MercoPress. South Atlantic News Agency

Markets fear Argentina could be en route to a ‘technical’ default

Judge Reena Raggi underlined that a court’s role is to enforce contracts, “not to rewrite them”

“We are representing a government, and governments will not be told to do things that fundamentally violate their principles” lawyer Jonathan Blackman told the Manhattan US appeals court.

“So the answer is you will not obey any order but the one you propose?” Circuit Judge Reena Raggi asked.

“We would not voluntarily obey such an order” replied Blackman, who later said Argentina would be no more likely to obey a US court than the US would be to obey an Iranian court.

“If that’s the confrontation the court seeks with the injunctions; that is the court’s decision” insisted Blackman.

Judge Reena Raggi underlined that a court’s role is to enforce contracts, “not to rewrite them” and added that it “hardly seems appropriate for a court not to enforce one of its orders because a party will breach another of its obligations.”

That was part of the dialogue at the New York Appeals court on Wednesday where Argentina made its case that it won’t voluntarily comply with rulings that might force it to pay the holdouts and a decision, it argued in favor of the creditors would open it up to more than 43 billion dollars in additional claims.

Central bank reserves that Argentina uses to pay foreign debt have tumbled as depositors pulled almost half their dollars from banks in the past 16 months on concern the government of President Cristina Fernandez will seize their savings and convert them into pesos, according to Maximiliano Castillo, a former manager at the central bank.

Reserves fell 1.6 billion this year to a five-year low of 41.7 billion as investors await the US court ruling on whether the nation has to pay 1.3 billion to holdout creditors left over from its 2001 default. The extra yield investors demand to hold Argentine debt instead of US Treasuries jumped 2.66 percentage points to 12.57 percentage points this year, according to JPMorgan Chase & Co. That’s more than six times the premium that Brazil and Mexico pay.

“The situation has started to become critical, the level of reserves is worrisome.” said Aldo Pignanelli, a former central bank president. “I don’t think the government has a clear idea on how to stem this hemorrhaging.”

The Argentine government has tapped more than 30 billion dollars to pay debt since 2010, according to central bank President Mercedes Marco del Pont. Cristina Fernandez has earmarked an extra 8bn for the same purpose this year, according to the 2013 budget.

Dollar bank deposits fell to a four-year low of 7.6 billion on Feb. 8, accounting for 16% of central bank reserves, according to latest data from the monetary authority. When Cristina Fernandez was re-elected in October 2011, the deposits stood at 14.8 billion, or 31% of reserves.

Argentina’s stance at the court has sparked fears the country could suffer its second massive debt default in 11 years. The court is weighing whether to reverse an order that the Argentine government pay 1.3 billion dollars to the holdouts. The court’s decision could have wide impact on global debt markets.

The court also pointed out it would deny Argentina’s request for a rehearing of an earlier appellate order in October that required it to treat bondholders equally.

Argentine Economy Minister Hernán Lorenzino said in New York during an interview with a Buenos Aires news channel that “what’s at stake here is the future, if any, of the sovereign debt swap processes.”

Lorenzino said that Argentina’s stance and that of the bondholders who joined the debt swap agreed in highlighting that “the inequity demanded by common sense and at the same time the impossibility of assimilating the equal treatment demanded by the vulture funds.”

Argentine Vice-President Amado Boudou, during the same interview with Lorenzino, said that “Argentina will not break its own laws” in ordering payment in full of the sum the holdouts are demanding.

“When governments are in debt, they work for the creditors and that was taking place until the arrival of President Néstor Kirchner. Argentina will not allow the lender’s interest to be prioritized over education, health and Argentine well-being” said Boudou, adding that “Argentina will not break its own laws that state that it will not pay those debt-holders who did not accept the debt swap.”

The appeal comes after US District Judge Thomas Griesa in Manhattan ruled last February that Argentina had violated its contractual obligation to treat all creditors equally. That meant the country would have to pay the holdouts if it also wished to pay bondholders who agreed to two giant debt swaps.

If ordered to pay the small group of holdout creditors, there are fears that Argentina could default again on 24 billion dollars in previously restructured debt. A victory by the holdouts, Argentina argues, would harm those investors who agreed to the restructurings as well as banks which handle its payments. The country also says such a ruling could make future debt crises “irresolvable,” and spur further investor litigation.

Last October, the Second Circuit largely upheld Griesa’s ruling on equal treatment for bondholders. On Wednesday the court said it would not revisit that ruling, clearing the way for it to review Griesa’s plan for how the payments would be made.

Griesa had said the next time Argentina made an interest payment to the exchange bondholders it would have to pay 1.3 billion dollars owed to the holdouts into a court escrow account.

Argentina defaulted 11 years ago on about 100bn in sovereign debt. About 92% of its bonds were restructured in 2005 and 2010, giving holders 25 cents to 29 cents on the dollar.

The appeals court is also examining treatment of Bank of New York Mellon, which acts as trustee to the exchange bondholders and the impact from the ruling’s injunction on other third parties.