Crucial week for Argentina’s bonds’ dispute with ‘technical default’ fears looming
The Argentine government will appeal on Monday the New York federal court ruling from Thomas Griesa which orders the country to pay 1.3billion dollars to the investment funds which held out from the (2005 and 2010) restructuring of the 2002 defaulted sovereign debt.
The Argentine strategy will be to alert the court and the financial world of the dangers involved in the decision for the debt restructuring processes which have currently become quite common because of the critical moments many countries are going through with exceptionally high debt/GDP ratios.
The appeal will argue that the implementation of Judge Griesa decision puts at risk future sovereign debt restructuring processes globally and could have severe consequences for the functioning of the New York financial markets.
“If the decision remains and prospers (paying the investment funds 1.3bn) no country in the world could implement a successful debt restructure, such as Argentina’s, because no bond holders will accept a ‘hair cut’ when they could simply sit and wait for a favourable decision that enables to collect the full face value of the bond plus interests accrued.
Judge Griesa rejected an Argentine petition to freeze a previous decision from the same court which retained payment of the sovereign bonds to investors until several pending issues are solved while an appeal to a higher court was in process.
The ruling was a huge setback for Argentine President Cristina Fernandez, who calls the holdout funds vultures and has vowed never to pay them. It also dismayed investors who took part in the two debt swaps and fear Argentina will now enter into technical default on about 24 billion in restructured debt. About 93% of bondholders agreed in 2005 and 2010 to swap defaulted debt from the 2002 default for new paper at a steep discount.
Cristina Fernandez's decision to vilify holdouts makes payment a difficult prospect, and a local law prohibits offering a better deal than that given in the swaps. Doing so might expose Argentina to lawsuits from creditors who tendered their paper.
On the other hand, another default - albeit a technical default - would tarnish Cristina Fernandez's record on managing the economy, deepen Argentina's isolation from global financial markets and hit investment at a time of sluggish growth.
The Argentine government is due to pay exchange bondholders at least 3.3 billion dollars in principal and interest in December. But if Judge Griesa's demand for payment of the 1.3bn into an escrow account for holdouts is upheld by an appeals court and Argentina still refuses to pay, US courts could embargo payments to the creditors who accepted the debt restructurings.
Argentine Economy minister Hernan Lorenzino and member of the negotiating team called the latest Griesa ruling: a kind of judicial colonialism.
”The only thing left is for Griesa to order them to send in the (US Navy's) Fifth Fleet,” Lorenzino told reporters, outlining Argentina's plans to file an appeal against with the 2nd Circuit Court of Appeals in New York on Monday.