Saturday, December 1, 2012

Argentina dodges another default - for now

Argentina dodged a technical default this week due to the appeals court ruling. A US appeals court suspended Judge Griesa's ruling to place $1.3 billion into escrow by December 15th (see discussion). The suspension is pending the appeals court ruling.
WSJ: - Argentina's bonds and stocks extended their gains in Buenos Aires on Friday, as investors continued to cheer a U.S. court ruling earlier in the week that temporarily quashed fears the Argentine government might have to default on its debt next month.

"That traders have extended their optimism with greater calm [during the session] after celebrating yesterday's suspension of [judge] Griesa's ruling is reasonable given that valuations continue to be attractive and are out of sync with credit fundamentals," research firm Estudio Ber said in a note.

Dollar-denominated GDP warrants, whose payout is linked to Argentina's economic growth, rose 4.6% to 83.25 pesos ($17.20), adding to Thursday's whopping 21.9% surge. Peso-denominated GDP warrants closed 1% higher at ARS15.66.

The dollar-denominated Bonar 2017 bonds rose 1.1% to ARS532.00, and the Boden 2015 rose 1.3% to ARS580.50.

The hefty gains bonds logged in the last two trading sessions of November follow a decision by a U.S. appeals court Wednesday night to suspend a ruling by federal Judge Thomas Griesa that barred the Argentine government from paying investors who own restructured bonds unless it also fully repays defaulted bonds held by creditors who are suing.
Bond yields and CDS have tightened sharply.

Source: JPMorgan
JPMorgan: - Argentine asset markets have been held captive to the twists and turns of a US$1.3 billion US lawsuit pitting Argentina against a subset (1% of claims) of its holdout creditors (8% of claims). This week the Appeals Court prioritized due process and opted to extend the stays until the end of February 2013—a measure that favors Argentina, which is seeking review. Furthermore, the Appeals Court admitted restructured bondholders (92% of claims) to the judicial dispute by granting their motion to appear as interested third parties (in support of Argentina’s litigating position) in court. As a consequence, credit markets saw relief: bond prices rebounded and short-dated credit default swap spreads collapsed—although longer-dated maturities remain at distress levels.
This means that the dollar denominated bonds will pay the next coupon in December as usual - with all the money going to the bond holders who had participated in the 2001 default restructuring and none going to the holdouts. The ruling therefore has bought Argentina some valuable time, delaying the possibility of default (and CDS trigger) at least until March, 2013, when the next payment on these bonds is due. This case is critically important not just for Argentina but for any sovereign bonds issued under US law. Any future sovereign debt restructuring and market participants' response will be based on the outcome of these proceedings.
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