Argentina’s Defiance in Debt Swap Dims Market Redemption

Argentina’s attempt to circumvent a U.S. court order to pay its overseas bondholders is threatening to prolong the nation’s isolation from international markets and sink its economy deeper into recession.

President Cristina Fernandez de Kirchner said on Aug. 19 that Argentina will let holders of foreign-currency bonds swap into new securities governed under local law after a U.S. ruling blocked payments and triggered its second default in 13 years. The plan comes in direct conflict with orders from U.S. District Judge Thomas Griesa, who ruled that Argentina must first resolve unpaid debts from its 2001 default before it can make any other payments and said such a swap would be illegal.

The proposal is also the clearest sign yet Argentina would rather remain cut off from overseas markets than compromise with creditors led by billionaire Paul Singer’s Elliott Management Corp., which are owed $1.5 billion as a result of Griesa's rulings. At a time when the nation’s reserves are tumbling, the debt dispute may shave 5 percentage points from growth next year if left unsettled, Bank of America Corp. said.

“By prolonging the default, Argentina will be locked out of debt capital markets for a longer period of time,” Marcos Buscaglia, Bank of America's chief Latin America economist, said in an interview from Buenos Aires.

Argentina’s benchmark overseas bonds due in 2033 declined 0.56 cent to 79.81 cents on the dollar as of 11:43 a.m. in New York, after dropping 2.37 cents yesterday, the most in two weeks. The peso fell 0.3 percent today to 8.3472 per dollar, extending the two-day decline to 0.7 percent.

Main Objective

Argentina hasn’t borrowed internationally since it stopped paying a record $95 billion of bonds 13 years ago.

Jesica Rey, a spokeswoman at the Economy Ministry, didn’t respond to a telephone call or e-mail seeking comment on whether the proposed plan will hurt Argentina’s chances of regaining access to foreign debt markets.

Holders of defaulted bonds from 2001, who are known as the holdouts after they refused to offer Argentina debt relief in restructurings in 2005 and 2010, asked Griesa to consider contempt sanctions against Argentina, calling the plan to pay its debt outside his jurisdiction a “grave affront.”

Griesa called a hearing for today at 3 p.m. in New York.

“This plan makes no pretense that Argentina will honor its obligations under plaintiffs’ bonds,” Robert A. Cohen, a lawyer for the holdouts, said in a letter yesterday to Griesa.

‘Bond Tourists’

Argentina submitted a bill to Congress to authorize the debt swap, Fernandez said in the nationwide address. Payments will be made into accounts at the central bank instead of through Bank of New York Mellon Corp., the current trustee.

Economy Minister Axel Kicillof said yesterday the main objective is to change the payment location and bondholders will find ways to get their money from the account in Buenos Aires.

“No one’s going to have to take a plane,” he told reporters. “These days even your gas and electricity bills can be paid by the Internet. We’re not going to have an influx of bond tourists coming to get paid.”

Griesa blocked Argentina from paying $539 million in interest on the 2033 bonds that were due by July 30 and said the country must pay the holdouts in full or reach a settlement before payments on its other debt.

Before last month’s default, Argentina had sought to repair ties with its other overseas creditors.

Chosen Path

The government settled five arbitration cases at the World Bank, paid Madrid-based Repsol SA $5 billion for the expropriation of YPF SA in 2012 and negotiated with the Paris Club to settle obligations left over from the 2001 debt crisis.

Yet Argentina has repeatedly said it would only offer the holdouts the same terms -- about 30 cents on the dollar -- that other creditors accepted in prior debt restructurings.

“The path they’ve chosen won’t give them access to markets,” said Eduardo Levy-Yeyati, director of Buenos Aires-based research firm Elypsis. “They’re going to have to pay their debt by selling the furniture or tightening the belt.”

Argentina’s central bank reserves have tumbled 21 percent in the past year to $28.9 billion, the lowest in more than seven years. The economy will contract 1 percent this year, the median estimate of 22 analysts in a Bloomberg survey showed.

Ray Zucaro, a money manager at SW Asset Management LLC, said that while bonds have tumbled since July 30, they’re still higher than the five-year average. He’s optimistic that Argentina will settle with the holdouts once a Rights Upon Future Offers clause expires in December.

‘Still Optimistic’

The rule requires Argentina to give all restructured bondholders the same deal if it voluntarily offers improved terms to any creditor. The clause could trigger additional claims of at least $120 billion, according to the government.

“I’m still optimistic that come January and the expiration of the RUFO clause, the Damocles sword hanging over Argentina, that this issue could be resolved,” Zucaro, who owns Argentine provincial and corporate bonds, said in a telephone interview from Newport Beach, California.

Finding a new trustee to handle payments to bondholders from Buenos Aires who is prepared to risk being in contempt of court will be the main obstacle for Argentina, according to Luis Caputo, a Buenos Aires-based money manager at Noctua International LLC. He said he sold all his New York-law and local-law Argentine bonds in the past month.

“It’s not reasonable to think they will be breaking the law for an indefinite period of time,” Caputo said by telephone. “It’s not good for the country.”

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