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 In a stern tone, U.S. District Judge Thomas Griesa in New York
slammed the decision by Latin America's third-biggest economy to
defy his order to pay holdout investors in full and instead default
on $29 billion in debt.
As Griesa was speaking, a 15-member committee facilitated by the
International Swaps and Derivatives Association (ISDA) voted
unanimously to call the missed coupon payment a "credit event." The
move triggers a payout process for holders of insurance on Argentine
debt, which analysts estimate could amount to roughly $1 billion.
Argentina's economy ministry said later in a combative statement
that Griesa's attitude sought to favor "vulture funds". It has asked
Argentina's securities watchdog to investigate whether the
litigation against the nation by holdouts was merely the "facade of
speculative maneuver".
Griesa said: "Nothing that has happened this week has removed the
necessity of working out a settlement." He chided Argentina for
making public statements he characterized as misleading.
"The debts weren't extinguished. There's no bankruptcy, no
insolvency proceedings," Griesa said. "The debts are still there."
The veteran judge has been at the center of Argentina's drawn-out
fight against the New York hedge funds suing it for full payment on
bonds they bought on the cheap following the country's record 2002
default on $100 billion in debt.
The lead holdout investors are NML Capital Ltd, an affiliate of
Elliott Management Corp and Aurelius Capital Management.
Argentine bond prices slightly extended earlier losses after
Griesa's comments.
In other markets, the blue-chip Merval stock index <.MERV> pared
earlier losses to trade down just 0.6 percent from Thursday's close
at 8,150.91. The peso currency traded fractionally weaker on the
black market at 12.700 per U.S. dollar.
Griesa told both sides to continue working with mediator Daniel
Pollack, a lawyer one senior Argentine government minister had
dubbed "incompetent" a day earlier.
Argentina's lead lawyer told the judge the Buenos Aires government
had no confidence in Pollack after he released a statement after
negotiations broke down, saying the case had become "highly
politicized."
"The Republic of Argentina believes ... it was harmful and
prejudiced to the republic and the impact on the market," lawyer
Jonathan Blackman said in an exchange that prompted Griesa to tell
the hearing that everyone should "cool down" about ideas of
mistrust.
In a separate procedural action, Griesa signed an order allowing
Euroclear and Clearstream, like Citibank, to make a one-time payment
with respect to certain U.S. dollar-denominated bonds that were
issued under Argentine law in the 2005 and 2010 debt restructurings.
RISK OF ACCELERATION
The Argentine government maintains it has not defaulted because it
had made a required interest payment to a bank intermediary on one
of its bonds. But Griesa blocked that deposit in June, saying it
violated his ruling that Argentina settle its dispute with holdout
investors first.
As a result, holders of exchanged Argentine bonds did not receive
the interest coupon payment by a July 30 deadline.
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On Friday, the ISDA-facilitated Determinations Committee declared
that a "failure to pay" event had happened. It will now hold an
auction to settle outstanding credit default swap (CDS)
transactions.
CDS reaction was muted as market participants waited for ISDA's
auction process to start and investment accounts remained hesitant
to take positions.
"The amounts are not very large. We estimate the amount of CDS
outstanding for Argentina at about $1 billion; it's not something
that’s going to systemically affect financial markets," said Jorge
Mariscal, emerging markets chief investment officer at UBS Wealth
Management.
One of the lead holdouts, NML, has in the past denied Argentine
accusations that it wants to trigger a default to get a windfall on
its holdings of CDS.
Before Friday's hearing, Argentina's government had said it expected
nothing favorable to come from Griesa. It has previously called the
federal judge an "agent" of the New York hedge funds.
Argentina had argued it needed to await the Dec. 31 expiration of a
legal clause barring it from paying better terms to the holdouts
than those accepted by restructured debt holders before changing its
negotiating terms, said Ander Faergemann, senior emerging debt fund
manager at PineBridge Investments in London.
Argentina's latest debt crisis is in sharp contrast to the mayhem
that surrounded its default in 2002, when the economy collapsed
around a broke government and millions of Argentines lost their
jobs. This time the government is solvent.
Asked how painful the default would be to the shrinking economy,
Rune Hejrskov at Jyske Invest said: "It really depends if it's a
'default lite' (quick settlement) or a hard default. Either way,
there will be a toll on the macro backdrop."
Fund managers have generally said the market so far has priced in an
agreement within the next six months.
However, some have said the risk that bondholders would accelerate
their demands on the principal value and accrued interest would grow
if expectations of a deal waned.
"I would not be surprised if this drags on longer, which would
complicate the picture," UBS's Mariscal said when asked if there
would be an acceleration.
(Additional reporting by Richard Lough, Eliana Raszewski and Walter
Bianchi in Buenos Aires and Carolyn Cohn, Andrew Winterbottom and
Davide Scigliuzzo in London and Daniel Bases in New York; Writing by
Richard Lough; Editing by W Simon, Jonathan Oatis, Simon Gardner and
Ken Wills)
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