Argentine Bonds Fall After Clearstream Suspends Settlement

Argentine bonds fell after Clearstream Banking SA said it suspended settlement on the nation’s securities due to a conflict between Citigroup Inc. and local regulators.

Argentina’s local law dollar bonds due 2017 slid 0.9 cent to 98 cents on the dollar, pushing yields up 0.54 percentage point to 9.95 percent at 3:56 p.m. in New York. Clearstream said in an e-mail that it suspended settlement in the Argentine market. The ban applies to all of the nation’s local law restructured dollar debt, and will temporarily apply to non-exchange bonds until the company receives legal confirmation on its assets with custodian banks, Clearstream said in a statement on its website.

A $3.7 million payment due today on Argentina’s local law dollar notes due in 2038 that were issued in restructurings is in a limbo after a U.S. court ordered financial institutions not to transfer funds to clients in line with a 2012 ruling. While the government removed Citibank Argentina as custodian of the bonds and ordered Caja de Valores to make the payments, Clearstream and Euroclear Bank SA/NV said they won’t transfer the funds to bondholders to comply with the U.S. court decision.

“The fear is that the transfer and therefore the trading of all bonds will be restricted,” Alejo Costa, a strategist at Puente Sociedad de Bolsa SA, said by e-mail. “Everyone had already assumed the local law exchange bonds weren’t going to get paid, the concern now is that more bonds will be included.”

Clearstream spokesman Oliver Frischemeier declined to comment further.

Citibank Accord

In 2012, U.S. District Court Judge Thomas Griesa ruled in favor of a group of holders of defaulted bonds from the nation’s 2001 crisis led by Paul Singer’s NML Capital which went into effect in June. While Argentina was ordered to pay the investors in full at the same time it pays restructured debt, the government has refused, causing it to default on its foreign law debt. This is the first payment under local legislation in jeopardy.

Citibank signed an accord with NML approved by Griesa to make the debt payment today and on June 30 after saying earlier this month it plans to exit its custodian business in Argentina because government officials had threatened to revoke its license if it follows court orders to stop paying local law exchange bonds.

‘No Liquidity’

No other entity in the distribution chain however is authorized to process the payments, meaning investors overseas won’t receive the funds.

On March 27, the government suspended Citibank from operating in the country’s capital markets and appointed Caja de Valores to process the bond payments.

All Argentine bond transfers between Euroclear and Clearstream are currently being blocked, according to a person familiar with the matter who isn’t authorized to speak publicly.

“At this point there should be no liquidity in the international markets given the risk that Euroclear suspends settlement as well,” Jorge Piedrahita, chief executive officer of Torino Capital in New York wrote in a note.

Clearstream said it expects to restore settlement for bonds in the Argentine market “only once it can ensure that title to securities can be safely transferred between its customers.”

‘Temporary Disruption’

Clearstream said in a March 30 statement it replaced Citibank with Caja de Valores as custodian, while Euroclear did the same for local bonds not issued in the restructurings two weeks ago.

While Griesa’s rulings only apply to local and international bonds sold in Argentina’s debt restructurings, Clearstream’s e-mail spurred speculation payments on other securities may be in danger.

Clearstream later clarified in an online statement that it is waiting for confirmation on the legal status of its assets deposited with Citibank Argentina and Caja de Valores before resuming internal and external settlement on non-exchange bonds.

In the meantime, the bond market should be able to operate as usual if settlement is through Euroclear, Barclays Plc. analyst Sebastian Vargas wrote in a note.

“While some temporary disruption is possible, as accounts that were set up to trade in Clearstream switch to Euroclear and Clearstream operates directly with Caja de Valores, we think that market participants should be able to adapt quite rapidly to a settlement suspension for Clearstream,” Vargas said.

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