Argentina’s debt case: Reading the tea leaves

You are probably aware of current economic policies in Argentina, and the so-called debt case of the century.

You’ll probably know by now that the Court has turned down the Argentinian request to hear an appeal of a lower court decision. The decision established that the unwillingness of Argentina to pay defaulted holdouts, while duly servicing restructured debt, violated the spirit of the pari passu clause. Well, there’s a lot to be said for this interpretation, and a lot against.

We certainly would write an interrogation mark on the wisdom of the court. But that is by now spilled milk. Leaving aside the well-known emotional overtones of the Argentinian President, the fact is that blindly submitting to the original Judge Griesa’s ruling. and paying off the holdouts might set off an unmanageable chain of events.

The recalcitrant holdouts, with the millionaire Paul Singer at the head, are owed USD1.5 b, i.e. about 5% of the foreign currency stock of the country. It may hurt dignity, and Congress would have to repeal its own law prohibiting payment to the holdouts. But there is no big deal here.

The problem is that other bondholders who refused to participate in the restructurings can lay claim to an estimate of  USD15 b. (including interest), almost half of the international reserves. A bridge too far… that Argentina will have to cross at some point, because the remaining bondholders  will no doubt freeride on Mr Singer’s case.

For the moment,  harsh realities suggest that the authorities will have to hold negotiations with the holdouts that brought the case and agree on a paying formula -in part probably with newly-issued bonds- that satisfies Mr Singer. For some technical reasons, an agreement should not be expected before 2015. Of more immediate concern, Argentina has been prevented by the court  from servicing restructured debt while holdouts are left in the cold.

On the basis of a commitment to bona fide negotiations with the holdouts, this stay of payment should be lifted so that Argentina can settle a USD900 m coupon maturing June 30. For the record, quite a number of politicians backed negotiations as soon as the news broke in Buenos Aires. This  included most presidential hopefuls for 2015, many of them obviously worried about the heavy legacy for the new incumbent if the current dispute remained unsolved by then: several initiatives of the current administration to pave the way to the capital markets -agreement with Paris Club, payment to Repsol, flexibility in pending arbitration cases, devaluation….- would come to grief if the President decided to stick to her guns. But her rallying cry,  repeated once and again,  “we’ll never negotiate with the vulture funds”, has probably lost its edge