Argentina ‘Greek Tragedy’ Nears End as Debt Ruling Looms

Argentina may learn at any time whether a U.S. appeals court will rule that it must pay $1.4 billion to holders of its defaulted debt, something the South American country has resisted for more than a decade.

The court in New York is set to rule after Argentina submitted a payment proposal last week that would force holders of defaulted bonds to take a steep discount on debt the nation repudiated in its record 2001 default on $95 billion. With further appeals unlikely to succeed, the ruling may be the last word on the matter.

Argentina’s proposal largely ignored previous U.S. court rulings and instead offered the type of restructuring deal that has been rejected by holdout bondholders led by billionaire hedge fund manager Paul Singer and his Elliott Management Corp. unit NML Capital Ltd. The proposal sets up a possible collision between Argentine politicians and U.S. judges that has been a decade in the making.

“This has some Greek tragedy elements to it,” said Anna Gelpern, a law professor at American University in Washington who is an expert on government debt. “The parties are bound to play along and succumb to their fates.” Joshua Rosner, an analyst at Graham Fisher & Co., said in an e-mailed note March 30 that Argentina’s last-minute proposal is the equivalent of the nation “thumbing its nose at” the court.

Trigger Default

A decision forcing Argentina to pay the defaulted bondholders immediately would expose it to $43 billion in additional claims it can’t pay and trigger a new default, the government has warned. The nation’s officials have also said they may ignore the U.S. court altogether.

In its proposal, Argentina said it would give holders of the repudiated bonds about one-sixth of what a U.S. judge has said they’re entitled to receive. The country’s proposed plan, filed March 29 -- one hour before a deadline set by the court weeks ago -- offers two possibilities for holdout bondholders to exchange their defaulted debt for new bonds.

“After taking the full month available to work on its response, Argentina came back last night with a proposal for exactly the same package that it had offered back in 2010,” Joe Kogan, head of emerging-market debt strategy at Scotia Capital Markets, said in a note March 30. Kogan said he expects the country’s bonds to fall “upon news of Argentina’s continued intransigence.”

‘Argentine Consumption’

“The proposal itself appears intended for local Argentine consumption,” Kogan said. Argentine officials said they will submit a bill to their nation’s Congress to provide for the plan to be implemented.

The government’s restructured notes due 2033 fell

1.09 cents to 52.66 cents on the dollar at 3:30 p.m. in New York after earlier declining to 51.76 cents, according to data compiled by Bloomberg. The yield on the bonds jumped 33 basis points, or 0.33 percentage point, to 16.81 percent, the highest level on a closing basis since June 2009.

Though Argentina could file an appeal of any adverse ruling by the three-judge appellate panel to a larger number of judges, or the U.S. Supreme Court, it’s unlikely to be granted either because contract issues in the case were based on New York state law. As a result, it’s improbable they would be reviewed by the Supreme Court, said Henry Weisburg, an international litigator at New York-based Shearman & Sterling LLP.

Argentina’s best bet for high court review may lie with the Foreign Sovereign Immunities Act, a federal law that limits suits against foreign governments. However, Weisburg said it’s unlikely the court will choose to consider the case on that ground either.

‘Vulture’ Investors

Argentina’s top leaders have vowed never to pay the hedge funds, which it calls “vulture” investors, that hold the debt.

Jonathan Blackman, the attorney for the South American nation, has said Argentina would default on its restructured debt if it’s forced by the panel to pay so-called vultures.

“So the answer is you will not obey any order but the one you propose?” U.S. Circuit Judge Reena Raggi asked Blackman during oral arguments in February.

“We would not voluntarily obey such an order,” Blackman said, with Hernan Lorenzino, Argentina’s minister of economy, and Vice President Amado Boudou sitting nearby.

Blackman argued that a lower-court order obliging Argentina to pay the defaulted bonds whenever it makes payments on restructured debt violated its sovereignty, threatens to trigger a new financial crisis and would quadruple the number of Argentine bond cases in New York federal court.

‘Court’s Decision’

“If that’s the confrontation the court seeks with the injunctions, that is the court’s decision,” Blackman said. “We’re representing a government and governments will not be told to do things that fundamentally violate their principles.”

The holdout creditors are seeking to uphold rulings by U.S. District Judge Thomas Griesa in Manhattan, who has presided over the case for a decade. Griesa has ruled that Argentina must pay holdouts the full amount they’re owed whenever it makes a required payment to the holders of the exchange bonds.

The Exchange Bondholder Group, which took the deal offered by Argentina for their bonds, claimed the ruling threatens their investment.

“We’re innocent parties,” attorney David Boies argued for the Exchange Bondholder Group at the oral arguments. Griesa’s order shouldn’t apply to restructured debt holders, he said.

‘Exist Unchanged’

“If you allow Judge Griesa’s injunction to exist unchanged, everybody in this courtroom knows what’s going to happen,” Boies argued. “Argentina is going to default.”

In a related case, the U.S. Court of Appeals said March 26 that it won’t grant a full-court reconsideration of an earlier ruling barring Argentina from treating restructured-debt holders more favorably than holders of the repudiated debt.

In November, Griesa quizzed a lawyer for Argentina about press statements by President Cristina Fernandez De Kirchner and Lorenzino that the republic wouldn’t pay “vulture funds.”

“I don’t know literally what the intentions of the republic are,” Griesa said in the Nov. 9 hearing. “But I have had some modest amount of experience, and that is that the republic will not comply with the judgments which have been entered against it.”

The three judges on the appeals panel are Rosemary Pooler, appointed by President Bill Clinton; and Barrington Parker and Raggi, both named to the court by George W. Bush.

Holdouts’ Gain

In a press conference March 30 in Buenos Aires, Boudou said the country won’t issue more debt to repay old debt as part of its proposal. The Argentina vice president said the Griesa ruling it’s fighting would mean a 1,300 percent gain in five years for holdouts.

According to Argentina, the payment formula it’s challenging, set by Griesa, would give NML Capital $720 million. That compares with an estimated value of $120.6 million for NML under one of the payment alternatives the nation is proposing, the so-called discount option.

“Argentina’s proposal accounts for past-due amounts to bring the debt current, provides for a fair return going forward, and also gives an upside in the form of annual payments if Argentina’s economy grows,” the country’s lawyers said in its proposal. It “fulfills the court’s dual objectives to satisfy the pari passu clause: non-discrimination in payment priority and equal treatment among bondholders.”

Deep Discount

In 2005 and 2010, Argentina offered its creditors new bonds, at a deep discount. About 91 percent of bondholders agreed to the debt restructuring, or exchange.

NML and other holdouts have tried to use U.S. courts to enforce their rights under the original bond agreements.

In its proposal to the court, Argentina estimated that NML paid $48.7 million for the bonds in 2008.

“The formula adopted by the district court would cause great harm to the exchange bondholders while giving plaintiffs a return that is exorbitant on its face,” Argentina said.

Argentina’s legislature in 2005 passed a so-called lock law barring payment on the defaulted bonds.

Under Argentina’s proposal, a so-called par option, which is intended for small accountholders, would give bondholders new bonds due in 2038 in a nominal face amount equal to the amount of their defaulted debt, plus unpaid interest up to the end of

2001. The par bonds would pay interest that rises from

2.5 percent to 5.25 percent a year over the life of the bonds. They would also receive a one-time cash payment to compensate for interest they would have earned if the bonds had been issued on Dec. 31, 2003, according to the letter.

Additional Payments

The holders would receive additional payments when Argentine gross domestic product growth exceeds about 3 percent a year, the government said in the letter.

The discount option would give bondholders discount bonds due in 2033, less than the defaulted amount, with an

8.28 percent annual rate and an increase in principal over time. They would be compensated for past due interest on those bonds with new bonds due in 2017 that pay 8.75 percent annually, according to the letter.

The holders would also receive GDP-tied payments, according to the proposal.

“It is our hope that the plaintiffs will finally join the 92 percent of creditors, accept this fair and equitable offer and put this difficult period to rest,” said Sean O’Shea, a lawyer for the exchange bondholders, in an e-mailed statement March 30.

Better Terms

Argentina said its proposal wouldn’t allow the plaintiffs in the lawsuit to force it to offer payment on better terms than those received by bondholders who agreed to the restructuring.

Eugenio Bruno, an attorney at the Buenos Aires law firm Estudio Garrido, said in an e-mail that Argentina’s proposal is similar to past debt-restructuring offers by the country that have been rejected by NML and the other holdouts.

If the government were to offer a better deal, it would trigger provisions allowing holders of the exchange bonds to take advantage of more favorable terms offered to the holdouts, he said.

Bruno represents Alfonso Prat-Gay, a former governor of Argentina’s central bank, who submitted a brief in the case supporting his country’s effort to overturn the lower U.S. court ruling. Bruno said he also advises exchange bondholders and holdouts who aren’t involved in litigation.

Following the oral arguments, the three-judge panel ordered Argentina March 1 to provide a suggested formula for paying the creditors. Argentina’s lawyer, at the Feb. 27 arguments in Manhattan, “appeared to propose” an alternative to the payment formula devised by Griesa, according to the appeals court.

The judges may ask for a response from the creditors to the new proposal, or come to a decision without one.

The lower court case is NML Capital Ltd. v. Republic of Argentina, 08-cv-06978, U.S. District Court, Southern District of New York (Manhattan). The appeal is NML Capital Ltd. v. Republic of Argentina, 12-00105, U.S. Court of Appeals for the Second Circuit (New York).

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