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 Latin America's No. 3 economy has for years fought the holdout hedge
funds which snapped up its junk bonds after its $100 billion default
in 2002 and then refused the restructuring terms, suing for
repayment in full.
But time is up. After a slew of legal setbacks for Argentina in U.S.
courts, the country has just days to comply with a 2012 ruling by
U.S. District Judge Thomas Griesa to pay $1.33 billion plus interest
to the funds it calls "vultures."
If the deadlock persists, Griesa will prevent Argentina from making
a July 30 deadline for a coupon payment on exchanged bonds,
triggering a new default just as the economy struggles with
recession, dwindling reserves and soaring inflation.
"The outcome is still uncertain, with just days before a technical
default is triggered," said analyst Mauro Roca of Goldman Sachs. "A
deal now seems unlikely."
Unlike Argentina's 2001-2 debt crisis when it was broke and could
not pay its civil servants, this time around the country is solvent
but prevented by Griesa from servicing its bonds until the battle
with the holdouts is resolved.
Argentina's combative stance has upped the odds of a default.
Efforts to find a solution through a mediator have made scant
progress, with one of the lead holdouts saying the government had
made clear "it will be choosing default".
Argentina's president, Cristina Fernandez, has not minced words,
branding the holdouts extortionists and lambasting the judge for a
ruling she says is unjust.
The government argues a deal with the holdouts would leave it at
risk of breaking the so-called RUFO clause which bars it from
voluntarily offering better terms to investors than what it gave in
the bond swaps accepted by 92.4 percent of creditors. RUFO stands
for "rights upon future offers."
With the RUFO clause set to expire on Dec. 31, Argentina wants a
stay on Griesa's ruling to allow negotiations without risking claims
from exchange bondholders that the government estimates could hit
$400 billion. So far, the judge has refused.
MESSY OR CLEAN
A high-stakes game of poker is playing out. Griesa's ruling
prohibits Argentina from servicing its restructured debt until it
settles with the holdouts.
If neither side flinches, Argentina will default as of July 31.
Although it will have sufficient finances to service its foreign
currency restructured debt, worth $35 billion, it will be unable to
get payments to creditors outside Argentina.
A default won't send shockwaves through the global economy:
Argentina is already isolated from international capital markets.
How much pain it causes at home will depend on how quickly Argentina
can extricate itself from the mess.
That will largely be determined by whether Argentina persuades
bondholders it is ready to negotiate a swift settlement after the
Dec. 31 expiration of the RUFO clause.
If it can, there is less chance of a so-called "acceleration" demand
by bondholders for early payment. Bondholders might then simply have
to wait a few months for their payments.
In this scenario, Argentina's banishment from global markets would
remain and borrowing costs for Argentine companies and provinces
would rise.
"We'd likely see higher yields, which is bad for the investment
environment, and a default could spark some capital outflows which
would start putting a strain on the currency again," said David Rees
at London-based Capital Economics.
That would likely push Argentines to increase their dollar holdings,
weakening a peso already down 20 percent so far this year on the
official rate and putting more pressure on foreign reserves that are
at five months' import cover.
Siobhan Morden, head of Latin America strategy at Jefferies in New
York, said there was the "risk of worse stagflation". Inflation is
privately estimated at above 30 percent.
Farmers in the world's No. 3 soybean exporter say they will hoard
the oilseed in the event of a default, potentially pushing global
food prices higher in the short run.
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However, if more than 25 percent of holders of exchanged bonds call
on Argentina to "accelerate" the payments, the country will become
mired in a far messier default that will take longer to clean up.
Argentina could restructure its bonds under local legislation to
circumvent the U.S. court ruling, though this is seen as unlikely,
analysts say. Alternatively, it could offer a new bond swap, still
under foreign legislations - a scenario that would likely have to
include holdouts if Argentina ever hopes to tap international
markets again.
In the interim, financial pressure would grow as debt servicing
costs more than double in 2015 and reserves fall to critically low
levels.
"If this stretches into next year when you have a $6 billion
maturity on the Boden15s ... that becomes problematic to finance,"
said Stuart Culverhouse, head of research at Exotix, a frontier
markets broker in London.
Culverhouse estimated that reserves, already at eight-year lows of
about $29 billion, could sink to about $10 billion. "That's where
they were in 2001 at one point. It's a bad place to be."
DEAL REMOTE, STILL NO PANACEA
Analysts said Argentina could still pull a rabbit out the hat.
Griesa could still suspend his ruling to avert a default - a
scenario he described as "the worse thing I can envision".
Holdouts would need to request the stay and would likely ask
Argentina for a guarantee, possibly financial, it would negotiate
from January once the RUFO clause had expired.
"There is probably more for plaintiffs to lose than to gain from a
default," said Alejo Costa, strategy chief at local investment bank
Puente.
"If Argentina defaults, they don't know what is happening and might
have to go through another lengthy legal process."
How the holdouts act may depended on how many credit default swaps
protecting them against default they hold. They could elect to cash
in on those now and hunker down for an even longer legal fight, or
take a negotiated deal and move on.
A stay is seen having little effect on an economy analysts already
forecast to contract by about 1 percent.
On Friday, Argentine debt negotiators left mediator Daniel Pollack's
office after just one hour, pouring more cold water on hopes for a
deal, which now seems the least likely outcome.
Even if Argentina does pull off a deal, it will come too late to
haul the economy out of recession this year.
"But maybe it makes for a stronger growth prospect next year, if
anything because you're lifting consumer confidence, you're easing
some of the exchange rate pressures," said Culverhouse of Exotix.
"But there will be a delay in getting this resolved and new foreign
investment."
(Additional reporting by Richard Lough and Jorge Otaola; Editing by
Richard Lough and John Pickering)
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