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A woman walks with her dog past a mural that reads in Spanish "Vultures" in reference to the dispute between the Argentine government and a U.S. hedge fund, known locally as "vulture funds," in Buenos Aires on Aug. 20, 2014. (Victor R. Caivano/AP)
A woman walks with her dog past a mural that reads in Spanish "Vultures" in reference to the dispute between the Argentine government and a U.S. hedge fund, known locally as "vulture funds," in Buenos Aires on Aug. 20, 2014. (Victor R. Caivano/AP)

Argentina bonds, peso reel on country’s debt swap plan Add to ...

Argentina’s new plan to skirt U.S. courts and resume payment on defaulted bonds aims to protect creditors who participated in two debt restructurings, the economy minister said on Wednesday, adding it would be “madness” to pay holdout creditors 100 cents on the dollar.

The government is sending a bill to Congress replacing its New York intermediary bank with state-run Banco Nacion, the latest move in a years-old legal chess game between Argentina and holders of defaulted bonds who have sued for full repayment.

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Argentina’s black market peso reeled on the news, falling to an all-time low as the country’s benchmark dollar-denominated bonds due in 2033 slumped more than 2 per cent in price.

The deadlock with the holdout creditors is squeezing Argentina’s foreign reserves and the availability of dollars in the market by preventing the economically ailing country from issuing international bonds. Last month, Argentina slid into default on an estimated $29-billion (U.S.) of its restructured debt after a New York court blocked an interest payment of $539-million. The payment did not go through to investors because U.S. District Judge Thomas Griesa says restructured bonds cannot be paid unless the holdouts are simultaneously paid 100 cents on the dollar, plus interest.

The $539-million remains with intermediary Bank of New York Mellon. Argentina says Griesa overstepped his bounds by blocking the coupon payment, and is moving to ensure future payments go through local banks.

On Tuesday evening, President Cristina Fernandez announced she is sending a bill to Congress replacing Bank of New York Mellon with state-run Banco Nacion as intermediary. She also offered to swap bonds governed by U.S. law for debt under local jurisdiction.

Economy Minister Axel Kicillof told reporters the proposed swap would neither break existing bond contracts nor be obligatory.

“Argentina is going to continue paying its debts,” Kicillof said, mentioning a $200-million payment due on Sept. 30 on restructured Par bonds denominated in dollars. “Argentina will preserve its debt restructurings.”

But to pay the holdouts 100 cents on the dollar, in accordance with U.S. court rulings, would be “financial madness,” he said.

Argentina’s black market peso weakened 1.49 per cent early on Wednesday to a record low of 13.43 per U.S. dollar. The local currency later recouped some of those losses to trade at 13.35 per greenback.

On international markets, the price on Argentina’s widely traded and dollar-denominated Discount bond maturing in 2033 fell 2.31 per cent to bid 80.513, with a yield of 11.024 per cent.

Argentina’s portion of the JP Morgan Emerging Markets Bond Index Plus widened by 33 basis points to 797 over U.S. treasuries, marking an increase in risk perception, while the index as a whole tightened by one basis point to 296.

DOZEN-YEAR CONFLICT

The case goes back to Argentina’s 2002 default on about $100-billion in sovereign bonds. The vast majority of holders participated in restructurings in 2005 and 2010, which offered less than 30 cents on the dollar on the defaulted debt.

A group of hedge funds led by Elliott Management Corp. and Aurelius Capital Ltd. opted to sue in the U.S. federal courts, which govern the original bond contracts, for 100 cents on the dollar.

Fernandez and her ministers characterize the funds “vultures” who bought Argentine bonds at steep discounts and are out to wreck the country’s finances in their pursuit of huge profits.

“They have created conditions of anarchy and the destruction of the rule of law, all so they tenaciously attack countries that do not accept the conditions that they impose,” cabinet chief Jorge Capitanich said.

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