Argentine Seeks Talks With Bond Holdouts to Avert Default

Argentina plans to start talks with holders of its defaulted bonds in a bid to comply with a U.S. court ruling and stave off a new debt crisis.

Officials from the South American country plan to meet next week in New York with holdout creditors led by billionaire hedge fund investor Paul Singer, a lawyer for the government told a Manhattan federal judge today. That change in tack came less than 24 hours after Economy Minister Axel Kicillof said the country would seek to skirt the U.S. ruling by moving its overseas bonds into the local market, a move that U.S. District Judge Thomas Griesa said today would be illegal.

Bonds rallied, reversing losses earlier in the day, on optimism that the talks will lead to a settlement that will allow Argentina to keep servicing its restructured bonds. Securities maturing in 2033 rose 2.4 cents to 76.7 cents on the dollar at 3:58 p.m. in New York after earlier dropping to a three-month low of about 71 cents.

“If they want to talk about settlement, they know how to find us,” Robert Cohen, a lawyer representing Elliott Management Corp.’s NML Capital, told Griesa. A group led by NML is owed more than $1.5 billion, lawyers said at the hearing.

Argentina defaulted on a record $95 billion debt in 2001, replacing the defaulted bonds with new ones at a sharp discount in two restructurings. Holdouts including NML Capital have fought for full payment on the defaulted bonds. Argentina has vowed never to pay the holdouts, calling them “vultures” and refusing to pay U.S. court judgments in their favor.

‘Extortion’ Claim

Cohen told Griesa today that Argentina’s offer to negotiate was belied by Kicillof’s remarks and by President Cristina Fernandez de Kirchner in a nationwide address June 16, hours after the U.S. Supreme Court refused to hear her country’s appeal. In the speech, Fernandez used the term “extortion” to describe Griesa’s ruling requiring full payment on the defaulted bonds.

“The president’s speech is a problem,” Griesa said today. It “really does not give me confidence in a good-faith commitment to pay all the obligations of the Republic.”

A federal appeals court in New York lifted a stay today on Griesa’s order that Argentina pay the holdout bondholders if it seeks to pay its restructured debt. The stay had been in place pending the Supreme Court’s June 16 order, which sparked the bond rout.

“This just enhances our conviction that Argentina should be bought on dips,” Jorge Piedrahita, the chief executive officer of New York-based Torino Capital LLC, said in an e-mail. The mostly likely scenario is that NML will be offered new bonds to replace the defaulted debt it holds, he said.

$15 Billion

Officials overseeing South America’s second-largest economy say the nation doesn’t have sufficient reserves to pay what they estimate could be $15 billion of claims from holders of defaulted bonds that didn’t participate in two debt exchanges following the 2001 default.

For bond investors, “right now there’s probably more downside than upside because we don’t know what Argentina is thinking when they say we’re going to negotiate and we don’t know what NML’s thinking,” said Daniel Freifeld, a portfolio manager at Callaway Capital Management LLC in Washington, which owns Argentina’s local law bonds. “But in the end there’s a lot more interest in seeing this get resolved than seeing this fall apart.”

The extra yield investors demand to hold Argentina’s dollar bonds instead of U.S. Treasuries fell 0.68 percentage point to 8.05 percentage points, still the highest in the developing world after Venezuela, according to data from JPMorgan Chase & Co.

30 Cents

In 2005, Argentina offered to exchange its defaulted securities with bonds worth about 30 cents on the dollar. It made a similar proposal in 2010. Owners tendered about 92 percent of the outstanding debt.

The holdouts, including NML Capital, fought for full payment in court. Griesa has expressed frustration at Argentina’s refusal to pay U.S. Court judgments.

“Negotiation is fine,” Griesa said. “As a judge, what I want is a legal mechanism to prevent another situation where the Republic can simply laugh off another judgment.”

Payout Jeopardized

Kicillof said yesterday that complying with the U.S. ruling would jeopardize the country’s ability to honor the restructured debt because paying the plaintiffs the $1.5 billion they say they’re owed would trigger demands from other holdout creditors for similar terms.

Central bank reserves, which the government uses to pay its debt, have fallen 25 percent in the past year to $28.8 billion. In March, Argentina’s economy contracted for the first time since September 2012 as the government implements policies to stem a drain on central bank funds. Consumer prices rose an accumulated 12.9 percent in the first five months of the year.

Kicillof said the government wouldn’t allow hedge funds to sabotage its efforts to rebuild the country after the debt crisis in 2001.

Jay Newman, a money manager at Elliott, has publicly called on Argentina to negotiate with holders of defaulted bonds multiple times.

“Some people say that we need to negotiate with the vultures,” Kicillof said. “The vultures are vultures because they don’t negotiate. The vultures are vultures because they go to court to get the full total of their claims.”

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