Argentine dollar bonds plunged after the U.S. Supreme Court said it won’t hear the country’s appeal of its case with holdout creditors, putting into effect a lower-court ruling that may prompt the government to default for a second time in 13 years.
Debt payments scheduled for June 30 on restructured bonds due in 2033 are in danger of being blocked by the lower-court ruling. The notes, sold under New York law, fell 6.6 cents on the dollar to 75.09 cents at 1:24 p.m. in New York, according to data compiled by Bloomberg. The extra yield investors demand to own Argentine debt over U.S. Treasuries rose 89 basis points, or 0.89 percentage point, to 826 basis points in the biggest increase in emerging markets, according to JPMorgan Chase & Co.
The court’s decision is adding pressure on Argentina to negotiate with holdout creditors led by Elliott Management Corp., which President Cristina Fernandez de Kirchner’s government calls “vultures,” before the country’s next bond payment. Its lawyers have said it can’t afford to pay as much as $15 billion in claims. Fernandez, 61, is expected to outline the country’s strategy in a speech at 9 p.m. tonight.
“This is the worst and least-expected scenario,” Michael Roche, an emerging-market strategist at Seaport Group, said in a telephone interview from New York. “Investors had been accumulating Argentine debt expecting a positive outcome, so the fall will be hard.”
Argentine debt had returned 19 percent in the past three months, the most in emerging markets, on bets the court would take the case or ask for the U.S. solicitor general’s opinion, delaying a final ruling and allowing the country to continue to pay bondholders.
U.S. District Court Judge Thomas Griesa is now responsible for the enforcement of the ruling, said Henry Weisburg, an attorney at Shearman & Sterling LLP.
Lawyers for holders of the defaulted bonds filed papers today in the Court of Appeals saying that Griesa’s orders “are now in full force and effect” as a result of the Supreme Court’s refusal to hear the case.
“It’s going to be a very tumultuous situation,” Weisburg said in a telephone interview from New York. “There’s not a lot of time for people to go to court and for judges to consider. It’s going to be very tight.”
Economy Ministry spokeswoman Jesica Rey didn’t immediately respond to a phone message and e-mail seeking comment on the decision.
“America’s highest court has spoken,” NML Capital Ltd., a unit of Elliott, said in an e-mailed statement. “Now it is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina’s economy and its international standing.”
Argentine stocks tumbled, with American depositary receipts of state oil producer YPF SA plunging as much as 15 percent. Power distributor Empresa Distribuidora y Comercializadora Norte SA’s shares traded in New York fell as much as 18 percent.
While the 2012 ruling from a lower court calls for a $1.3 billion payment, Argentina said in a May 27 filing the order would put it at risk of default because total payments to creditors who rejected restructurings in 2005 and 2010 would equal $15 billion. Holders of more than 90 percent of the defaulted bonds agreed to provide debt relief in those restructurings, at losses of about 70 percent.
Argentina halted payments on a record $95 billion in 2001.
Economy Minister Axel Kicillof last week raised the prospect of negotiating with the holdouts, a step the country has previously rejected.
Decade of Dispute
“This increases holdouts’ leverage dramatically,” said Tim Samples, a professor at the University of Georgia whose research focuses on investor-government relations. “Argentina is going to be more willing to negotiate with the holdouts and the holdouts certainly understand that.”
This is the closest that defaulted-debt holders have been to getting paid. In the past decade, NML, run by billionaire Paul Singer, has tried to seize an Argentine naval vessel docked in Ghana to force the country to pay, while other creditors attempted to ground the presidential plane.
“The next step is Argentina’s reaction,” Siobhan Morden, the head of Latin American fixed income at Jefferies Group LLC, said in an e-mailed response to questions. “Although investors are convinced on Argentina’s willingness to pay, what’s more important is Argentina showing its ability to pay.”
Argentina’s foreign currency reserves have plunged to $28.8 billion from a high of $52.6 billion in January 2011.
In August, Fernandez said that in the event the country lost the appeal, it would offer a new swap to defaulted bondholders and let investors who own the restructured notes swap them into debt subject to local law.
Argentina has 25 days to ask for a rehearing from the highest court, which is “literally never” granted, according to Richard Samp, the chief counsel of the Washington Legal Foundation, which filed a brief in support of NML.
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps surged 617 basis points to 2,367 basis points, the biggest jump in a year, according to CMA data.
The implied probability of default jumped to 80 percent from 70 percent on June 13. Argentina is the country most likely to renege on its debt in the world, according to CDS prices.