With its second default in 13 years looming at the end of the month, Argentina insists it cannot hold talks with hedge-fund holdouts from its last default without being allowed to make payments on its performing debt during the negotiations.
An Argentine delegation is set to meet with a court-appointed mediator on Monday, a week after it missed a $539 million payment on its restructured bonds. The group plans to insist that the judge in the case issues a stay allowing it to make that payment as a condition for opening talks with the holdouts, led by Elliott Management and Aurelius Capital Management.
“These conditions will naturally include our objective of honoring the restructuring of 92.4% of our debt and generating fair conditions for all creditors,” Argentine Cabinet Chief Jorge Capitanich said. “We are going into the meeting with this objective.”
U.S. District Judge Thomas Griesa, who ruled that Argentina must pay the holdouts $1.5 billion if it wishes to pay its restructured debt, last week rejected the country’s request for the stay, after Elliott complained it would leave the country with little incentive to make a deal with investors it has excoriated as “vulture funds.” He also blocked its plan to make the coupon payment, anyway, leaving $539 million in Argentine funds in limbo at the Bank of New York Mellon.
Griesa has told the bank to return the money, but Argentina insists that it now belongs to its creditors. BNY Mellon says it cannot return the money without a wire transfer order from Argentina, and plans to formally ask Griesa for guidance next week.
“Following an exchange of letters today, the court asked BNY Mellon to make a formal motion asking for clarification on what actions it should take with the money that the government deposited in its account at the Central Bank of Argentina last week,” a source told Reuters. “The bank is asking Griesa, essentially, how can it get from point A to point B without being sued.”
Elliott plans to ask Griesa to order BNY Mellon to return the money. The hedge fund yesterday also sought to distinguish itself from Argentina, pledging to “negotiate without preconditions” and offering to meet Argentine Economy Minister Axel Kicillof today, when Kicillof will be in Washington, D.C., to speak at the Organization of American States.
Argentina will not be formally in default until a payment grace period expires on July 30.
Amidst the posturing, media reports indicate that there is a growing consensus in Argentina that the holdouts should be paid to avoid an economic catastrophe.
“The solution is to reach an agreement, and an agreement obviously means paying,” Daniel Scioli, the governor of Buenos Aires Province and a member of President Cristina Kirchner’s party, said recently. Kirchner had—until a U.S. Supreme Court ruling upholding Griesa’s orders—vowed to never pay the holdouts. But, with just a year-and-a-half left in her term, she may now have no choice.
“If the government doesn’t reach a deal with holdouts, its legacy falls apart,” political analyst Nicolas Solari told The Wall Street Journal. “The government took over during a profound debt and default crisis a decade ago and always bragged about solving those problems. Now it would risk leaving power in the middle of another default and economic crisis.”
In addition, a deal could smooth the path for some of Kirchner’s other priorities.
“It would give the government less margin of freedom in their domestic agenda, which is pretty complicated,” Goldman Sachs’ Mauro Roca told Bloomberg News, speaking of a default. And the dispute is already having an effect on the Argentine economy, weakening its currency.
“The problem is relevant for ordinary Argentines because it affects our cost of living,” 24-year-old sales clerk Michael Larreategui explained to the Journal. “If they don’t solve this issue, inflation could get worse.”