Vulture Funds: Meeting in New York Underway as Default Deadline Looms

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Finance Secretary Pablo López is part of the Argentine delegation in New York (photo: AFP/Don Emmert/Télam)

Finance Secretary Pablo López is part of the Argentine delegation in New York (photo: AFP/Don Emmert/Télam)

A delegation from Argentina entered a new meeting with mediator Daniel Pollack in New York today hoping to reach a last ditch agreement to avoid a default.

The Argentine team is again seeking a stay on the ruling by Judge Thomas Griesa obliging the country to pay bond holdouts at the same time as it makes a payment on bonds held by those who accepted debt restructurings in 2005 and 2010.

If these exchange bondholders do not receive payment by 30th July, Argentina will enter into a ‘technical default’ despite having deposited the money with a New York bank. However, the government says making the payment to the holdouts – led by so-called vulture funds – would activate a RUFO clause included in the debt restructurings that would leave the country vulnerable to a flood of lawsuits that could reach up to US$500bn.

Last week, Judge Griesa rejected Argentine requests for a stay in the ruling until the RUFO clause expires at the end of the year.

Meanwhile, Judge Griesa last night authorised Citibank Argentina to make a “one time only” payment on dollar-denominated bonds issued under national law. The exception was made because bonds issued as part of the compensation package for the takeover of Repsol by YPF cannot be distinguished from some of those issued as part of the 2005 and 2010 debt restructuring.

Griesa said his decision was made so as not to interfere with the Repsol agreement, which is not related to the dispute over defaulted debt. The judge requested that Argentina take measures to make these bonds distinguishable before the next payment is made.

The one-off payment is expected to be made today. However, the government criticised the decisions, with Cabinet Chief Jorge Capitanich calling it a “circumstantial measure” and an example of how the “US legal system allows for a series of abnormalities in this case, and that worries us.”

As the countdown to a potential default neared a climax, Argentina yesterday made its first US$642m payment to the Paris Club of debtors, as part of the US$9.7bn repayment plan agreed earlier this year.

A statement by the Economy Ministry said that the payment showed “Argentina continues to normalise its international debt resulting from the 2001 debt default.”

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One Response to “Vulture Funds: Meeting in New York Underway as Default Deadline Looms”

  1. Werner Almesberger says:

    The flock of vultures may still grow: according to an article in Cronista Comercial [1], the bonds that have been converted (i.e., the “good” ones) have not only the RUFO clause everyone is worried about, but also a less-known cross-default clause.

    The latter comes into play when the country enters a default: then the bond holders can decide to request that their bonds be paid back immediately, instead of having to wait until they mature.

    If the bond holders decide to do this, Argentina would have to figure out a way to dodge the bullet within two months. If unsuccessful, it would have to pay up to another USD 30 Bn – much less than the RUFO black hole, but still a lot. Since there are not nearly enough reserves for this (*), the technical default would then certainly become a full-blown default.

    (*) It would still make sense for these bond holders to try to get paid since the bonds are currently traded well below their nominal value. So even with a full-blown default and the losses this implies, they may get a large enough part to come out winning.

    – Werner

    [1] http://www.cronista.com/finanzasmercados/Tenedores-de-bonos-Par-estan-listos-para-acelerar-en-caso-de-default-20140729-0060.html

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