal by Dec. 15, when the country is scheduled to pay more than $3 billion on warrants linked to economic growth, Lorenzino said.
“We will take all the necessary legal steps” to defend the country’s interests, and will go to the U.S. Supreme Court if needed, Lorenzino said.
Griesa specified that the Dec. 15 coupon on the warrants cannot be paid unless Argentina ensures a payment to the defaulted bondholders in the escrow account beforehand or at the same time.
One-year credit default swaps rose 224 basis points, or 2.24 percentage points, to 6,506 at 4:58 p.m. in London, according to data compiled by Bloomberg. The swaps have risen 58.81 percentage points since Oct. 26. Five-year swaps rose 113 basis points to 2,766 today.
U.S. bond markets were closed today for the Thanksgiving holiday.
“This is the worst scenario one could’ve imagined for Argentina,” Brian Joseph, the head of trading at Buenos Aires-based brokerage Puente Hermanos Sociedad de Bolsa SA, said in a telephone interview. “The bonds and warrants are falling because investors are worried Argentina will decide not to pay what Griesa wants and the ratings agencies will declare a selective default, forcing the real money investors to sell.”
The yield on Argentina’s 8.75 percent bonds due in 2017 surged 84 basis points to 16.93 percent, the biggest jump since Nov. 13, according to data compiled by Bloomberg. The bonds’ price fell 2.2 cents to 74.8 cents on the dollar.
The Merval index fell 3.3 percent to 2,242.40 at the close in Buenos Aires, the lowest since June 14.
Griesa rejected Argentina’s request to stay his ruling while it’s considered by the appeals court, citing press reports of statements by Argentine President Cristina Fernandez de Kirchner and members of her cabinet saying they wouldn’t pay the holders of the country’s restructured debt.
“Surely an extraordinary circumstance of the most serious nature arises from continuous declarations by the President of Argentina and cabinet officers, that Argentina will not honor or carry out the current rulings,” Griesa wrote in his opinion. “The less time Argentina is given to devise means for evasion, the more assurance there is against such evasion.”
Argentina offered to exchange defaulted bonds for new bonds in 2005 and 2010 at a discount of more than 70 percent, according to a court filing in Manhattan by holders of the exchanged bonds. About 92 percent of the bondholders accepted the offer, they said in the filing.
Holders of restructured debt including Gramercy Advisors LLC and Fintech Advisory Inc. backed Argentina in filings to the court while Bank of New York Mellon Corp., the trustee for Argentina’s benchmark bonds, entered a filing on Nov. 16 that argued the judge’s order could place the bank in an untenable legal position.
Griesa rejected the arguments made by the current creditors that a payment in full to defaulted bondholders, including Elliott’s NML Capital Fund Ltd. and Aurelius Capital Management, would be unjust given the unfavorable terms accepted by bondholders in the restructuring.
“In accepting the exchange offers of thirty cents on the dollar, the exchange bondholders bargained for certainty,” Griesa wrote. “The exchange bondholders made the choice not to pursue the route which plaintiffs have pursued.”
Attorneys for exchange bondholders are preparing an immediate appeal and motion to stay Griesa’s ruling, according to an e-mailed statement.
“Given Judge Griesa’s obvious frustration with the Republic of Argentina we expected this ruling,” Sean O’Shea, a lawyer for Gramercy Funds Management LLC, said in the statement. “What we did not expect was the disregard of innocent Exchange Bond Holders’ due process rights.”
Griesa also concluded the arguments made by BNY Mellon “miss the point,” and that it is the responsibility of third parties to ensure their actions don’t enable Argentina to break the law.
The GDP warrants fell 0.03 cent to 11.81 cents. The extra yield, or spread, investors demand to own Argentine dollar bonds over U.S. treasuries surged 116 basis points to 1,263. The average spread among emerging markets in JPMorgan Chase & Co.’s EMBI Global index widened 2 basis points today.
Lorenzino said in a Nov. 20 interview with C5N television channel that Argentina will continue to pay bondholders that accepted the debt swap while declining to comment on how to resolve disputes with holdouts.
“This ruling may initiate a war between holdouts and bondholders who accepted the restructuring,” Eugenio Bruno, a lawyer from Garrido and Associates who advises holders of restructured bonds, said in a telephone interview from Panama City. “Argentina will deposit the cash and there won’t be enough cash to pay all, starting a war between hedge funds.”
The case is NML Capital Ltd. v. Republic of Argentina, 08-cv-06978, U.S. District Court, Southern District of New York (Manhattan).