Argentine Bonds Fall on Lack of Progress in Default Talks

Argentine bonds posted the biggest drop in more than a month after a government delegation refused to meet face-to-face with holdout creditors and returned to Buenos Aires, increasing speculation the nation will default next week.

Bonds due in 2033 fell 4.2 cents to 84.26 cents on the dollar at 2:15 p.m. in New York, the biggest decline since June 16. Court-appointed mediator Daniel Pollack said a “brief” fourth meeting today with Argentine officials ended without reaching a resolution and didn’t say when the next meeting will take place. The delegation will return to Argentina to confer with and seek further instructions from the government.

“No resolution of the impasse between the parties has been reached,” Pollack said in an e-mailed statement. “I anticipate that there will be further communications with the parties prior to the Default date (July 30).”

The South American country needs to reach a settlement with holders of its defaulted debt, or obtain a delay on U.S. court orders to avert reneging on its obligations for a second time in 13 years. U.S. District Court Judge Thomas Griesa, who ruled in favor of defaulted bondholders, ordered “continuous” talks before a 30-day grace period expires. Griesa said the country must pay the group of holdouts $1.5 billion if it makes any more payments on restructured debt.

Argentina’s government officials “explained in detail different aspects of the litigation and diverse alternatives that exist,” the Economy Ministry said today in an e-mail, without providing more information. “Dialogue led by the mediator will continue in the coming days.”

Fading Hope

Pollack said today that while holdouts including Elliott Management Corp. and Aurelius Capital Management LP weren’t present at the meeting, he briefed them by telephone and they reiterated their “availability and willingness” to meet.

Argentina and representatives from the hedge funds met separately with Pollack yesterday. The mediator said while he urged a face-to-face meeting between the parties, Argentina refused to hold direct talks with the creditors.

“In the absence of direct talks between the two parties it’s kind of hard to see how a settlement could be reached,” Marco Santamaria, a New York-based money manager at AllianceBernstein, which oversees $25 billion of emerging-market debt, said in a telephone interview. “Hope is quickly fading.”

While the cost to protect the nation against non-payment is the highest in the world, bond prices are holding up on speculation that Fernandez might be able to swap investors into local-law bonds outside of Griesa’s jurisdiction, and thus continue paying if there’s a default.

‘Bad Faith’

As of yesterday, Argentine debt had returned 8.9 percent in July compared with an average gain of 1.1 percent for emerging markets, according to data compiled by JPMorgan Chase & Co.

Argentina said yesterday it called for the court to create a financial instrument to protect against risks related to a clause that would require the nation to offer any terms reached with holdout creditors to owners of restructured notes. If no such instrument is created, a stay would be the best option.

Argentine Cabinet Chief Jorge Capitanich said today at a press conference that Griesa is showing “bad faith” by not granting a stay, which would help “solve the problem.”

Economy Minister Axel Kicillof said today at an event in Buenos Aires that while the country is willing to find a negotiated solution to the issue, it won’t accept “extortion” from the holdouts or U.S. courts. He said the ruling as written now is impossible to comply with since it would prompt exchange bondholders to sue for the same terms.

‘Engage Argentina’

The government deposited $539 million with a trustee bank last month to cover payments to holders of restructured bonds, without also providing money for the holdouts, prompting Griesa to block any disbursements.

Argentine bonds rallied yesterday the most in emerging markets on speculation that the holdouts will ask Griesa for a delay of his ruling until Dec. 31. That’s the expiration date of a bond clause prohibiting Argentina from sweetening terms for the holdouts without giving a similar offer to investors who complied with the country’s earlier efforts to restructure its debt. Argentina defaulted on $95 billion of debt in 2001.

Violating the clause could expose the country to claims of as much as $500 billion, according to Argentina. The nation will keep meeting its obligations and won’t fall into default, President Cristina Fernandez de Kirchner said this week.

NML Capital Ltd., the Elliott unit involved in the case, said Argentine officials refused to negotiate on any aspect of the dispute and instead stated that no solution was possible.

“We will continue to seek ways to engage Argentina in negotiations,” NML said in an e-mailed statement yesterday. “But there is currently a total lack of willingness on Argentina’s part to solve this problem.”

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