Tuesday, August 27, 2013

Argentina tries to avert default - again

Last week the US appeals court ruled in favor of the NY-law bond houldouts (a group of bondholders who did not participate in the swap some years back when Argentina defaulted), forcing Argentina to make payments on these bonds. And paying these dollars will be a material burden on Argentina, who has limited foreign reserves.
WSJ: - A U.S. appeals court ruled in favor of Argentina's holdout creditors in their bid to be paid in full on long-defaulted bonds.

That sets the stage for a Supreme Court showdown and increases the odds that Argentina will default for the second time in just over a decade.

The U.S. Second Circuit Court of Appeals in New York ruled Friday that if Argentina keeps up its payments to creditors who accepted a discounted restructuring offer, then it also must pay a group of holdout bondholders 100% of the roughly $1.33 billion they are owed in principal and accrued interest. However, it kept a stay in place on enforcement of the ruling while the U.S. Supreme Court decides whether to review the case.

"It's a tough ruling, and it seems they accepted all the plaintiffs' arguments," said Eugenio Bruno, an attorney at Argentine law firm Estudio Garrido, which represents several creditors that accepted the swap offers.
Today Argentina is proposing to swap the NY-law bonds for domestic paper.
Reuters: - Argentina's government is proposing a voluntary bond swap on its foreign debt, shifting payments to Buenos Aires, if it cannot overturn U.S. court rulings that threaten to trigger its second debt crisis in just over a decade.

The bond swap would allow Argentina to keep paying the creditors who agreed to restructure the country's sovereign debt after a record $100 billion default in 2002, President Cristina Fernandez said in a televised address on Monday night.

Investors in international markets would have the option to swap their foreign debt for Argentine bonds if ongoing appeals of the U.S. court rulings are rejected, a government source told Reuters on condition of anonymity.
Of course the devil is in the details, but on the surface this violates the U.S. Second Circuit Court of Appeals ruling which is telling Argentina to make contractual payments on the current bonds. As expected, the NY-law bondholders are skeptical at this stage. Foreign holders know that should there be a problem in the future, they don't stand a chance with some puppet court in Buenos Aires. The ability for foreigners to take their money out of the country is also a potential issue.
Reuters: - But Fernandez's proposal of a new bond swap raised questions about whether investors would be interested in taking Argentine bonds in lieu of foreign debt, given strict currency and capital controls that the left-leaning Fernandez government has imposed.

"Changing the location of the payments to Buenos Aires is going to be extremely complicated amid the currency controls," said Jorge Todesca, a former deputy economy minister who is now head of the Finsoport economic consultancy.
This is particularly painful given Argentina's bloated official exchange rate - the "unofficial" rate now has the peso at 37% discount (around 9 pesos to the dollar - chart below). And given this uncertainty, the unofficial peso is expected to continue weakening further.

Source: El Dolar Blue

Market participants clearly view these events as raising the probability of Argentina's technical default and are awaiting the details of the proposed swap. If the proposal is not acceptable, the nation is likely to default - again. Argentina sovereign CDS premium jumped, with points upfront now approaching 50% (for every $100 of protection you need to pay some $50 in premiums).

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