US: Credit Market

Argentina, hedge funds to clash in court over debt

Lawyers for Argentina and for hedge funds that did not take part in its debt restructuring are scheduled to appear in federal court in New York on Wednesday in what could be a last-ditch attempt by the country to avoid default.

The news follows a Tuesday speech in Buenos Aires by Economy Minister Axel Kicillof, who said Argentina is taking steps so it can continue paying the vast majority of bondholders who agreed to a debt restructuring in the last several years—without paying the holdouts.

Construction workers work near posters that read "Enough vultures, Argentina united for a national cause" in Buenos Aires June 18, 2014. Argentina is taking steps to place its restructured debt under local law so it can continue making payments despite a string of adverse U.S. court rulings.
Reuters

U.S. District Judge Thomas Griesa, who has ordered Argentina to pay the holdout funds $1.33 billion, is set to preside over the hearing, set for 2 p.m. ET. Griesa has issued an order barring payments to bondholders who participated in the 2005 and 2010 restructurings unless all the holdout investors are paid their award at the same time. The restructured bond holders are due a payment on June 30.

If the payment isn't made, Argentina would enter a technical default on the restructured debt.

Read MoreArgentina on the precipice? Maybe, says S&P

Argentina has been adamant that it will not pay the holdout funds. Kicillof said on Tuesday that they will not negotiate with what he and other officials have called "vulture" funds. The dispute has prevented a resolution to Argentina's sovereign debt crisis since it defaulted on $100 billion in debt in 2001-2002.

Argentina's debt prices fell again on Wednesday after Kicillof said the country wants to swap bonds governed by U.S. law for those governed by Argentine law so they would not be subject to U.S. courts that have made paying existing bondholders more difficult.

Argentina's debt battle
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Argentina's debt battle

"If some sort of solution acceptable to the government is not found, Argentina will probably follow through with the swap and default," wrote analysts at Eurasia Group on Wednesday. "What is harder to gauge is how much the government is willing to concede in the end (or how credible its threat really is)."

The U.S. denominated discount bonds due in 2033 fell in price, boosting its yield, according to Thomson Reuters data.

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The spreads on Argentina's portion of JPMorgan's emerging market bond index widened.

On Monday, the U.S. Supreme Court declined to hear an appeal by Argentina in its battle against the hedge funds which refused to take part in its debt restructuring. This left intact Griesa's ruling ordering the country to pay the holdouts, which Argentina has vowed not to do.

A technical default would not occur immediately on June 30 because the government has a grace period of 30 days before such a determination can be made.

"Notwithstanding the high uncertainty remaining, the government's open recognition that discussions with Judge Griesa are becoming a critical element for a permanent solution could be a welcome development," wrote credit analysts at Deutsche Bank.

— By Reuters