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Default nears; Argentina fights with debt holdouts

First Published      Last Updated Jul 29 2014 01:08 pm

Buenos Aires • Argentina risks financial default unless it reaches an agreement with a group of holdout bondholders by Wednesday. Here are the issues at stake:


In 1998, Argentina fell into recession and faced crushing payments on its international debt. As it tried to avoid default in 2001, it arranged a "debt swap," asking investors to trade in bonds coming due for longer-term ones. The swap, however, failed to resolve Argentina's troubles. In December 2001, the country declared it would stop making payments on about $100 billion of debt.

Argentina's government lined up two more swaps in 2005 and 2010, offering existing creditors new bonds worth much less than the old ones. Critics described Argentina's negotiating style as "take it or leave it." Most investors accepted — something is better than nothing — and traded in roughly 93 percent of the defaulted bonds.


Hedge funds began buying Argentina's bonds as the country slid into crisis and kept adding to their holdings after it defaulted. Some, like NML Capital, refused to participate in the exchanges and held out for a better deal.

These holdouts then turned to U.S. courts, seeking to force Argentina to pay up under terms agreed to when the bonds were first sold, before 2001.

Argentina's government demonizes the investors as "vulture funds." "The vultures feed on carrion, and these fund groups are circling around countries in default or close to default," said Matthias Carugati of the Management & Fit consulting firm in Buenos Aires.

At least two of these groups are in litigation with Argentina: Billionaire Paul Singer's NML Capital Ltd., and Aurelius Capital Management.


U.S. District Court Judge Thomas Griesa in Manhattan ruled in 2012 that the creditors who rejected Argentina's earlier debt-swap offers deserved to be paid in full — a figure he put at $1.33 billion. With interest, that amount has risen to about $1.5 billion. The creditors say they are due $1.6 billion.

The U.S. Supreme Court last month refused to overturn Griesa's ruling. The court also allowed the plaintiffs to ask any court in the country to investigate Argentina's assets and subject them to liens to ensure payment of the debt.


Argentina asked Griesa to temporarily suspend his order, saying it could not comply because it has legal obligations to creditors who accepted the debt swaps. It says a delay would give it time to solve the problem of the holdouts.

Since Griesa refused to suspend his ruling, Argentina must continue negotiations led by a court-appointed mediator. The meetings are taking place in New York.


Griesa blocked a $539 million payment that Argentina was due to make on June 30 to holders of the restructured debt securities. He said it would violate his orders unless Argentina also pays money owed to the plaintiffs. A 30-day grace period for paying the restructured debt expires Wednesday.

Normally, any country that didn't pay its bondholders would be in default. Argentina's situation has a wrinkle. The Argentine government maintains it will not default because it has already deposited the payment in a New York bank. If that money fails to reach the creditors, it says, Argentina isn't to blame because the judge has blocked the release of the money.

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