Argentina Makes Move That Seems to Defy Judge's Order on Bond Payments
Argentina made a puzzling and potentially provocative move on Thursday in its landmark legal battle with New York hedge funds, which are suing the country over bonds that it defaulted on over 10 years ago.
Judge Thomas P. Griesa of the Federal District Court in Manhattan has ruled that Argentina cannot make payments on its main class of bondholders without also paying the hedge funds what they say they are owed.
But on Thursday, Argentina announced that it had deposited $539 million with the Bank of New York Mellon, for the purpose of paying its main bondholders. A payment is due on their bonds on June 30. Confusing matters, Argentina had recently said it was 'impossible' to make that payment.
Argentina's motivation for moving the money to Bank of New York Mellon, the trustee handling the bond payments was unclear. By taking a clear step toward paying the main bondholders, Argentina risks further provoking Judge Griesa. He called for a hearing on Friday morning.
'This is a brazen step in violation of the court's orders and it warrants a swift and decisive response,' Robert A. Cohen of Dechert, which is representing NML Capital, a unit of Elliott Management, said in a letter to the court.
Argentina's decision to make a deposit at the Bank of New York Mellon comes soon after it said it would negotiate with the hedge funds. Those talks are meant to happen under a 'special master,' an independent lawyer that the court appointed on Monday. But after a meeting on Tuesday between lawyers from both sides, further negotiations have not taken place, according to two people briefed on the situation who were not authorized to discuss the matter publicly.
The Argentina case could open a new chapter in the vast international debt markets that countries tap to fund their deficits. Some bond market experts say a hedge fund victory could make it harder for economically stricken nations to lighten their debt loads by striking deals with creditors. But supporters of the hedge funds say credit markets function better when the rule of law is upheld.
The legal battle has gone for years, stoking ill will toward the hedge funds in Argentina. Its president, Cristina Fernández de Kirchner, has called the funds 'vultures.' The fight appeared to enter a frantic end game earlier this month when the United States Supreme Court declined to hear the case.
Argentina almost certainly understands that, unless it settles with the hedge funds, the deposited $539 million will never get to its main bondholders. Bank of New York Mellon is unlikely to pass on the money to the main bondholders. Judge Griesa's ruling says that intermediary banks would be in contempt if they paid the main bondholders without paying the hedge funds. Bank of New York Mellon, for its part, recently said that it would 'comply with any court order by which it is deemed bound.'
Argentina defaulted on nearly $100 billion of debt in 2001. In the following years, most bondholders exchanged their defaulted securities for new bonds that were worth substantially less than the original value of the bonds. Some bondholders, known as holdouts, wanted to be repaid in full and didn't participate in the exchanges. Elliott Management, founded by Paul E. Singer, has spearheaded the holdouts' efforts.
Argentina could in theory reverse course and decide to pay the holdouts, a move that might clear away an issue that has been weighing on the price of its bonds. The country's struggling economy might get a boost from a settlement if it led to lower borrowing costs.
But Argentina's most recent actions may instead be designed to confuse its opponents as it prepares a plan to defy the holdouts.
The country could in theory swap its main class of bonds into new securities that are issued out of Argentina, away from the New York jurisdiction. But Argentina may find it hard to make dollar payments on such bonds. The dollars would probably have to be routed through intermediary banks, which would still be subject to Judge Griesa's order.
The case is being tried in America because the disputed bonds were issued under New York law.
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