Argentina advanced toward a new default on Wednesday, when its finance ministry said that US court decisions made it “impossible” to meet its next interest payment.
The US Supreme Court on Monday issued a decision upholding a lower court’s ruling that Argentina must pay holdout creditors before servicing restructured debt from the country's 2002 default. The lower court’s ruling took effect on Wednesday, when a “stay” on its implementation — to allow the higher court to consider accepting a review on the case — was lifted.
“The lifting of the stay by the Second Circuit makes it impossible to pay in New York the next maturity on the restructured debt,” the finance ministry said in a statement on Wednesday night. The sovereign has a payment of around $900m due on its restructured debt on June 30.
CDS referencing Argentina widened on the news, trading at 2,337bp on Thursday morning, some 200bp wider on the day, according to data from Markit.
The sovereign has asked the holders of restructured bonds to swap the New York-law securities into new ones governed locally, to avoid a possible seizure of its funds. It says it does not have the money to comply fully with the order.
The Supreme Court order calls for Argentina to pay around $1.5bn to holdout creditors, but the Argentine government said that complying with the decision would make the country liable for $15bn in claims from bondholders that did not subscribe to restructuring offers after the default.
Moody’s calculates that the obligations could rise to around $12bn if all dollar and euro-denominated claims are considered.
“These latest developments have narrowed down the possible outcomes to two equally likely scenarios,” the ratings agency said Thursday. “The first is that Argentina carries out the proposed debt swap, which would likely lead to default and at least a temporary interruption of payments to restructured bondholders. The second scenario is that although the government has announced a new debt swap, the government instead tries to negotiate a judicial settlement.”
Legal risks mean the sovereign may struggle to attract high participation in a swap, Jefferies analysts said on Wednesday. But talking it out is also tough: “The negotiations appear difficult for the simple reason that the sides are just too far apart with Argentina having no flexibility to pay the huge potential liabilities against a potential group of hardcore litigants that are inflexible to their cash par claim,” Jefferies said. LF
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