Argentina was expected to miss a bond payment on Monday, setting it on a course for a possible catastrophic default.
Argentina owes an interest payment to the majority of its creditors, but the government has a 30-day grace period after Monday to avoid going into its second default in 13 years.
The U.S. Supreme Court recently turned down Argentina’s attempt to block a lower court ruling that it must pay hedge funds that own bonds left over from its record $100 billion default in 2001.
U.S. District Judge Thomas Griesa urged Argentina on Friday to continue negotiating with the funds that refused to participate in debt swaps in 2005 and 2010. The judge also said it would be illegal for Argentina to make a payment to the majority of its bondholders without also paying more than $1.5 billion to the holdouts.
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Griesa appointed a special master last week to facilitate talks because Argentina indicated through its lawyers that it planned to negotiate for the first time with the U.S. bondholders.
President Cristina Fernandez has long refused to negotiate with the plaintiffs led by New York billionaire Paul Singer’s NML Capital Ltd., who spent more than a decade litigating for payment in full rather than agreeing to provide Argentina with debt relief. But Fernandez has been backed into a corner by NML Capital’s payment plan.
The holdout creditors accused Argentina on Monday of refusing to begin talks.
“Argentina’s professed willingness to negotiate with its creditors has proven to be just another broken promise. NML is at the table, ready to talk, but Argentina has refused to negotiate any aspect of this dispute,” Elliott Management, which runs NML said in a statement.
“There are no negotiations underway, there have been no negotiations, and Argentina refuses to commit to negotiations in the future. Argentina’s government has chosen to put the country on the brink of default. We sincerely hope it reconsiders this dead-end path.”
Paying the hedge funds that she often calls “vultures” in full would likely trigger lawsuits from other bondholders demanding to be paid on similar terms. Argentina’s government estimates that the liability could run up to $15 billion.
With nearly $29 billion in foreign reserves, Argentina appears to have the money to pay its bills. But those reserves include loans to other countries, deposits with the IMF and other assets that aren’t easily used. Take those away, and Argentina has roughly $16 billion on hand.
Troubled countries often find bond investors willing to lend to them to pay other creditors. But Argentina has been locked out of the bond markets for more than a decade. Some investors would probably step up to lend it money, but at high interest rates – and at high political cost for the leftist government.
Fernandez and her husband, the late President Nestor Kirchner, have used much of the Central Bank’s reserves to pay down Argentina’s debts, provide energy subsidies and fund social programs, weakening its ability to control one of the world’s highest inflation rates and manage the money supply.
“This is a legal chess game,” said Alberto Ramos, Latin America analyst at Goldman Sachs.
“If (Argentina) solves this, its worries about reserves disappear. The worry about reserves comes from the fact that this is still an open issue that prevents access to normal and conventional sources of financing.”