For the second time in 13 years, Argentina is in default on foreign-currency debt. Government talks with holdout creditors from its original 2001 default, including Paul Singer’s Elliott Management Corp., aimed at averting the crisis ended without resolution. Local and international banks have come with their own proposals, so far without success.
So how will the situation get resolved? Here are seven possible outcomes:
1) Talks between Argentina and Elliott restart and progress to the point where the hedge fund asks a U.S. judge to delay a ruling that has blocked the government from making interest payments unless it first pays in full the firm and other creditors owed from the 2001 default. Such a decision would allow the government to resume debt payments, including $539 million in interest that was due July 30. Economy Minister Axel Kicillof said yesterday that he is willing to to meet again with the holdouts. U.S. Judge Thomas Griesa has called a hearing for the case in New York today.
2) A third party -- such as a local or foreign bank -- strikes a deal with the holdouts to take the burden off the government. Plans that have already been floated include giving New York-based Elliott and creditors fighting the government a guarantee in an escrow account until the end of the year. That may entice Elliott to ask the judge to temporarily stop blocking Argentina’s debt payments. Or the third party could buy debt from Elliott and other holdout creditors directly and get reimbursed by Argentina in 2015.
A group of international banks, including JPMorgan Chase & Co., has held talks with Elliott, according to a person familiar with the discussions who asked not to be identified because the information is private. The head of investment banking at Buenos Aires-based Banco Macro SA also presented a proposal to creditors, which fell through, according to a bank official.
3) Bondholders agree to waive a clause known as RUFO in their contracts, which the government says prohibits it from offering holdouts a better deal than the 30 cents on the dollar in 2005 and 2010 debt restructurings without extending the same offer to all bondholders. A group of investors owning about 5.2 billion euros ($7 billion) of debt already proposed this to Argentina, and Kicillof said officials would be open to it. The government would need the consent of at least 75 percent of bondholders to change the terms of their contracts. Should RUFO be waived, it would be easier for Argentina to settle with the holdouts before the end of the year.
4) Argentina swaps newly-defaulted bonds into securities governed by local law, a proposal Kicillof raised in June. Griesa said such an exchange would be illegal. A swap would be challenging to execute because any intermediaries assisting Argentina in the process could be sued for contempt of court, while investors who aren’t able to hold local bonds would have to sell their holdings.
5) Nothing happens until 2015, after the RUFO clause expires, or even later -- after President Cristina Fernandez de Kirchner’s second term ends late next year. Nobody gets paid in the interim and the government would try to persuade bondholders not to demand accelerated payments by signaling the default is temporary.
6) Holders of the newly defaulted foreign-currency debt demand accelerated payments of their bonds, as allowed by cross-default clauses. Such a request would need to be made by holders of 25 percent of the debt. The government would have 60 days to undo the process by figuring out a way to pay the blocked $539 million interest payment. Argentina has a total $29 billion in overseas bonds denominated in foreign currency, about equal to its international reserves.
7) No deal is ever struck to resolve claims by Elliott and other holdout creditors. Argentina continues to deposit money into an account with trustee Bank of New York Mellon Corp., which proceeds to get sued by bondholders for not passing along funds for debt payments. The 83-year-old judge in New York who decided the original ruling is faced with several more years of court proceedings, and Argentina remains isolated from international markets.