NOW THIS IS MESSY

Argentina could default on its debt at the end of the month

June 16, 2014
June 16, 2014

If Argentina goes deep in the 2014 World Cup in Brazil, their legions of international haters may have something to make them feel better: Imminent default on the country’s debt.

That’s because the US Supreme Court today declined to overturn a lower court ruling won by NML, an American hedge fund subsidiary of Elliott Capital Management, that would force Argentina to pay up on billions of dollars in bonds it issued before it defaulted on them in 2001.

US courts interpreted a clause in the bonds, issued under US law, as requiring Argentina to pay its old creditors at the same rate it pays its current creditors, who lent the country money as part of a restructuring that followed 2001-2002 default and restructuring process. (That’s a simplified version; for extremely in-depth coverage, turn to Joseph Cotterill’s recounting of the saga.)

What that ratable payments clause—known as pari passu—means is that the Argentines can’t continue paying just some of their creditors while ignoring others, since those others now have the ability to sue Argentina’s US bank—the Bank of New York Mellon—for failing to distribute its payments equally.

In practical terms: If Argentina wants to still keep fighting the “vulture funds” from before 2001 that have so far refused to accept less than full repayment, it will need to stop paying all of its bonds at once. That might be disastrous for the country, which has suffered from economic mismanagement that has driven foreign investment out and left it with an anemic growth rate on the brink of recession. The government is borrowing from foreign reserves to fund itself, even as inflation and unemployment remain high.

Josh Rosner, a financial analyst who argues that Argentina should settle this matter to rebuild its global credit and attract foreign investment, says that such a default would leave the country “locked out of the international capital markets for the next decade.”

President Cristina Kirchner, on the other hand, has based her political appeal on saying a firm no to the hold-out creditors, though some public opinion surveys show more Argentines are willing to enter negotiations with those creditors.

One way to dodge both hold-out creditors and economic disaster was offered in a memo by Argentina’s American lawyers that was leaked last week. It suggested the “best option” for the country would be to default in the US and set up an alternate payment system for its non-hold-out creditors outside the reach of US law. But that would take time, and it’s not clear that current bondholders, familiar with Argentina’s default-rich history, would really prefer Argentine bonds to those issued in Europe.

Actually, the best solution would be a negotiated settlement between the hold-out bondholders, the current bondholders and Argentina, as Felix Salmon explains, though such a reasonable deal is probably a long-shot.

Which leaves us waiting until June 30, the next date that Argentina’s current bondholders are scheduled to be paid—at which point the country will have to pay the hold-outs as well. Argentina has said that it will default rather than do so. While further legal appeals could buy the country a few more weeks—and we’ve been too quick to see a crisis here before—it seems that the country is finally out of options. Argentina will have to either face its creditors, or defy US courts and international finance yet again.

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