Argentina is not Greece. It has enough cash to fund obligations to bond holders who bought its debt after a default in 2002. However, it does not want to pay investors that refused to participate in the 2002 restructuring.
Elliot Capital Management recently made headlines when it got the Republic of Ghana to impound the Argentine navy’s ARA Libertad off the coast of Africa. The hedge fund subsequently seized the three-mast frigate, which serves as a training ship for the Argentina navy.
Ghanaian officials cooperated with the operation because U.S. courts had ruled that Argentina owes Elliot Management money. How much money? Elliot and another hedge fund, Aurelius, hold around $1.3 billion in Argentine debt, which Argentina refuses to repay.
This debt is special because it is not restructured, which means that it wasn’t part of the 2002 settlement, which saw creditors take losses of 70 percent on Argentine debt. The $93 billion default was then the largest in history, to be surpassed only by Greece in 2012.
Elliot Management and Aurelius bought the defaulted debt on the cheap but never accepted the 70 percent loss. They are fighting a legal battle to regain the full amount, and recently, court rulings in the United States have gone their way.
U.S. Federal Judge Rules Argentina Has to Pay
In a ruling late Wednesday, Nov. 21, federal judge Thomas Griesa of the U.S. District Court of the Southern District of New York ruled that Argentina needs to make good on the payment immediately.
“These threats of defiance cannot go unheeded,” Thomas wrote in his judgment, indicating that the litigation road Elliot Management and Aurelius took had been open to all creditors.
They chose to forgo the option in lieu of a quick settlement and guaranteed, albeit much lower, payments. Therefore, ordering Argentina to pay the full amount on the defaulted bonds that Elliot holds is not a violation of the rights of the holders of the restructured bonds.
“In accepting the exchange offers of thirty cents on the dollar, the exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating,” wrote Thomas.
Argentina still has various appeal options in front of the U.S. Second Circuit Court of Appeals and the Supreme Court. This is why Argentina was ordered to pay the money into an escrow account by Dec. 15.
Argentine Refusal Puts Other Debt in Jeopardy
Argentine president Cristina Fernandez de Kirchner already said that her country would not pay “one dollar” to the “vulture funds.”
The refusal creates a significant legal dilemma. Until Argentina files a successful appeal, the country is obliged to pay. If it doesn’t do so, which it has said it won’t, it will be ruled in contempt of the court.
This might lead the courts to block scheduled payments to other bondholders in December. The payment of around $3 billion in interest is due next month. If Argentina cannot make the payment because of a transfer block by the U.S. judicial system, it will be placed in technical default.
Argentina said it will continue to make payments in Argentina, as they cannot be seized by the United States. However, even if those payments are made, it will be very difficult to transfer them out of the country.
Investors, fearing the uncertainty, have exited Argentine bonds en masse. A 10-year bond denominated in Argentine pesos fell 1.8 percent Nov. 22 in Argentine trading. It now yields a whopping 24.6 percent, as much as Greek bonds before they defaulted earlier this year. According to Bloomberg, contracts to protect investors from a default in Argentine debt are now the most expensive in the world.
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