US Supreme Court Passes on Argentine Bonds Case

By Bianca Fernet

Ahh. Nothing gets me going quite like the smell of defaults in the morning.

In my article Bonds and Why You Don’t Care (Yet), I shared the cruel harsh reality that writing about Argentina’s economy is sometimes a bit like terrible sex – tedious, monotonous, and makes you want to scream, “Just do it already!” Argentina’s path to economic ruin feels like a drunk snail making its lazy way through molasses, where every apparent turning point in reality amounts to little more than disappointment.

If you recall, a big telling point in the ongoing saga of Argentina vs. Vulture Funds was whether or not the U.S. Supreme Court would hear the case after Argentina appealed the decision of a lower court.

And guess what? They said no! Which means they let stand the 2012 ruling that prohibits Argentina from making payments in June 2014 on $24 billion of restructured debt unless it also pays about $1.33 billion to the holders of the non-restructured debt. Happy days (for me, because I’m bored).

If Argentina pays the $1.33 billion to the holdouts, it’s likely that they will face a series of legal claims that could total close to US $132 billion, or the value of the pre-2001 crisis debt.

Argentina’s current US dollar reserves total about US $36.9 billion, so that’s really not a feasible option.

Why does Argentina care?

The so-called “teeth” in this ruling is that while the US government can’t technically tell Cristina what to do (or Michelle Obama probably would have advised against this apparent fashion faux pas), it can prevent banks in the United States and banks with operations in the United States from making the payments.

Argentina has reopened the debt swap option to these holdouts, offering the same approximately 30% of face value received by the other restructured debt holders. This option is nothing more than an attempt to gain some international pity and perhaps support. The holdouts filing suit are called “Vulture Funds” because their business model revolves around buying defaulted or distressed debt and then suing for full value, so accepting a debt restructure is probably a clear violation of their mission statements.

What next?

In the event of a default, it’s a tough call to say what will happen. First of all, about zero people ever will be surprised. I’ll probably yawn and roll over. Secondly, Argentina has issued its more current debt under local law so it will not be directly affected.

As per usual, Argentina is looking for a loophole that will allow them to pay the holders of restructured debt while upholding the promise to never pay a centavo to the “vultures.” President Cristina Kirchner said in August that Argentina would offer new restructured debt to the holders of the defaulted-for-the-second-time restructured debt, but this time under local law out of reach of the black-robed arms of the US Supreme Court.

Griesa, the federal judge who made the initial ruling, has barred Argentina from pursuing this plan on the grounds that it is “an apparent attempt to evade” his ruling. Obviously. But is it illegal? And where is it illegal? And what can anyone do about it?

You should care, just a bit

The relevant little wiggle to keep an eye on is what will happen to the unofficial exchange rate. Companies and individuals use locally-issued bonds that are traded on multiple markets to move money in and out of Argentina legally and at the unofficial rate. The implied exchange rate on these instruments is what determines how many pesos your dollars demand on the street.

The key pieces to Argentina’s economy are import/export restrictions, subsidies, dollar reserves, inflation, and the parallel exchange rate. A default would (please God) smack the reserves and parallel rate into some kind of action, although hardly the climax we were anticipating. By Bianca Fernet

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