Argentina will make a last-ditch attempt this week to stall a U.S. court ruling that has shaken the nation's strategy to put a 2002 debt crisis behind it and fuelled fears of a fresh default.
A decade since it staged the biggest sovereign default in history, Argentina faces a stark choice between depositing $1.3-billion (U.S.) before Dec. 15 to pay "holdout" creditors who rejected two debt restructurings, or jeopardizing payments to all its bondholders.
About 93 per cent of bondholders agreed in 2005 and 2010 to swap defaulted debt from the 2002 default for new paper at a steep discount.
But U.S. District Judge Thomas Griesa last week ordered Argentina to pay the holdouts, led by Elliott Management Corp.'s NML Capital Ltd and Aurelius Capital Management, who rejected the swaps and are fighting for full repayment in the courts.
The ruling was a huge setback for Argentina's combative, left-leaning 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 the G20 country will now enter into "technical default" on about $24-billion in restructured debt.
Ms. Fernandez's decision to vilify holdouts – who are loathed by most Argentines – 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 Ms. Fernandez's record on managing the economy, deepen Argentina's isolation from global financial markets and hit investment at a time of sluggish growth.
Some analysts fear the case's implications could stretch far beyond Argentina and its creditors, hampering future debt restructurings and the operation of global payment systems.
The Argentine government is due to pay exchange bondholders at least $3.3-billion in principal and interest in December.
But if Judge Griesa's demand for payment of the $1.3-billion into an escrow account for holdouts is upheld by an appeals court and Argentina still refuses to pay, U.S. courts could embargo payments to the creditors who accepted the debt restructurings.
Like Argentina, those creditors are preparing to appeal Judge Griesa's ruling, which reflected his growing frustration with feisty statements from Ms. Fernandez and other government officials.
"These threats of defiance cannot go unheeded," Judge Griesa said in his order, which hit Argentine bond prices.
As part of the long legal battle, NML won a court order in early October to seize an Argentine naval vessel during a visit to Ghana, and the ship remains stranded.
NML has more outstanding court judgments against Argentina that are not included in this case but it is willing to negotiate and would still consider a combination of cash and bonds to settle the dispute, a source familiar with its position said on condition of anonymity.
The hedge fund denies Argentine accusations that it wants to trigger a default to get a windfall on its holdings of credit default swaps (CDS), derivatives used to insure against default.
"That would take a huge position in the CDS market to achieve and I don't think they have an interest in doing that," the source said, adding that NML would receive about half the amount that Judge Griesa wants paid.
Negotiations or voluntary payment by Ms. Fernandez's government appear almost impossible. Economy Minister Hernan Lorenzino called Judge Griesa's ruling "a kind of judicial colonialism."
"The only thing left is for (Judge) Griesa (is) to order them to send in the (U.S. Navy's) Fifth Fleet," Mr. Lorenzino told reporters, outlining Argentina's plans to file an appeal against Judge Griesa's ruling with the 2nd Circuit Court of Appeals in New York on Monday.
A pro-government newspaper, Pagina 12, said Argentina's lawyers – Cleary Gottlieb Steen & Hamilton – would ask the court to reinstate Judge Griesa's stay on payment to the holdouts and contest his latest ruling in its entirety by arguing that it put future debt restructurings at risk and endangered global financial institutions such as clearing houses and banks acting as payment agents.
Many specialists think it unlikely that the appeals court will reinstate the stay.
"It may be an issue of process, but Argentina will struggle to justify why it refuses to pay the $1.3-billion," Eurasia Group analyst Daniel Kerner wrote last week. "Argentina has the resources to meet the payment, so in the end it will be a political decision (and) there does not seem to be any political support for paying the holdouts at all."
Last month, the appeals court backed a ruling by Judge Griesa that Argentina has discriminated against holdouts. Argentina has requested a new hearing before all of the court's 13 judges.
Most analysts think the so-called en banc rehearing is also unlikely to yield a different result, though some say it might ease the impact on third parties such as Bank of New York Mellon Corp., which transfers funds from the Argentine government to the bondholders, and clearing system operators.
Judge Griesa's ruling means such payment intermediaries are subject to embargoes on funds destined for exchange bondholders.
"While the situation looks very difficult for Argentina and exchange bondholders right now, it remains possible that the appeals court could amend [Judge] Griesa's order with regard to the application to third-party intermediaries," investment bank Credit Suisse said last week.
"If the appeals court were to take a more moderate stance than (Judge) Griesa, it may also issue a new stay on the order."
That would buy Argentina some breathing space and a swift rehearing is likely given the looming Dec. 15 deadline.
Beyond the appeals court, Argentina's last-remaining legal option in the United States would be the Supreme Court.
Some legal experts think the Supreme Court could choose to weigh in on this case because of its implications for debt restructurings at a time of global economic turbulence.
U.S. government lawyers have backed Argentina's position on pari passu, or equal treatment. They said that Judge Griesa's orders "could enable a single creditor to thwart the implementation of an internationally supported restructuring plan."
However, not everyone thinks the ramifications will be that wide because most bonds issued since Argentina's default contain collective action clauses that make a restructuring deal binding on all creditors.
"The pendulum, post Argentina, has swung," said Hans Humes, president of Greylock Capital Management. The New York-based fund shunned the first debt swap, but accepted the same terms five years later in 2010.
"We used to have a discussion about what a country is able to pay and (Argentina) broke the mould and we've been forced to sit down and listen to what they want to pay. So in the current case maybe it's swinging back in our favour a bit," he added.
Securing the U.S. Supreme Court's intervention before the hefty payment on Argentina's growth-linked warrants is due on Dec. 15 appears a remote prospect.
An eventual default would deepen Argentina's economic isolation. Partly because of the risk of legal action by the holdouts, the country has yet to return to global credit markets almost 11 years since the economic meltdown of 2001/2002.
Paying all the outstanding defaulted bonds would cost up to about $11-billion, equivalent to about a quarter of the foreign currency reserves that Argentina needs to keep servicing its debts in the absence of fresh credit.
Guillermo Nielsen, a former Argentine finance secretary who helped oversee the 2005 bond swap, said the government should deposit the $1.3-billion on time and keep litigating.
"A default on the new bonds must be avoided at all costs," he said. "The (2002) default was incredibly costly for Argentina and this situation could end up causing a new default combined with contempt of court."