Billionaire Singer’s Smoking Gun Sparks Default-Risk Jump

The relative calm that prevailed in the market for Argentina’s credit-default swaps has been shattered.

The upfront cost of protecting $10 million of the nation’s debt against non-payment for three months has almost doubled to $734,046 since May 27, when the U.S. Supreme Court scheduled a conference this month to decide whether to hear Argentina’s appeal of an order to repay creditors. Newspaper Clarin reported on May 28 that Argentina’s lawyer recommended in a memo that the nation default if the petition is denied.

With interest payments on $13 billion of bonds at risk June 30 if the U.S. court rejects Argentina, the nation’s debt securities are the most expensive in the world to protect using default swaps. A lawyer for hedge fund Elliott Management Corp., one of the creditors from Argentina’s default in 2001 holding out for better terms, told a judge on May 30 the leaked memo may be “the smoking gun” showing Argentina plans to defy U.S. courts and default.

“People had become a little too comfortable,” Ray Zucaro, who helps manage $390 million at SW Asset Management LLC, said by telephone from Newport Beach, California. “Once people saw Argentina’s thought process in black and white, it brought it to the forefront of people’s minds.”

Swap Volatility

A rejection of Argentina’s appeal would leave intact a 2012 ruling requiring the country pay holders of debt left over from its 2001 default in full when it pays restructured notes.

Jesica Rey, a spokeswoman for the Economy Ministry, didn’t reply to an e-mail seeking comment on the memo or plans to default.

Argentina’s peso weakened 0.3 percent today at 8.1285 per dollar as of 3:01 p.m. in New York.

“There is no smoking gun and there is no plan,” Carmine Boccuzzi, a lawyer for Argentina, told U.S. District Judge Thomas Griesa at a May 30 hearing in New York. “We simply cannot pay everyone across the board and we point out that the result of that is a very likely imminent default” if the Supreme Court doesn’t agree to review the case.

Speculation that Argentina will opt to default instead of paying bondholders led by billionaire Paul Singer’s Elliott Management who have rejected two debt swaps pushed the nation’s default swaps to a record in 2013.

Prices dropped from their highs as the nation pursued an appeal with the U.S.’s highest court.

Holders of more than 90 percent of the defaulted bonds agreed to provide debt relief in restructurings in 2005 and 2010, at losses of about 70 percent.

Cleary Memo

The high court will hold a conference June 12 and could act as soon as June 16, when it’s scheduled to release orders, including a list of new cases it will hear.

The May 2 memo to Argentina’s Economy Ministry contained legal advice from New York-based Cleary Gottlieb Steen & Hamilton LLP, the nation’s attorneys. It was initially posted on an Argentine website by an “unauthorized” person, according to Cleary, which declined to discuss its contents, citing attorney-client privilege.

Buenos Aires-based Clarin said on May 28 it had obtained a copy of the confidential document, without naming its source.

According to a copy of the memo posted May 23 on Argentine website, the country wants to continue paying its restructured debt, but the courts have put it in a “terrible” position where, absent Supreme Court review, it appears the country will be forced to default.

‘Best Option’

“Barring revision by the Supreme Court of the lower-court’s ruling, the best option for the Republic is to permit the Supreme Court to force a default and then immediately restructure all of their external bonds such that their payment mechanism and other related aspects stay outside the reach of the American courts,” Boccuzzi and two other attorneys wrote in the memo.

Robert Cohen, a lawyer for hedge fund Elliott’s NML Capital Ltd., asked Griesa at the May 30 hearing to demand Argentina inform the court within 72 hours what it plans to do if the Supreme Court won’t hear the case.

Griesa, who issued the initial decision in February 2012 that requires Argentina repay creditors, said he couldn’t rule on NML’s request at the time.

Default Trigger

The contracts would be activated in the event Argentina fails to pay any principal or interest on a restructured security for as long as 30 days after payment is due, if at least 25 percent of investors agree to accelerate the maturity on an Argentine note, or if a moratorium on payment is declared by the government, according to bond indentures and the International Swaps and Derivatives Association.

“If there’s a technical default, most likely it’s going to be a short default and Argentina should be able to continue paying after a short period, but no matter what you’re going to be in a situation of a technical default, so CDS could be triggered,” Daniel Chodos, a New York-based strategist at Credit Suisse Group AG said by telephone.

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