Another date for the diaries of Argentine debt-watchers: on 30 September the US Supreme Court will decide whether to hear Argentina’s appeal against a ruling that would block further payments on its current bonds unless it also pays holdout creditors. Following another decision against the country in late August, and looking ahead to a possible Supreme Court judgement, Argentina’s chamber of deputies voted overwhelming to approve a new indefinite debt swap offer for the remaining 7% of holdout creditors from the country’s 2002 default. Given that the main attraction of the new offer is that it has no expiry date, few analysts expect it to mollify the more intransigent holdouts.
New deal
On 23 August, the US Second Circuit Appeals Court restated a judgment which blocks the Argentine government from making payments on new bonds issued as part of its debt renegotiations. The court ordered the government to settle the outstanding US$1.33bn plus interest it owes to creditors who refused the terms of its heavily discounted debt swaps in 2005 and 2010 before continuing to pay those who accepted the deals. The block is on hold pending the appeal to the US Supreme Court. If the Supreme Court upholds the Appeals Court decision, Argentina will be forced to choose between paying its creditors, a move that could prove almost politically impossible for a government that has consistently denounced the injustice of the “vulture funds” case, or entering into default. If the Supreme Court decides against hearing the appeal, the Appeals Court ruling will stand, leaving Argentina with the same unpalatable choice.
In a brief to the Supreme Court, Argentina’s lawyers argued the case has an “extraordinary significance to the interests of Argentina, the United States, other foreign states”. The petition also cited the supporting brief filed by France, which emphasised the potential “wider economic harm” at stake. Warning of the third parties who would be “directly harmed” by the ruling’s enforcement, such as the bondholders who accepted the previous write-downs, Argentina’s lawyers argue that the Appeals Court ruling was based on a “patently erroneous reading of the boilerplate pari passu clause contained in nearly all sovereign bond contracts.” The pari passu, or equal treatment clause, is the key legal issue at stake.
Why Pari Passu matters
The pari passu clause typically provides that the bond debt will rank equally with other debt. It is a standard provision in international sovereign and private sector bonds. One of the reasons the case is important is because of the consequences of adopting one of the two main competing interpretations of pari passu clauses.
The narrow interpretation holds that there is a breach of the pari passu clause only if the debtor changes the ranking of who gets paid first by statute or some other legal measure. The wide interpretation holds that once a debtor is in fact insolvent, it cannot actually pay any of its debts without paying its creditors equally. This interpretation would prevent sovereigns and indeed other corporate or bank debtors from making any unequal payments when they are in any kind of payment default, thus inhibiting payments to preferred creditors regardless of the implications for the stability of the market.
In the meantime, the handling of the case has further eroded Argentina’s credit-worthiness. On 10 September the international ratings agency Standard & Poor’s (S&P) lowered its long-term foreign currency credit ratings on Argentina to CCC+, seven levels below investment grade. S&P said that if the legal case triggers a wider selective default or a ‘distressed’ debt swap, it could lower the rating further to ‘selective default’.
Despite the apparent concession from Buenos Aires, President Cristina Fernández remained defiant. In her first broadcast interview for four years, she attacked the holdouts again. “They bought these bonds for almost nothing. Can anyone explain to me why they should be rewarded with such astronomical returns?”
- Blue dollar on the move
The official value of the dollar rose again this week, to around Arg$5.7. On the black market, however, the ‘blue’ dollar (now increasingly known as the “cave” dollar, referring to the discreet locations where it is traded) is trading at around Arg$9.3.
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