Argentina Special


U.S. Supreme Court rules against Argentina in holdouts case jeopardizing government efforts to return to global capital markets

On 16 June, the U.S. Supreme Court unexpectedly refused to hear the Argentinian government’s appeal in its dispute with the holdout bondholders from previous debt swap deals who are demanding full repayment of debt from the 2001 default. The high court upheld lower court rulings that ordered Argentina to pay around USD 1.3 billion to bondholders who refused to participate in the 2005 and the 2010 debt restructuring processes, along with those who accepted the deal. If the Argentinian government decides not to pay the holdouts, then the U.S. government will have to block payments to creditors of restructured bonds, thereby forcing the country to enter into a technical default. Some analysts recognize that, although it would be difficult, Argentina could try to pay its creditors without paying holdouts by transferring the restructured bonds out of U.S. jurisdiction before the next payment, which is due on 30 June.

According to the Right Upon Future Offer (RUFO) clause included in the debt swap deals, if the government decides to “voluntarily” reach an agreement with the holdouts then all bondholders who participated in the 2005 and 2010 restructuring could benefit from the better terms offered to the holdouts, thus increasing the total amount that the country must repay. The decision to comply with the holdouts—which could potentially trigger further payments under the RUFO clause—could add more pressure on the country’s already strained external position. Foreign-exchange reserves, which are partially used to pay creditors, currently stand at USD 28.5 billion. This is just a fraction of the USD 52.6-billion peak recorded in January 2011.

In a separate ruling, the U.S. top court ruled out lower courts seeking out Argentinian assets outside the United States in order to fulfill debt obligations. The verdicts will likely have an important impact outside Argentina, as they create a precedent for future restructuring of sovereign debt and strengthen the position of creditors in relation to governments in claims over debt swaps.

Meanwhile, President Cristina Kirchner stated in speech broadcast on 16 June that the government will not negotiate with the holdouts, who she referred to as “vultures”. Kirchner also affirmed that the country will comply with bondholders who accepted the restructured debt, although she did not specify the concrete steps for doing so.

On a positive note, Argentina and the Paris Club group of international creditor governments reached an agreement on 29 May to clear debt in arrears over a period of five years, extendable under certain conditions. The Argentinian government will pay arrears amounting to USD 9.7 billion, including a minimum disbursement of USD 1.15 billion (plus 3.00% interest), up to May 2015. The following payment must be made in May 2016.

Despite the deal with the Paris Club and the agreement with Spanish firm Repsol over an expropriation in 2012, the ongoing struggle with the holdouts could derail Argentina’s efforts to return to international financial markets in which it has not participated since the 2001 crisis that prompted a record USD 93.0 billion default.

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