Argentine Default Threat Spurs Bond Selloff: Buenos Aires Mover

Argentina’s credit-default swaps surged and bonds fell the most in emerging markets after the country said it would halt payments on its restructured bonds if a U.S. court ordered it to pay defaulted debt holders.

Yields on the government’s benchmark bonds due 2017 surged 396 basis points, or 3.96 percentage points, to 19.67 percent at 3:48 p.m. in New York, the biggest jump on record. The yield is about four times the average borrowing costs in emerging markets. Argentina’s one-year credit-default swaps climbed 1,329 basis points to 6,510 basis points, the biggest jump in the world, according to data compiled by Bloomberg.

Speculation is soaring that the South American country will default for the second time since 2001 after Jonathan Blackman, Argentina’s attorney, said the nation would halt payments on its restructured debt before giving into holdouts who refused to accept prior renegotiations. Billionaire hedge fund manager Paul Singer’s NML Capital Ltd., a unit of Elliott Management Corp., is leading the group of investors pressing Argentina to pay them $1.33 billion for their defaulted bonds.

“If you could sell at current prices, I would sell,” Joe Kogan, the head of emerging-market debt strategy at Scotia Capital Markets who attended the hearing, said in a phone interview from New York. “I got the sense that the judges would really love to rule against Argentina. They just want to make sure they’ve covered all the arguments.”

‘Technical Default’

Argentina says a ruling in the creditors’ favor would open it up to more than $43 billion in additional claims it can’t pay. The central bank had $41.7 billion of reserves yesterday.

“Argentina won’t violate its own law on debt payments,” Argentina’s Vice President Amado Boudou said yesterday in an interview on television channel C5N after the hearing.

The country said they would offer holdouts the same terms it offered creditors in its 2010 debt swap instead of the full amount they claim.

JPMorgan Chase & Co. reiterated its underweight recommendation on Argentine government bonds today because “technical default risk is likely to escalate once again,” according to an e-mailed report.

Argentina’s claim faced skepticism from the three-judge panel yesterday during the appeals court hearing in New York as U.S. Circuit Judge Reena Raggi questioned Blackman and other parties during more than two hours of arguments.

“So the answer is you will not obey any order but the one you propose?” Raggi said.

Won’t Obey

“We would not voluntarily obey such an order,” Blackman said. Hernan Lorenzino, Argentina’s minister of economy, and Boudou sat at the counsel table as the lawyer addressed the panel.

The extra yield investors demand to buy the government’s bonds instead of U.S. Treasuries soared 143 basis points to 1,257 basis points, according to JPMorgan’s EMBI Global index. Argentina’s benchmark equities index, the Merval, dropped 3.5 percent and the peso in the parallel market weakened 3.2 percent to a record 8 per dollar.

Still, BlackRock Inc. said it’s worth holding on to the performing bonds as the final ruling will take time while Bulltick Capital Markets said the ruling may be “unenforceable.”

“Yesterday after the court case you saw some pressure in the market place. We think bonds have traded down at such severe levels we think it’s worth holding on, this is going to play out over a long period of time,” Rick Rieder, chief investment officer for fundamental fixed income portfolios at BlackRock said on Bloomberg Television’s “Market Makers” with Stephanie Ruhle and Matt Miller. “We’re hoping if we get more pressure like it we would add to the position.”

Debt Swap

The country defaulted on a record $95 billion in debt in 2001. Holders of about 91 percent of the bonds agreed to take new exchange bonds in 2005 and 2010, at a discount of about 70 percent.

On Oct. 26 the U.S. appeals court upheld District Court Judge Thomas Griesa’s ruling that Argentina must treat bondholders equally and pay defaulted debt when servicing restructured bonds. Griesa’s Nov. 21 decision that the full payment had to be made by the country’s next payment of performing bonds in December was delayed until a hearing of the parties’ arguments yesterday. The court may take weeks or months to make a decision.

“Our overall impression was that the outlook for a resolution of the litigation by holdouts is negative for Argentina,” Credit Suisse Group AG analysts Casey Reckman and Daniel Chodos wrote today in a note. “We expect markets to retain a bearish tone.”

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