Tuesday, October 30, 2012

Ruling Raises Fears Of Argentine Default


Wed., October 31, 2012
An unexpected New York court decision has raised the spectre of an Argentine government default, causing a rise in the cost of insuring against a payment failure and rattling the country’s bond market, the Financial Times reported. The 2nd US Circuit Court of Appeals in New York late last week ruled that Argentina was legally barred from prioritising payments to bondholders that participated in debt exchanges in 2005 and 2010. The case had been brought by Elliott Capital Management and Aurelius Capital Management, two hedge funds that declined to participate in the past restructurings. They hold defaulted debt with a face value of $1.4bn. But Argentina has pledged never to negotiate with the holdouts, calling them “vulture funds”, and is barred by a so-called “lock law” from making any better offer than it did in 2005 and 2010. The hedge funds could try to target Argentina’s interest payments on the two exchanged bonds, which are paid via the Bank of New York Mellon. But unless Argentina increases its payments it would leave less for the restructured bondholders and lead potentially to a technical default. “If the order goes into effect, Argentina would essentially be prevented from making payments on their external debt,” Citigroup analysts Jeffrey Williams and Guillermo Mondino said in a note. With an appeal to the US Supreme Court possible it is still unclear how the saga will end, but investors increased bets that another default could be at hand, and sold Argentina’s bonds this week.

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