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Argentina’s options narrow after Supreme Court rejects review

Jun 16, 2014

US ruling leaves pari passu decision intact, June 30 deadline looms

     
     
   No room to move: traffic stalls in central Buenos Aires
Source: Leandro Kibisz
 
Argentina's financial policy makers looked boxed into a corner on Monday after the US Supreme court rejected a request to review a lower court's decision.

The earlier ruling had said Argentina must pay holdout creditors, led by NML Capital, in full, before servicing the debt it has restructured from its 2002 default. Monday's decision is set to force the country to pay billions of dollars to holdout creditors. It comes just days ahead of the next coupon payment date on the restructured bonds.

"Argentina may not continue to make interest payments to the exchanged bondholders without entering into some sort of agreement with NML Capital, otherwise it will be in contempt of the injunction," said Richard Samp, chief counsel at the Washington Legal Foundation.

The decision comes two weeks after Argentina reached a deal to pay back $9.7bn of arrears to the Paris Club of creditor countries, and will put further pressure on the country's overstretched finances.

Argentina has four options, says Kathryn Rooney Vera, a macroeconomic strategist at Bulltick Capital: comply with the decision and pay; negotiate with holdouts to reach a settlement; swap the restructured bonds into to Argentine law instruments - or default.

"The option of complying is complicated by the capacity to do so," Rooney Vera told LatinFinance, pointing to the country's declining reserves. "Settling is a distinct possibility, and I think they'll try, because I think the authorities are more open to negotiating and settling with holdouts. But we have the constraint of time."

Due to the timing, the sovereign may default on a coupon payment due on restructured debt at the end of the month, as it negotiates a settlement with holdouts, she said.

A default on all the country's obligations is unlikely, said Samp. "A decision to default would serve no one's interests and is certainly not a decision that Argentina is 'forced' to make, as it sometimes has asserted when speculating about what it would do when this day of reckoning was reached."

A stay on the lower court's decision - put in place to allow the sovereign to challenge the ruling higher up - remains in place, but is expected to be lifted by the lower court in "the next several days, without regard to whether Argentina files a rehearing petition," Samp said. LF



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