Argentina has vowed to continue its fight against Elliott Associates and other holdouts from its 2002 debt default, but Fitch Ratings doesn’t think it will win.
The ratings agency slashed the country’s sovereign debt rating yesterday, determining that “a default by Argentina is probable.” Argentina’s international law bonds are now rated CC. Fitch also cut its Argentine law bonds to B-minus.
Prior to the downgrade, both sets of bonds were rated B, four steps below investment grade.
Argentina is in danger of a technical default on exchange bonds it issued to creditors that accepted its debt restructuring—and a serious haircut in 2005 and 2010. A federal judge in New York has ordered the country to pay $1.33 billion into an escrow account for the holdouts, including Elliott affiliate NML Capital and Aurelius Capital Management, before it can make a $3 billion coupon payment on the exchange bonds. Argentina has vowed it will not pay the holdouts, which it calls vultures, but has also said that it will not default again.
Argentina’s eocnomy ministry said late on Monday it had filed an appeal and denounced Griesa’s ruling as “an attack on sovereignty that shows ignorance of the laws passed by our Congress.”
Any change to the terms of Argentine sovereign bonds must be approved by the country’s Congress.
The ministry said that if Griesa arranged a formula offering holdouts the same terms presented in the 2010 restructuring, Argentina’s Congress could debate it.
That proposal is unlikely to persuade the holdouts, however.
Earlier on Monday, investors holding $1 billion worth of restructured Argentine debt filed an emergency motion in a U.S. federal appeals court to fight the ruling, which they fear could prevent payment on their bonds and lead to a fresh default.
About 93 percent of bondholders agreed to swap defaulted debt from the 2002 default for new paper at a steep discount.
But holdouts, led by Elliott Management Corp’s NML Capital Ltd and Aurelius Capital Management, rejected the swaps and are fighting for full repayment in the courts.
Griesa’s order dismayed investors who took part in the two debt swaps and fear the G20 country will now enter into “technical default” on about $24 billion in restructured debt.
It was those holders who filed the motion on Monday in the U.S. 2nd Circuit Court of Appeals seeking to halt Griesa’s order.
The motion would ensure that interest payments to the bondholders continue while the appeal is decided,” said David Boies, a lawyer representing the investors. “Exchange bondholders agreed to take under 30 cents on the dollar to support Argentina’s debt restructuring.”
Argentina’s motion was filed to the same appeals court.
Aside from sparking howls from investors who participated in the debt restructurings, Griesa’s ruling was a setback for Argentina’s combative, left-leaning President Cristina Fernandez, who calls the holdout funds “vultures” and has vowed never to pay them.
Fernandez’s decision to vilify holdout creditors, who are loathed by most Argentines, makes payment a difficult prospect, and a local law prohibits offering a better deal than that given in the swaps. Doing so might expose Argentina to lawsuits from creditors who tendered their paper.
On the other hand, another default, albeit a technical default, would tarnish Fernandez’s record on managing the economy, deepen Argentina’s isolation from global financial markets and hit investment at a time of sluggish growth.
Some analysts fear the case’s implications could stretch far beyond Argentina and its creditors, hampering future debt restructurings and the operation of global payment systems.
The Argentine government is due to pay exchange bondholders at least $3.3 billion in principal and interest in December.
But if Griesa’s demand for payment of the $1.3 billion into an escrow account for holdouts is upheld by an appeals court and Argentina still refuses to pay, U.S. courts could embargo payments to the creditors who accepted the debt restructurings.
That would push Argentina into a technical default.