A ruling by a federal judge in New York on November 21 has increased the likelihood that Argentina will default on its payment to exchange bond holders.
Judge Thomas Griesa ruled that Bank of New York Mellon, as payment agent, must pay holdout bondholders at the same time.
Questions have been raised about the implication of the legal strategy being employed by NML Capital, a subsidiary of hedge fund Elliot Associates, since the judge first ruled that Argentinas agent, BNY Mellon, could not make payments to exchange bondholders while it is not making payments to the holdout bondholders, to whom he has awarded $1.3 billion.
That has raised the prospect that Argentina, which has repeatedly said it will not pay holdout bondholders and has passed a domestic law to that effect, will be forced to default on payment to exchange bondholders, despite the sovereign having said it has the ability and willingness to pay.
The value of some of the Argentine restructured debt has fallen by one-third since a New York court first ruled in favour of NML Capital.
The price of Argentinas credit default swaps soared on the prospect of technical default.
The ruling threatens to complicate future sovereign restructuring cases because it provides creditors with an incentive to hold out, lawyers have said. Jay Westbrook, a bankruptcy law professor at the University of Texas School of Law, told Euromoneys sister publication, International Financial Law Review: "The court has changed the leverage between the bondholders and the sovereign in a very dramatic way, and that may make it much less likely that bondholders will accept exchange offers in the future."
Sources close to NML Capital were keen to stress the exceptional case of Argentina, since the bonds in question are relatively old ones that pre-date collective action clauses that are used in sovereign insolvency agreements today.
Argentina has said it will pursue the case to the US Supreme Court. Some analysts believe that Argentina might seek to make exchange bond payments through other jurisdictions, thereby bypassing the New York courts ability to act against its agent. For its part, BNY Mellon has asked the court to rule on what it should do with regard to future payments if the appeals court upholds the current judgment.
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However, it is understood that NML Capital believes the chances are slim that Argentina will be able to circumvent the payment process of debt governed by US law and denominated in US dollars by using non-US jurisdictions.
NML Capital has been extremely active in pursuing Argentina for payment of its bonds at par, which it bought for a fraction of that amount after default, and has been awarded $1.3 billion by Griesa.
As well as its legal action in the US, NML Capital seized an Argentine navy training ship in Ghana as compensation and claims that the Argentine government has the dollar reserves to pay the awarded compensation.
However, Argentina has been equally vigorous in its public assertions that it will never make payments to the holdout bondholders and will continue to make payments only to the 93% of bondholders that exchanged at a rate of 33 cents on the dollar.
Those investors, led by Gramercy and along with BNY Mellon, are caught in the middle of the legal action.
A brief filed to the court on behalf of the holders of more than $1 billion of exchange bonds said: "A judicial mousetrap designed to secure a remedy for the plaintiffs is entirely appropriate. But the [exchange bondholders] lawful and exclusive property cannot and should not be used as the cheese."
NML Capital clearly believes that at some stage its legal proceedings will exert irresistible pressure on Argentina to pay the holdout bondholders.
It is hard to see a way for Argentinas president, Cristina Fernandez de Kirchner who has repeatedly said that her country will not pay what she calls "vulture funds" anything and has made it an issue of national principle and pride to agree to payment to holdout bondholders.
However, with her popularity falling, inflation rising and a remote possibility that Argentina might even be expelled from the IMF, the holdout investors are betting on payment from the next administration, if not the current one.