Argentine bonds sink after default as swaps holders seek ruling…

Argentina said it doesn’t oppose a deal sought by JPMorgan Chase & Co. (JPM) and other banks that would allow the country to resume debt payments, as its dollar bonds sank for a second day.

Argentina’s Economy Minister Axel Kicillof said the government wouldn’t oppose a third-party solution to its dispute with a group of hedge funds who successfully sued the country for $1.5 billion. A U.S. judge has blocked Argentina from paying its debt — including an interest payment due July 30 on $13 billion of bonds — until the hedge funds led by Elliott Management Corp. get their money. Standard & Poor’s declared the country in default while Moody’s Investors Service placed its rating on negative outlook.

Kicillof’s comments came as a group of international investment banks met with Elliott and the other so-called holdout creditors to propose buying securities they own from an earlier default in 2001, according to a bank official who asked not to be identified because the information is private. The official said talks would continue. Buenos Aires-based newspaper Ambito reported that an agreement on the amount was reached, while other issues have yet to be resolved.

“Argentina doesn’t oppose if privates want to negotiate with vulture funds using their own money,” Kicillof said in a press conference in Buenos Aires yesterday. “But the state can’t put its own money because that would mean breaking the law. It would be a fraud.”

Deadline Passed

Argentine notes due in 2033 were quoted 0.74 cents lower at 88.01 cents on the dollar as of 7:32 a.m. in New York, after a decline of 6.82 cents yesterday. The bonds had rallied 11.7 cents during the previous two days. Debt due in 2038 was quoted 0.45 cents lower at 53.25 cents today.

The Merval stock index fell from a record yesterday, plunging 8.4 percent.

The nation was supposed to pay $539 million in interest yesterday on its bonds due in 2033. The deadline passed after two days of negotiations at a court-appointed mediator’s office in New York failed to produce a settlement with the hedge funds.

Argentina can’t participate in a settlement with the hedge funds because doing so would require the country to similarly sweeten terms for the 93 percent of investors who went along with the country’s debt restructurings in 2005 and 2010, Kicillof said. Those investors got about 30 cents on the dollar.

The requirement, known as the RUFO clause, could trigger claims of more than $120 billion, dwarfing the country’s $29 billion of reserves, he said. The clause is set to expire at the end of 2014.

Default Denial

President Cristina Fernandez de Kirchner denied the country defaulted on its debt in her first public comments since the S&P statement. Fernandez said in a televised speech yesterday that while she’s open to further talks with the hedge funds, she must defend the nation’s interests. Paying them could trigger additional claims and ruin Argentina, she said.

“By the way they keep mentioning a third-party agreement, it looks like they’re putting more pressure on banks to take them out of the mud,” said Jorge Piedrahita, chief financial officer of Torino Capital LLC.

JPMorgan declined to comment on the speculation about a deal, as did Danielle Romero-Apsilos, a Citigroup spokeswoman.

Aurelius Capital Management LP, which won the lawsuit along with Elliott, said in a statement that, while it has been approached by private parties, no acceptable offer was made. Elliott’s NML unit, which has been battling Argentina for years in an effort to win payment on its bonds, declined to comment.

The International Swaps & Derivatives Association said it will rule on whether the missed bond payment means credit-default swaps have been triggered on Argentina’s $29 billion in overseas securities. A committee of 15 dealers and investors will meet at 11 a.m. in New York today. A ruling that a failure-to-pay credit event has taken place will trigger an auction which will ascertain sellers’ liabilities.

Two Days

“If two parties spend close to two full days in a room negotiating, you’d expect there to be some progress,” Alejo Czerwonko, a strategist at UBS Wealth Management in New York, said by e-mail. “Many investors are losing faith an agreement can ever be reached. All eyes are focused on a private solution now,” he wrote.

NML said in an e-mailed statement yesterday that Argentina refused to seriously consider a court-appointed mediator’s “numerous creative solutions” for resolving the dispute. NML said it found many of those options acceptable.

Fitch Ratings lowered Argentina’s foreign debt rating to selective default yesterday, following S&P’s decision to do the same a day earlier.


Moody’s yesterday affirmed Argentina’s Caa1 issuer rating, while placing the score on negative outlook because the default on foreign debt could increase pressure on Argentina’s official foreign-exchange reserves amid continued economic stagnation.

The U.S. judge overseeing the case scheduled a hearing in Manhattan federal court for 11 a.m. today. No additional information on the hearing was immediately available.

In the past year, Argentina has taken steps to restore its standing with international creditors after being locked out of credit markets since its $95 billion default in 2001.

Those include reaching an agreement with the Paris Club of creditors to settle $9.7 billion of debt and changing the way it calculated inflation after being faulted by the International Monetary Fund for flawed data.

In May, JPMorgan agreed to buy about $5 billion of government bonds that Argentina gave to Spanish oil producer Repsol SA as compensation for the takeover of its local unit in April 2012.

Court Stay

Also at issue is whether holders of Argentina’s foreign-currency bonds issued overseas will demand immediate repayment by invoking a so-called cross-default clause in the securities. Under the terms, Argentina would have to pay back the entire balance — plus unpaid interest — if at least 25 percent of holders demand their money be returned. The potential liabilities are equal to the country’s foreign reserves, which are already hovering close to an eight-year low.

“This looks like it could now drag out until 2015,” Kevin Daly, who helps oversee $13 billion of emerging-market debt at Aberdeen Asset Management Plc in London, said by e-mail yesterday. “The risk is that it gets pushed out further, or you get an acceleration demand by an exchange bondholder that adds a new wrinkle to the holdout quandary.”

Kicillof, speaking late on July 30 at the Argentine consulate in New York, told reporters that the holdouts rebuffed all offers and wouldn’t endorse a stay of the court ruling that would have allowed more time for talks.

YPF, Edenor

Daniel Pollack, the mediator, wrote in his own e-mailed statement that “real people” are likely to suffer because of Argentina’s default.

“The full consequences of default are not predictable, but they certainly are not positive,” Pollack wrote.

The economy, already headed for its first annual contraction since 2002 with inflation estimated at 40 percent, will suffer in a default scenario as Argentines scrambling for dollars cause the peso to weaken and activity to slump, according to Hernan Yellati, head of research at Banctrust & Co.

American depositary receipts of oil producer YPF fell 7.3 percent to $36.051 in New York, while ADRs of Empresa Distribuidora y Comercializadora Norte SA sank 9.2 percent to $14.58. In unregulated street trading, the peso weakened 3.9 percent to 12.8 per dollar.

“I expect a solution for holdouts after RUFO expires, but I think the market is too optimistic about the time frame,” Lutz Roehmeyer, a money manager who helps oversee $1.1 billion of assets at LBB Invest in Berlin, said by e-mail today. “Expectations call for a short period of default with the end of negotiations in January 2015. I think it will take longer because Argentina has no incentive to speed up now that they are in default.”

Default Swaps

Credit-default swaps to protect against losses from an Argentine default were the most expensive in the world yesterday, according to data compiled by CMA.

About $1 billion of Argentine sovereign debt is covered by the contracts, compared with $10 billion of Russian government obligations and $16 billion of Brazilian debt.

“We’re not considering accelerating our bonds,” Roberto Sanchez, who helps oversee $3.5 billion of emerging-market debt at Manulife Asset Management, said in a telephone interview from Boston. “Things are too fluid to know what the outcome of all this will be.” Bloomberg