The court questioned the country’s good faith during the process and cast doubt on the third-party character of the BoNY. The judges inquired about the bank’s role in the process of the payment of restructured bond holders. One judge suggested that the BoNY may be treated as Argentina´s agent because it receives fees to perform its duties.
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Argentina faced a tough hearing in the New York Court of Appeals, raising the likelihood of a default. The 5-year CDS widened to over 2800 bps.
Argentina faced a tough hearing in the New York Court of Appeals, raising the likelihood of a default. The 5-year CDS widened to over 2800 bps, from 2200 bps on Wednesday.
On October 26, the court had ruled that Argentina discriminated against bondholders who refused to take part in the debt restructurings of 2005 and 2010, stating that the government’s decision to pay the holdouts later than the debt holders who accepted the restructured bonds violated the pari passu clause. However, the case was returned to District Court Judge Thomas Griesa with a request to define the term “ratable payment” and elaborate on the scope of the parties to be affected by the injunctions. In particular, the court asked for clarification on the immunity of the bank that transfers the money from the Argentine government to holders of the restructured bonds. Judge Griesa issued a harsh injunction, stating that Argentina could not pay the restructured bond holders without paying the holdouts. The injunction covered all participants, including the Bank of New York (BoNY), which is the paying agent and indenture trustee. The judge ordered Argentina to make a deposit to guarantee the full payment of principal plus interest arrears to the holdouts in the amount of $1.3 billion. However, Argentina appealed Judge Griesa’s ruling and was granted a stay (temporary suspension) of the injunction in late November. The Court of Appeals then requested briefs from all involved parties and called for a hearing.
During yesterday’s hearing, Argentina`s lawyer affirmed that the country will not voluntary comply with the current injunction and will only accept a workable solution. The judges stated that the court cannot make a decision (to order Argentina to pay the holdouts) based on the assumption that Argentina will otherwise break its obligation to pay the restructured bond holders.
The court questioned the country’s good faith during the process and cast doubt on the third-party character of the BoNY. The judges inquired about the bank’s role in the process of the payment of restructured bond holders. One judge suggested that the BoNY may be treated as Argentina´s agent because it receives fees to perform its duties. Another stated that if the BoNY continues to make transfers after a positive ruling for the holdouts, it will be considered an illegal activity. The restructured bondholders´ lawyer stated that they are hostages of the trial, but a judge indicated that they knew about Argentina’s legal situation in relation to the holdouts from the beginning. As expected, the court rejected the en banc revision asking that the twelve members of the court review the opinion set forth by three of its members last October. The court could take one to three months to issue a final opinion. In the event of a negative ruling, Argentina will surely try to gain time by appealing to the Supreme Court, but it will need to present a strong case. An acceptance by the Supreme Court will require an intervention by the U.S. Solicitor General.
Our base scenario assumes a harsh decision ratifying Argentina´s violation of the pari passuclause and an order to make payments to the holdouts. We do not expect the intermediary entities to be enjoined by the decision, allowing Argentina to continue to service the restructured bonds. However, the recent hearing has introduced significantly high negative risk to the latter point.
If the BoNY is enjoined in the ruling, Argentina can try to continue servicing the exchange bonds by changing the jurisdiction, but that can result in a technical default that would likely have a negative impact on the economy. In that case, we expect a reduction in external credit lines (trade finance, inter-company lending, etc.) to further worsen the country’s relationship with international financial institutions and cause a tightening of FX controls, heightened stress in the FX market, and interventionism in the Financial sector. These factors will most certainly lead to lower growth and higher inflation (currently at 2% and 30%, respectively, in our base scenario).
Juan Carlos Barboza
Economist
Economist
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