Demonstrators set fire to a US flag during a protest near the United States embassy in Buenos Aires, following an adverse US court ruling, ON TUESDAY. Photo: Agustin Marcarian/ReutersDemonstrators set fire to a US flag during a protest near the United States embassy in Buenos Aires, following an adverse US court ruling, ON TUESDAY. Photo: Agustin Marcarian/Reuters

Argentina’s prospects for finally closing out its 12-year-old default on $100 billion of debt will depend on more political and legal maneuvering, a motivated US judge and the fatigue of investors, now that it has lost an epic battle with holdout creditors in the US courts.

Negotiating a new deal with the holdouts, who have fought to exercise their investor rights through the courts, potentially violates a provision specifically written to stop anyone getting a better deal than bondholders who participated in two prior restructurings in 2005 and 2010.

The US Supreme Court declined to hear Argentina’s appeal seeking to overturn an order to pay sovereign creditors $1.33 billion, setting off a scramble in Buenos Aires on what it can do now given its legal options are exhausted.

President Cristina Fernandez vowed on Monday night that Argentina would not again default on its bonds (see box below).

Exchange bondholders received between 25 and 29 cents on the dollar for their defaulted bonds. By itself, these deals are generally considered among the worst restructurings for investors in the history of sovereign defaults.

It almost looks like they are trying to broaden the debate to diffuse the stigma of default

Axel Kicillof, Argentina’s Economy Minister, said the government is starting to take steps to restructure the debt held by the exchange bondholders and place it under Argentine law in order to service it, which would violate the US court rulings. In a televised address to the nation on Tuesday, Kicillof also said he would instruct Argentina’s lawyers to speak with the US District Court Judge Thomas Griesa to explain his position.

“It almost looks like they are trying to broaden the debate to diffuse the stigma of default,” said Siobhan Morden, head of Latin America strategy at Jefferies in New York.

Kicillof has taken a conciliatory approach towards resolving some of Argentina’s long-standing disputes, including a deal to pay back the Paris Club of creditor nations almost $10 billion in debt and compensate Spanish oil major Repsol for the seizure of energy subsidiary YPF.

On Tuesday, Standard & Poor’s downgraded Argentina to CCC-minus, citing the heightened risk of default.

Holdout investors, led by NML Capital Ltd, a unit of billionaire Paul Singer’s Elliott Management Corp, and Aurelius Capital Management have said they are willing to sit down to negotiate with Argentina, but have never been taken up on their offer by the government.

These firms, who specialise in distressed debt investing, have used their deep pockets to press their rights in the courts. Argentina has countered that it is being extorted by the holdouts and if forced to pay would not have enough money without putting its entire economy in jeopardy.

A provision called Rights upon Future Offers precludes Argentina from voluntarily agreeing on better terms with holdouts.

“There is always room for interpretation but I’m not sure this can happen,” said Pierre Yves-Bareau, head of emerging market debt at JPMorgan Asset management in London, which holds some of the exchange bonds.

“It will be difficult for them to accept repaying a big chunk of their reserves to the holdouts. Also paying part to them won’t be fair to people like us.”

US District Court Judge Thomas Griesa, who handed down the judgment in the holdout’s favour, and has been dealing with the deluge of cases brought in the New York courts, has asked on several occasions why the two sides don’t sit down and finally negotiate a settlement.

“Whatever hostility he harbours toward Argentina – and there’s plenty of that – he has repeatedly said, ‘Why aren’t you negotiating?’ He has no interest in being the guy who causes Argentina to default on $25 billion, $30 billion in foreign debt,” said Marco Schnabl of Skadden, Arps, Slate, Meagher & Flom who has argued before Griesa on behalf of Argentine clients.

“Injunctions are amendable. I doubt he would do it on a unilateral request by Argentina” but if both sides asked, “he would give them that in a heartbeat.”

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