Argentine Dollar Bonds Rally on Speculation Ruling to Be Delayed

Argentine dollar bonds led gains in emerging markets after newspaper La Nacion reported holdout creditors will request an emergency stay on a U.S. court ruling before a July 30 deadline to continue settlement talks.

Government bonds due in 2033, whose interest payment was blocked by courts last month, rallied 2.25 cents to 88.51 cents on the dollar at 5 p.m. in Buenos Aires. Argentine bonds pared earlier gains after Aurelius Capital Management LP, which sued for better terms alongside Elliott Management Corp., called the story “utter fiction” in an e-mailed statement.

La Nacion, citing unidentified government officials, said holdout creditors may ask U.S. District Court Judge Thomas Griesa to delay his decision ordering Argentina to pay investors on defaulted bonds in full when paying restructured debt. A suspension of the ruling would let Argentina stay current on its performing debt and potentially allow the nation and holdouts to continue talks until Dec. 31, when a bond clause expires prohibiting it from voluntarily offering better terms than its previous restructurings.

“Since people’s perception of default risk has been rising the last few days, if there is any kind of rabbit to be pulled out of the bag that says default can be avoided, the market’s going to take that very positively,” Stuart Culverhouse, the global head of research at Exotix Partners LLP, said in a telephone interview from London. “However credible or not the actual story is.”

Argentine Delegation

If Argentina doesn’t reach a deal or obtain a delay on the ruling, the nation will default on July 30. A delegation of Argentine officials led by Finance Secretary Pablo Lopez and Carmen Corrales, an attorney for the nation at Cleary Gottlieb Steen & Hamilton, had a three-hour meeting with court-appointed mediator Daniel Pollack in Manhattan today.

Neither Argentine officials nor Corrales answered questions from reporters gathered outside the building.

The extra yield investors demand to hold Argentine debt over U.S. Treasuries narrowed 0.24 percentage point to 6.31 percentage points, according to JPMorgan Chase & Co.’s EMBIG Diversified index. The spread on emerging-market debt narrowed 0.06 percentage point on average.

Griesa rejected in a July 22 hearing Argentina’s petition for a stay, urging the parties to “continuously” negotiate to avoid a default. He said the nation doesn’t need a stay on his orders to reach an agreement.

“This matter could be resolved quickly if Argentina would join us in settlement discussions,” Elliott’s NML Capital Ltd. said in a statement after the hearing.

Argentina said in its latest filing that any deal violating the Rights Upon Future Offers clause will trigger claims of as much as $500 billion. Officials had earlier said claims from restructured bondholders demanding the same terms as holdouts would total $120 billion.

‘Prisoner’s Dilemma’

“This is a classic prisoner’s dilemma -- all three parties want the same thing, but since they have very little trust of one another, you end up with an outcome that no one wants,” Patrick Esteruelas, an analyst at Emso Partners Ltd., said in a telephone interview from New York. “All three parties want to avoid a default, but due to lack of trust, you might end up with a default.”

The costs for the Argentine economy in the case of a default could be “substantial,” and there could also be consequences for future restructurings elsewhere, International Monetary Fund Chief Economist Olivier Blanchard said at a press conference in Mexico City today.

Argentina’s benchmark exchange bonds are trading at over 80 cents on the dollar even as a potential default looms next week. There’s a price buffer preventing notes from falling further on speculation President Cristina Fernandez de Kirchner would swap investors into local law bonds to continue paying or find a way to settle with holdouts next year, according to Donato Guarino, a strategist at Barclays Plc.

‘New Term’

Fernandez said yesterday the nation can’t default because it deposited $539 million for the debt payment and continues to have a strong capacity to pay.

“Those who don’t pay go into default and Argentina paid,” Fernandez said in a nationwide broadcast. “They’re going to have to invent a new term that reflects that a debtor paid and someone blocked and didn’t allow that money to arrive.”

While bonds are rising, traders are betting there’s a greater chance Argentina will default next week. The country’s credit-default swaps due in three months imply a 41 percent likelihood that debt payments will be suspended, the highest in the world and up from 28 percent a week ago, according to data compiled by Bloomberg.

“The set of events is pointing to an increase of a probability of default,” Guarino, the Barclays strategist, said by phone from New York. “We’re at the end of the ride, and it’s pretty much in Argentina’s part of the court.”

Before it's here, it's on the Bloomberg Terminal.