September 20, 2014
US Supreme Court to decide on holdouts
Thursday will be a key day for the long-running fight with the ‘vulture’ funds
All eyes would have otherwise been fixed unanimously on Brazil this coming Thursday, but the attention of many economy-watchers will rest northward, in Washington DC, where the Supreme Court is expected to finally make a move on the most pivotal case in Argentina’s court battle with holdout hedge funds demanding the full repayment of debt from the 2001-02 default.
Whatever happens in Washington could end up determining whether the country enters technical default. Regardless of the outcome, the foreign exchange, stock and bond markets will all shuffle accordingly.
The most likely scenario though likely will not involve a decisive outcome this week, as many expect the US justices to request the opinion of Attorney General Eric Holder, pushing litigation back another few months.
With the US Executive looking kindly on Argentina’s recent turn toward orthodoxy — settlement with Repsol over the nationalization of YPF and more recently the agreement with the Paris Club to repay debt worth US$9.7 billion — this expected scenario would favour the country, as Holder would be likely to opine against the holdouts.
The Supreme Court deciding to hear the case outright would cause mayhem for all markets, but the chances of this are minimal.
“If there are more delays, the market could go up big time. But if they are forced into a technical default, bonds could drop 15 points,” a New York-based trader recently told Reuters.
Holder of the key
Eduardo Levy Yeyati, an economist, considers that the request for the attorney-general’s opinion would send the rate at which Argentina can issue debt below the eight-percent mark. YPF recently took on foreign debt at 8.75 percent amid high demand, a reference point for the government.
Both a request for Holder’s opinion and hearing the case would also mean edging closer to a crucial December 31 deadline. The Rights Upon Future Offers (RUFO) clause of Argentina’s bonds says the government cannot voluntarily offer better terms to holdouts than what was agreed with restructured holders until January 1, 2015. Therefore, as of next year, the government could technically pay the holdouts in full without undermining the restructurings of 2005 and 2010.
The prolongation of litigation would mean a more stable horizon for the peso against the dollar, and would send stock prices flying and bond returns significantly down.
Regardless of the recognition that Paul Singer’s NML Capital, and other holdout hedge funds, are pursuing full repayment of debt of US$1.33 billion, most legal, financial and economic experts the Herald has consulted in recent months agree that ruling against the country would undermine jurisprudence for future international debt restructuring.
In two restructurings, in 2005 and 2010, creditors holding around 92 percent of Argentina’s debt agreed to participate in debt swaps that gave them 25 cents to 29 cents on the dollar.
The “seven-percenter” holdout lobby is relentless and well-financed, however, even having sent the Paris Club a letter bemoaning its perception of Argentina as a non-paying country, and has made it clear it will not drop its legal battle until all judicial avenues are exhausted.
If the Court refuses to hear the case outright, Argentina would suddenly be at risk of “technical default,” because even if it is willing to pay its debts the financial channels to do so would be frozen.
A “stay,” or injunction, currently shields Argentine bank accounts from being paralyzed by a lower court ruling from Judge Thomas Griesa that ruled the country cannot make good on any restructured debt payments without paying holdout bondholders as well.
In the face of a negative ruling, the timing of the lifting of that “stay” would determine when Argentina would enter default.
Moreover, a flood of litigation would probably inundate the country’s doorstep, as restructured bondholders would likely seek full repayment as well. The government estimated in its final brief that such “me-too” debt could rise to US$15 billion, or half the current level of the Central Bank’s foreign reserves.
In a new light
In what many analysts viewed as an effort to show a willingness to pay its debts, the government rushed a law through Congress that opened a debt swap for the third time without a date limit to sign up. That means Argentina is willing to extend the same offer it made in 2005 and 2010 to the remaining holdouts.
Sealing up deals with the Paris Club and Repsol, as well as the agreement last October to pay compensation worth US$500 million to five companies in order to resolve disputes filed at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), have helped improve credibility in Argentina. The holdouts’ issue is thus the last hurdle to international credit lines at low interest rates.