Argentine President Cristina Fernandez de Kirchner is sending aides to work with lawmakers on averting a debt crisis a day after she ruled out complying with a U.S. court order to repay holders of defaulted bonds in full.
Cabinet Chief Jorge Capitanich, Economy Minister Axel Kicillof and Legal Secretary Carlos Zannini will meet with lawmakers tomorrow, according to state news agency Telam. Kicillof will hold a press conference at 6 p.m. in Buenos Aires today to unveil details of a plan to keep servicing restructured bonds while disobeying court orders that would block those payments unless holdout creditors including billionaire hedge fund manager Paul Singer are paid as well.
Investors were split on whether comments Fernandez made last night implied that she’s willing to seek a negotiated settlement with holdouts under different terms or whether the government is planning to swap foreign law securities to notes governed under local legislation. Hours after the U.S. Supreme Court declined to hear Argentina’s appeal of the case, Fernandez used the term “extortion” to describe the ruling while vowing to keep paying restructured debt including the next interest payment of $900 million due June 30.
“She’s leaving all options open,” Patrick Esteruelas, an analyst at New York-based hedge fund Emso Partners Ltd., said. “She set the parameters. She gives herself a potential out by negotiating something in between.”
Capitanich had said earlier that the aides were going to meet lawmakers today.
Standard & Poor’s cut Argentina’s debt rating two steps to CCC- and said the outlook was negative, citing the Supreme Court’s decision. The rating is nine levels below investment grade and one notch worse than Ukraine’s classification.
“A default or a distressed debt exchange pertaining to currently serviced debt appears to be inevitable within six months in our view, absent unanticipated significantly favorable changes in Argentina’s circumstances,” S&P said.
Fernandez said complying with the ruling was impossible and would expose Argentina to as much as $15 billion in claims from creditors who rejected restructuring offers following the country’s $95 billion default in 2001. The president said she instructed Kicillof, who negotiated to resolve debt disputes with the Paris Club and Repsol SA in the past four months, to figure out a way to keep paying holders of restructured notes.
“Argentina has the willingness to negotiate,” Fernandez said. “What it doesn’t have -- and I’ll spell it out for you -- is the need to be subjected to such extortion. I don’t think it’s deserved.”
Central bank reserves, which the government uses to pay its debt, have fallen 25 percent in the past year to $28.8 billion. They have increased 4.2 percent in the past three months.
Argentina’s restructured bonds plunged for a second day today, widening the yield spread over U.S. Treasuries by 0.32 percentage point to 8.82 percentage points. The country’s so-called discount bonds due 2033 fell 1,82 cent on the dollar to 72.84 cents, pushing up yields to 12.37 percent at 3:23 p.m. in Buenos Aires.
Fernandez said in August that she would offer to swap holders of restructured New York-law bonds into debt governed by local law to avoid having to pay holdout creditors in full. Government attorneys later denied having a plan to do so.
According to a May 2 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, which was tied to claims totaling $1.3 billion.
“We assign a low probability of the innovative expertise of the economic team to successfully execute a workaround solution within the 30-day grace period to avoid a technical default,” Siobhan Morden, head of Latin America strategy at Jefferies Group LLC, wrote in a note today.
The cost to protect Argentine debt over five years from non-payment with credit-default swaps jumped 1.28 percentage point to 25.09 percentage points, the highest in the world, according to prices compiled by CMA.
Deutsche Bank AG analysts recommended investors buy local-law debt over foreign law securities in a report today. saying “more real money investors may be forced to sell” because the bonds could be removed from benchmark indexes in case of a default.
Last week, Kicillof raised the prospect of negotiating with the holdouts, a step the country has previously rejected.
The dispute revolves around Argentina’s 2001 default on a record $95 billion in debt. The country offered to exchange the securities with bonds worth about 30 cents on the dollar in 2005 and made a similar proposal in 2010. Owners tendered about 92 percent of the outstanding debt.
Argentina calls the 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.
“America’s highest court has spoken,” NML Capital, a unit of Singer’s Elliott Management Corp., said in a statement yesterday after the ruling. “It is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina’s economy and its international standing.”
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 after reaching a $5 billion accord in February to compensate Repsol for Argentina’s seizure of oil producer YPF SA. The deals helped push bond yields to a two-year low before the Supreme Court ruling.
“Fear of a default, which would have negative political and economic consequences and put the government’s policy agenda at risk, will push the government to negotiate,” Daniel Kerner, Latin America director at Eurasia Group, said today in a research note. “The government will likely look to an agreement that allows it to show that it is not fully conceding, thus the agreement would have to be for a lower amount, or in bonds.”
If the government doesn’t make the interest payment on the restructured notes later this month, the bonds will be in default 30 days after the country misses the coupon payment.
“The holdouts are wholly rational market participants and at this point in time they want to move on,” Diego Ferro, co-chief investment officer at Greylock Capital Management LLC, said in a telephone interview from New York.