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Argentina Bond Judge Orders Talks in Bid to Avoid Default

The judge overseeing a battle between Argentina and holders of its defaulted debt ordered both sides into “continuous” negotiations to avoid a default eight days from now.

U.S. District Judge Thomas Griesa in Manhattan today rejected arguments by a lawyer for Argentina who warned of “a very imminent risk of default” unless there’s a temporary suspension of his order that defaulted bondholders must be paid at the same time as holders of its restructured debt.

“I expect the parties and their lawyers to work really continuously,” Griesa told attorneys in his packed courtroom. “There is not a lot of time.”

Griesa ordered both sides to meet with a court-appointed mediator to avoid a default by South America’s second-biggest economy, after Brazil. A default would probably deepen the current recession, fuel inflation and prompt a selloff in the peso, Claudio Loser, a former International Monetary Fund director, said July 18. The mediator, New York lawyer Daniel Pollack, scheduled a meeting for 10 a.m. tomorrow.

Argentine government dollar bonds due 2033, whose payments were blocked by the judge on June 30, dropped 1.57 cent to 86.55 cents on the dollar at 2:40 p.m. in New York, the lowest in two weeks. The yield on the notes rose 0.23 percentage points to 10.07 percent. The extra yield investors demand to hold Argentine debt over U.S. Treasuries widened 0.07 percentage points to 6.77 percentage points, according to JPMorgan Chase & Co.

Defaulted Debt

The holders of the defaulted debt, led by billionaire Paul Singer’s NML Capital, must be paid $1.5 billion at the same time Argentina makes interest payments to the holders of the restructured debt, according to Griesa’s rulings.

“We are prepared to do as the judge asked and meet continuously with Argentina and the special master to resolve this dispute,” NML said in a statement today. “We are confident this matter could be resolved quickly if Argentina would join us in settlement discussions.”

Argentina has said paying the defaulted bondholders in full could result in holders of the restructured bonds making billions of dollars of claims under a “rights upon future offers” clause. And Argentina says it faces about $20 billion in potential claims from holdouts.

The country said it can’t afford to pay such claims.

Blocked Payment

Griesa last month blocked Argentina’s bid to make a $539 million payment on the 2033 debt, saying it was illegal.

Argentina’s “incendiary” rhetoric, including references to the bondholders as “vultures,” was unfortunate, the judge said today.

In the two-hour hearing, Griesa recounted the history of bondholder’s attempts to recover on their investments after the country defaulted on a record $95 billion in 2001. More than nine-tenths of the bondholders agreed to exchange their bonds, at a sharp discount, in debt restructurings in 2005 and 2010.

The countdown to a possible default began last month when the U.S. Supreme Court declined to review Griesa’s rulings requiring equal treatment of defaulted and restructured bondholders.

Griesa said “sensible” steps need to be taken to reach a settlement with Argentina’s creditors to avoid a default.

“People will be hurt by that,” Griesa said. “Real hurt. Not ‘vultures,’ but real people.”

‘Significant Constraints’

Jonathan Blackman, the lawyer for Argentina, told Griesa a settlement faces “very, very significant constraints” that make it impossible to reach a settlement by the deadline.

“I think that the order to negotiate 24/7 is misplaced,” Carlos Abadi, the chief executive officer of New York-based investment bank ACGM Inc., said in an instant message after the hearing. Abadi said both sides can agree to ask Griesa for a delay that would let Argentina avoid a default while working toward a resolution with bondholders. Abadi said a default would decrease the value of the holdouts’ claims.

Griesa began the proceeding by hearing arguments about whether his orders bar payments to holders of U.S. dollar-denominated exchange bonds issued under Argentine law and payable in that country, without a corresponding payment to holders of the defaulted bonds. Griesa was also asked to clarify how his rulings apply to other bonds issued outside U.S. jurisdiction.

Edward Friedman, a lawyer representing the defaulted bondholders, argued Griesa’s earlier rulings include all the exchange bonds issued in the nation’s two debt restructurings.

Griesa didn’t say when he will rule on the questions.

Bank of New York Mellon Corp., the indenture trustee for Argentina’s exchange bonds, asked Griesa what it should do with the $539 million Argentine payment. Griesa urged the bank to work out a resolution with the bondholders.

The case is NML Capital Ltd. v. Republic of Argentina, 08-cv-06978, U.S. District Court, Southern District of New York (Manhattan).

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