BUENOS AIRES/NEW YORK Argentina on Monday appealed a U.S. court order to pay $1.3 billion to investors who rejected two debt restructurings tied to its 2002 sovereign debt crisis, amid fears that the country faces another default.
U.S. District Judge Thomas Griesa last week ordered Argentina to deposit the money before December 15 to pay the "holdout" creditors, a move that could jeopardize payments to bondholders who participated in the 2005 and 2010 debt swaps.
Argentina's economy ministry said late on Monday it had filed an appeal and denounced Griesa's ruling as "an attack on sovereignty that shows ignorance of the laws passed by our Congress."
Any change to the terms of Argentine sovereign bonds must be approved by the country's Congress.
The ministry said that if Griesa arranged a formula offering holdouts the same terms presented in the 2010 restructuring, Argentina's Congress could debate it.
That proposal is unlikely to persuade the holdouts, however.
Earlier on Monday, investors holding $1 billion worth of restructured Argentine debt filed an emergency motion in a U.S. federal appeals court to fight the ruling, which they fear could prevent payment on their bonds and lead to a fresh default.
About 93 percent of bondholders agreed to swap defaulted debt from the 2002 default for new paper at a steep discount.
But holdouts, led by Elliott Management Corp's NML Capital Ltd and Aurelius Capital Management, rejected the swaps and are fighting for full repayment in the courts.
Griesa's order dismayed investors who took part in the two debt swaps and fear the G20 country will now enter into "technical default" on about $24 billion in restructured debt.
It was those holders who filed the motion on Monday in the U.S. 2nd Circuit Court of Appeals seeking to halt Griesa's order.
The motion would ensure that interest payments to the bondholders continue while the appeal is decided," said David Boies, a lawyer representing the investors. "Exchange bondholders agreed to take under 30 cents on the dollar to support Argentina's debt restructuring."
Argentina's motion was filed to the same appeals court.
Aside from sparking howls from investors who participated in the debt restructurings, Griesa's ruling was a setback for Argentina's combative, left-leaning President Cristina Fernandez, who calls the holdout funds "vultures" and has vowed never to pay them.
Fernandez's decision to vilify holdout creditors, who are loathed by most Argentines, makes payment a difficult prospect, and a local law prohibits offering a better deal than that given in the swaps. Doing so might expose Argentina to lawsuits from creditors who tendered their paper.
On the other hand, another default, albeit a technical default, would tarnish Fernandez's record on managing the economy, deepen Argentina's isolation from global financial markets and hit investment at a time of sluggish growth.
Some analysts fear the case's implications could stretch far beyond Argentina and its creditors, hampering future debt restructurings and the operation of global payment systems.
The Argentine government is due to pay exchange bondholders at least $3.3 billion in principal and interest in December.
But if Griesa's demand for payment of the $1.3 billion into an escrow account for holdouts is upheld by an appeals court and Argentina still refuses to pay, U.S. courts could embargo payments to the creditors who accepted the debt restructurings.
That would push Argentina into a technical default.
NML has more outstanding court judgments against Argentina that are not included in this case but it is willing to negotiate and would still consider a combination of cash and bonds to settle the dispute, a source familiar with its position said on condition of anonymity.
As part of the long legal battle, NML won a court order in early October to seize an Argentine naval vessel during a visit to Ghana, and the ship remains stranded.
The hedge fund denies Argentine accusations that it wants to trigger a default to get a windfall on its holdings of credit default swaps (CDS), derivatives used to insure against default.
"That would take a huge position in the CDS market to achieve and I don't think they have an interest in doing that," the source said, adding that NML would receive about half the amount that Griesa wants paid.
Negotiations or voluntary payment by Fernandez's government appear almost impossible. Economy Minister Hernan Lorenzino called Griesa's ruling "a kind of judicial colonialism".
Argentina's appeal asks the court to reinstate a stay on payment to the holdouts and contests Griesa's latest ruling by arguing that it puts future debt restructurings at risk and endangers global financial institutions such as clearing houses and banks acting as payment agents.
Many specialists think it unlikely that the appeals court will reinstate the stay.
Last month, the appeals court backed the ruling by Griesa that Argentina has discriminated against holdouts. Argentina has requested a new hearing before all of the court's 13 judges.
Most analysts think the so-called en banc rehearing is also unlikely to yield a different result, though some say it might ease the impact on third-parties such as Bank of New York Mellon, which transfers funds from the Argentine government to the bondholders, and clearing system operators.
Griesa's ruling last week means such payment intermediaries are subject to embargoes on funds destined for exchange bondholders.
"While the situation looks very difficult for Argentina and exchange bondholders right now, it remains possible that the appeals court could amend Griesa's order with regard to the application to third-party intermediaries," investment bank Credit Suisse said last week.
"If the appeals court were to take a more moderate stance than Griesa, it may also issue a new stay on the order."
That would buy Argentina some breathing space and a swift rehearing is likely given the looming December 15 deadline.
Beyond the appeals court, Argentina's last-remaining legal option in the United States would be the Supreme Court.
Some legal experts think the Supreme Court could choose to weigh in on this case because of its implications for debt restructurings at a time of global economic turbulence.
U.S. government lawyers have backed Argentina's position on pari passu, or equal treatment for all bondholders. They said that Griesa's orders "could enable a single creditor to thwart the implementation of an internationally supported restructuring plan.
However, not everyone thinks the ramifications will be that wide because most bonds issued since Argentina's default contain collective action clauses that make a restructuring deal binding on all creditors.
"The pendulum, post Argentina, has swung," said Hans Humes, president of Greylock Capital Management. The New York-based fund shunned the first debt swap, but accepted the same terms five years later in 2010.
"We used to have a discussion about what a country is able to pay and (Argentina) broke the mold and we've been forced to sit down and listen to what they want to pay. So in the current case maybe its swinging back in our favor a bit," he added.
Securing the U.S. Supreme Court's intervention before the hefty payment on Argentina's growth-linked warrants is due on December 15 appears a remote prospect.
An eventual default would deepen Argentina's economic isolation. Partly because of the legal action by the holdouts, the country has yet to return to global credit markets almost 11 years since the economic meltdown of 2001/2002.
Paying all the outstanding defaulted bonds would cost up to about $11 billion, equivalent to about a quarter of the foreign currency reserves that Argentina needs to keep servicing its debts in the absence of fresh credit.
Guillermo Nielsen, a former Argentine finance secretary who helped oversee the 2005 bond swap, said the government should deposit the $1.3 billion on time and keep litigating.
"A default on the new bonds must be avoided at all costs," he said. "The (2002) default was incredibly costly for Argentina and this situation could end up causing a new default combined with contempt of court."
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