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U.S. top court rejects Argentina appeal in bond fight

U.S. Supreme Court building in Washington, D.C.
Andrew Harrer | Bloomberg | Getty Images
U.S. Supreme Court building in Washington, D.C.

The U.S. Supreme Court declined on Monday to hear Argentina's appeal over its battle with hedge funds that refused to take part in its debt restructurings, a move that risks send Latin America's No. 3 economy into a fresh sovereign default.

The high court left intact lower court rulings that ordered Argentina to pay $1.33 billion to the so-called holdouts who refused 2005 and 2010 debt swaps in the wake of its catastrophic 2001-02 default on $100 billion.

Argentina has previously refused to pay up. If it sticks to that position, U.S. authorities could prevent full payment to creditors holding restructured bonds even though the country is able and willing to pay them.

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This could result in a default as early as June 30, when payments are due on discount bonds governed by New York.

Argentina's country risk, as measured by the J.P. Morgan EMBI+ Index, rose nearly 10 basis points on the news, while Argentine stocks were down nearly 4 percent.

Investors had not expected the adverse decision from the court.

"It's a very damaging scenario for Argentina," said Marco Lavagna at Ecolatina consultancy, noting that how lower courts implemented their rulings was key.

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"Maybe something could open up there and allow for negotiation."

Argentina hinted last month it might consider negotiating with holdouts but could not do so until next year when a clause in its debt swaps prohibiting it from offering holdouts better terms expires.

The government was not immediately available for comment on Monday but state-run news agency Telam said President Cristina Fernandez would deliver a televised address on Monday night.

Argentina wants to avoid making full payment to holdouts led by hedge funds Aurelius Capital Management and NML Capital, a unit of billionaire Paul Singer's Elliott Management Corp. It says that doing so would open the door to claims from other holdouts worth as much as $15 billion.

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"We are reviewing the decisions from the Supreme Court today and what the next steps might be, but we have no other comment at this time," a spokesman for NML told Reuters.

Creditors holding about 93 percent of Argentina's bonds agreed to participate in the two debt swaps in 2005 and 2010, accepting between 25 and 29 cents on the dollar.

In a double blow, the U.S. Supreme Court on Monday also ruled that creditors can seek information about Argentina's non-U.S. assets in a case about bank subpoenas that is part of the country's decade-long litigation with holdouts.

The question was whether NML could enforce subpoenas against Bank of America and Banco de la Nacion Argentina. The court's ruling may nonetheless have limited impact in part because of Argentina's limited assets around the world.

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On the issue of paying bondholders, Argentina had said in its most recent court filing that the government would struggle to pay the bondholders in full while also serving its restructured debt.

In that scenario, "Argentina will have to face, objectively, a serious and imminent risk of default," the filing said.

The bondholders dispute that assessment, saying in their own court filing there was evidence presented in lower courts that Argentina could afford to pay.

Argentina was contesting an August 2013 ruling by the 2nd U.S. Circuit Court of Appeals in New York. In it, the appeals court upheld a ruling by U.S. District Judge Thomas Griesa, who ordered Argentina to pay the $1.33 billion into a court-controlled escrow account.

He said Argentina must pay the bondholders who rejected the debt restructuring along with those who accepted.

The nine-member Supreme Court declined to hear a companion case filed by bondholders that did agree to restructuring. The court noted in its order that Justice Sonia Sotomayor recused herself from the cases.

—By Reuters