Argentine Economy Minister Axel Kicillof, who negotiated $15 billion of payments to resolve debt disputes in the past four months, has two weeks to pull off his toughest deal yet.
The country’s bonds plunged today after the U.S. Supreme Court decided against hearing Argentina’s appeal of an order requiring it to pay holders of defaulted notes from 2001 in full when making payments on its restructured debt. The next payment comes due June 30, giving Kicillof limited time to reach a settlement with holdouts and avoid a new default.
The government says paying back holdout creditors in full would amount to $15 billion, money that would deplete foreign reserves already hovering near an eight-year low. Locked out of international credit markets for more than a decade, Argentina may have few options other than meeting a request for negotiations from Elliott Management Corp., the New York-based hedge fund run by Paul Singer that refused to accept two prior debt restructurings that gave investors about 30 cents on the dollar.
“Argentina was never going to negotiate on Elliott’s terms without a negative ruling in hand,” Eduardo Levy-Yeyati, the chief economic adviser at New York-based investment bank ACGM Inc., said in a telephone interview from Buenos Aires. “Now they can say to voters, ‘We did everything legally possible.’”
The dispute revolves around Argentina’s 2001 default on a record $95 billion in debt. The country offered to substitute lower-value bonds in 2005 and made a similar proposal in 2010. Owners tendered about 92 percent of the outstanding debt.
Kicillof, who holds a doctorate in economics from the University of Buenos Aires, brokered a $9.7 billion settlement last month to resolve a dispute with the Paris Club group of creditors dating from the 2001 default. That came months after reaching a $5 billion accord to compensate Repsol SA for Argentina’s seizure of oil producer YPF SA. The announcements helped push bond yields to a two-year low before the Supreme Court ruling.
Argentina calls investors who have refused previous debt exchanges “vultures” because they bought many of the bonds post-default at a discount, angling to eventually collect a windfall. Argentina said it couldn’t afford to pay both sets of bondholders because claims similar to Elliott’s could mount to $15 billion from the $1.3 billion involved in the current ruling.
“America’s highest court has spoken,” NML Capital, a unit of Elliott Management, said in a statement. “It is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina’s economy and its international standing.”
Lawyers for the defaulted bond holders today filed papers in the Court of Appeals saying that the previous orders “are now in full force and effect” as a result of the Supreme Court’s refusal to hear the case.
Carmine Boccuzzi, a lawyer who represents Argentina, didn’t return a voicemail message seeking comment. The country had said in a May 27 filing that complying would create “a serious and imminent risk of default.”
Notes due 2033 and sold under New York law, which have the interest payment due June 30, fell 7.04 cents on the dollar to 74.66 cents at 5:55 p.m. New York time, according to data compiled by Bloomberg. The extra yield investors demand to own Argentine debt over U.S. Treasuries widened 129 basis points, or 1.29 percentage point, to 866 basis points, the most in emerging markets, according to JPMorgan Chase & Co.
NML had argued that an equal-treatment, or “pari passu,” clause in the bond agreement bars Argentina from treating the restructured securities more favorably than the defaulted bonds.
A federal trial judge agreed with that argument, as did the New York-based 2nd U.S. Circuit Court of Appeals in two rulings.
Argentina has given mixed signals about its likely next step. In an appeals court hearing last year, the government’s attorneys said the Latin American country wouldn’t “voluntarily” obey the court orders.
In its most recent Supreme Court brief, the country promised to comply with the orders, while saying the likely result would be a new default. According to a memo leaked to an Argentine website last month, the country’s attorneys recommended a default and immediate restructuring in the event the Supreme Court rejected the appeal.
Last week, Kicillof raised the prospect of negotiating with the holdouts, a step the country has previously rejected.
“Kicillof is a very bright individual, but he doesn’t have much experience on these matters and that is an issue here,” Diego Ferro, co-chief investment officer at Greylock Capital Management LLC, said in a telephone interview from New York. “The holdouts are wholly rational market participants and at this point in time they want to move on.”
In a September poll of 1,000 Argentines conducted by Buenos Aires-based research company Poliarquia Consultores for Graham Fisher & Co., 74 percent of those surveyed believe the government should negotiate with holdouts from the restructuring.
Between paying the debt in full and not paying it at all, 68 percent of those surveyed said the government should pay holdouts in full.
Over the past year, Argentina has also settled claims with five companies in the World Bank arbitration arm and improved economic data reporting at the request of the International Monetary fund.
“The administration has a much stronger willingness to pay debt,” Kathryn Rooney Vera, a macroeconomic strategist at Bulltick Capital Markets, said in a telephone interview from Miami. “The sense that we get is they’re definitely open to negotiation and the winds have changed.”