MercoPress. South Atlantic News Agency

Argentina in last minute effort argues possible ‘technical default’ before Judge Griesa

Judge Griesa, Cristina Fernandez and Paul Singer involved in what will be a ‘lead case’

Argentina asked a US judge late Friday night to maintain his order blocking payment on defaulted sovereign bonds to holdout investors until lingering questions are settled in a higher court's appeals process.

Less than 15 minutes before a midnight deadline, Argentina's lawyers filed their brief outlining why US District Judge Thomas Griesa should reject the argument by holdout creditors to pay them in full on debt that has been in default since 2002.

The arguments came three days after Argentina asked the US 2nd Circuit Court of Appeals in New York to reconsider its October 26 ruling that favoured these holdout bondholders and rattled financial markets in the process.

That decision upheld the ruling made by Griesa that found Argentina discriminated against bondholders such as Elliott Management Corp's NML Capital Ltd and Aurelius Capital Management. They refused to take part in two debt restructurings as Argentina tried to recover from a 95bn dollars default a decade ago.

Griesa had put his own ruling on hold pending the appeal and Argentina on Friday argued he should keep the freeze in place until outstanding issues were settled.

“The Court should not accept the false urgency plaintiffs are trying to create and allow the Republic and all potentially affected third parties to prosecute their appeal rights before any orders go into effect,” Argentina said in its brief.

“Plaintiffs’ unprecedented demand for over one billion dollars from the fiscal reserves of a foreign state, with further demands to follow as more ‘me too’ plaintiffs pile in, had the immediate, intended effect on the market of sending it into disarray,” Argentina said in its brief. “Faced with losses already, third-party bondholders have asked the court to protect their interests.”

After the 2nd Circuit's ruling, Argentine officials were widely cited in the media saying they would flout the court and continue to pay investors who participated in the debt swaps but would never pay the holdout investors.

That prompted Griesa to demand a direct government pledge to comply with his orders.

National Director of Argentina's National Bureau of Public Credit, Francisco Eggers, submitted a signed affidavit saying the government would abide by the court's rulings and not seek to evade its directives.

“As directed by the court, on behalf of the Republic, I confirm that the Republic has complied, and will comply with the terms...,” Eggers said.

Last month's ruling led to fears US courts could ultimately inhibit debt payments to creditors who accepted the terms of the restructuring, out of consideration for investors who rejected Argentina's terms at the time.

This would trigger a technical default on approximately 24 billion dollars worth of debt issued in the 2005 and 2010 exchanges.

“It is far beyond the bounds of equity to seek to enforce the rights of one litigant by jeopardizing the rights of others,” lawyers representing a group of bondholders who participated in the exchange, led by Gramercy Funds Management LLC., said today.

The briefs from Argentina and the exchange bondholders addressed two questions that the appeals court had referred back to Griesa for answers.

These were technical questions of how debt payments would be calculated and how to treat the involvement of third-party banks such as Bank of New York Mellon, which act as transfer agents for money owed to exchange bondholders.

Argentine President Cristina Fernandez said immediately following the October decision her country would not pay “one dollar to the vulture funds”, the term used for holdout investors who buy distressed or defaulted debt and then sue in international courts to get paid in full.

In a brief filed late Friday the Bank of New York Mellon, which transfers funds from the Argentine government to the country's bond holders, argued to Judge Griesa that it is not an agent of the Argentine government and maintains an “arm's length” relationship.

The bank said its “duty of loyalty runs to the Exchange holders”, that is, to enforce the rights of investors who exchanged their bonds in 2005 and 2010. “Punishing an innocent third party to try to obtain compliance from an enjoined party goes beyond any legitimate purpose for contempt,” BNY Mellon said.

The bank said it could be put between a rock and a hard place if Griesa rules they are to make payments to all parties but are prohibited because Argentina does not transfer any money through it.

“BNY Mellon will face a potential conflict between its obligations to Exchange Holders under the Indenture and its obligations to the Court,” the bank argued. In that case, the bank said, it needs guidance from Griesa on what its duties and responsibilities would be.

Ultimately, the bank wants Griesa's order to remain in place, leaving the payments frozen until the 2nd Circuit reviews and rules on his logic.

The judge is expected to make a speedy response as Argentina is due to start making 3.3 billion dollars worth of payments to exchange bondholders starting December 2. Griesa's ruling will automatically return to the appeals court for review.

In a court filing this week, NML and Aurelius urged Griesa to lift his February 23 stay on payments pending appeal.

October's ruling by the appeals court largely upheld injunctions issued in February by Griesa in favour of the holdouts, which own roughly 1.4bn of defaulted debt. The holdouts said in their argument to Griesa that terms of the swapped Argentine bonds may allow the country to circumvent the United States by using subsidiaries in London and Luxembourg to make debt payments.