Argentina scrambles to avoid default as Wednesday midnight deadline looms

07/29/2014 7:49 PM

07/30/2014 6:59 PM

Argentina officials met Tuesday with a mediator in New York in a last-ditch move to resolve a dispute with American creditors that has the South American nation on the brink of default, a development that would have dire consequences for the already struggling Argentine economy.

Argentina has until midnight Wednesday to avoid default by paying holdout creditors, negotiating a settlement or receiving a stay, lending an air of urgency to the final hours of negotiations. A default, the second in 13 years, likely would cause the value of the peso to plunge, worsening inflation and pushing the price of imports higher.

Economy Minister Axel Kicillof, who had said last week he would not travel to New York, arrived unexpectedly Tuesday afternoon to participate in the talks, which were being led by Argentina’s finance minister, Pablo Lopez.

Meanwhile, some holders of euro-denominated bonds submitted a last-minute motion to the U.S. District Court for the Southern District of New York, requesting a stay to allow the negotiations to pass the midnight deadline.

In the Argentine capital of Buenos Aires, news outlets reported that the Association of Argentine Private Capital Banks, a group of private banks, had voted to offer a payment of $250 million to the holdout creditors to prevent a default.

U.S. District Judge Thomas Griesa has ordered Argentina to pay the holdout creditors demanding face-value for the debt they hold at the same time that it pays owners of restructured bonds who’d agreed to a 70 percent discount. Argentina appealed Griesa’s ruling, but the U.S. Supreme Court denied Argentina’s appeal on June 16, leaving Argentina out of legal options.

Griesa has denied two requests by Argentina for a stay on negotiations, but he had not ruled on the last-minute motion from the euro bondholders.

The debt crisis was sparked by a demand by a group of American hedge funds that purchased Argentine bonds at a discount after the country defaulted in 2001 that they be repaid the full amount of the bonds they hold.

For years, Argentina has refused to negotiate with the holdouts, who make up less than 8 percent of all bondholders of Argentine bonds. The other 92 percent of creditors agreed to restructured debt deals in 2005 and 2010 that offered a 70 percent discount.

The holdouts sued Argentina in U.S. court, won, then gained legal leverage in June when Griesa blocked a scheduled payment due June 30 to the owners of restructured bonds. The Argentine government had deposited $539 million with Bank of New York Mellon, a trustee that distributes the payments, to meet the June 30 due date, but Griesa ruled that those payments would violate his order unless the holdouts also were paid.

By missing the payment on June 30, Argentina went into technical default, which started a 30-day grace period that ends Wednesday.

Although Argentine officials have met with Daniel Pollack, a New York lawyer Griesa appointed to mediate the dispute, they have refused to hold face-to-face talks with the holdout creditors, who are led by billionaire Paul Singer and his hedge fund, NML Capital.

One major holdup in the negotiations is a clause in the contracts Argentina signed with the restructured bond-owners in 2005 and 2010 that entitles them to the same terms NML Capital may receive.

The 2001 default caused violent riots and several deaths in Buenos Aires, but many experts following the case have emphasized that a default this time would not be as bad, at least economically. Still, it would be a major setback for Argentina’s hopes of re-entering the global credit market.

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