Just days after a U.S. appeals court ruled that Argentina must pay a small group of bond investors more than $1.3 billion, the country’s president laid out a debt-swapping plan designed to get around the decision entirely.
The move was the latest bizarre twist in the long-fought dispute over the nation’s unpaid debts, a battle that has involved a seized warship and a profusion of public vitriol while capturing the attention of the international finance community.
The defiant new proposal, disclosed late Monday on national television by President Cristina Fernandez de Kirchner, may mark a turning point in the matter because it could accelerate the slow-moving legal process in the U.S. and push the South American nation into technical default.
In a wide-ranging address, Fernandez said she would ask the country’s legislature to pass a law offering holders of the nation’s bonds the chance to swap them for new bonds issued out of Argentina instead of New York.
The idea, she said, was “to avoid any barriers to payment because we have suffered such barriers before.”
The proposal flies in the face of an unfavorable ruling Friday by the U.S. 2nd Circuit Court of Appeals in New York.
That case stems from Argentina’s 2001 default on nearly $100 billion in sovereign debt. The nation settled with investors holding about 93% of the bonds by swapping the securities out for discounted ones issued in 2005 and 2010.
But holders of the remaining 7% refused the deals, and some, led by hedge funds Elliott Management and Aurelius Capital Management, sued in federal court in New York.
Last year, a district judge found that Argentina had violated its debt contracts and must pay the holdouts face value plus interest or it couldn’t pay anyone, including those who agreed to the swap.
Friday’s ruling, by a three-judge panel, upheld that decision and barred Argentina’s bank in New York from processing any payments to bondholders without also including the holdouts.
Fernandez has vowed publicly never to pay the holdout investors more than those who settled.
Under the proposal she outlined in her televised address, Argentina would offer all bondholders a chance to swap their securities issued in the U.S. for new bonds issued in Argentina under the same terms as those in the renegotiated bonds.
Her plan could engender more trouble with U.S. courts, as the circuit court judges explicitly warned Argentina against attempting to find another forum to pay its creditors as a way to dodge the ruling.
The 2nd Circuit also issued a temporary stay on its ruling, pending a U.S. Supreme Court review of a prior decision in the case. But Argentina’s provocative announcement could prompt the appeals court to lift the stay.
In that event, Argentina could be faced with a difficult choice: pay all the bondholders or default on the exchange bonds as well. For bondholders, the new proposal by Fernandez presents a dilemma.
Although investors generally prefer the legal protections offered by U.S.-issued bonds, Argentina's pledge never to pay the holdouts, and the recent court ruling, may give them a dire choice: roll the dice in Argentina or get nothing in New York.
Fernandez, who expressed hope that the case would still be resolved in the U.S. legal system, prayed that “God shine down on the United States Supreme Court.”
She also portrayed the situation as a matter of fairness. She said that those holdouts who sued Argentina represented just 0.45% of the original bonds and that they shouldn’t determine the fate of the vast majority of investors who accepted the exchange.
Elliott has not disclosed its holdings or the price it paid to acquire them in the secondary market. The hedge fund specializes in buying distressed debt at a discount and then suing for full value.
Last fall, for instance, it and other holdouts successfully petitioned a court in Ghana to seize an Argentine military ship, but the boat was eventually released.
Fernandez’s speech, which lasted about half an hour and included a history of the country’s borrowing habits that blamed prior administrations for Argentina’s financial woes, was followed by a barrage of more than 40 blasts from the president’s Twitter account, @CFKArgentina.
“This past Friday we have proven definitively that history is always just around the corner, particularly when it comes to economics,” one tweet reads.