Argentina’s government has 30 days to decide whether it should try to make peace with a group of New York hedge funds that it has bitterly fought for years in a dispute that could change the global market for government bonds.
The hedge funds, after a series of important victories in United States courts, have managed to back Argentina into a daunting legal corner. Judge Thomas P. Griesa of the Federal District Court in Manhattan has told the country that it cannot make payments on its main class of foreign bonds without also paying the defaulted bonds that the hedge funds hold.
Argentina was scheduled to make a payment to its main bondholders on Monday. The country had put $539 million in the Bank of New York Mellon, but the bank, not wanting to violate the court order, had said that it would not pass on the money to the bondholders.
The bonds now have a 30-day grace period in which late payments can be made. In that period, Argentina may decide to compromise with the hedge funds, known as holdouts, or take drastic measures, including an outright default on its main foreign bonds. A default could further weaken Argentina’s fragile economy.
“Huge financial matters have been resolved, or at least the foundations have been accomplished, in 30 days,” said Henry Weisburg, a partner at Shearman & Sterling who has written frequently on the Argentine case. “But it probably looks grim.”
Last week, Judge Griesa appointed a special master to oversee negotiations between the hedge funds and Argentina. But Argentina is not engaging, according to Elliott Management, a leading holdout firm. “There are no negotiations underway, there have been no negotiations,” Jay Newman, a senior portfolio manager at Elliott, said in a statement on Monday. Late on Monday, Argentina’s Ministry of the Economy said that the country intended to meet with the special master on July 7.
A victory for the holdouts, according to some legal specialists, could give bondholders significantly more power when they negotiate with countries that want to cut their debt load after a default. Other legal experts, however, say that recent changes to bonds make it harder for holdouts to exert pressure. And the supporters of the holdouts say that countries that issue bonds under New York law should be held accountable to that law.
Argentina ran out of legal options after the United States Supreme Court declined to take up the case in the middle of June. During its legal battles, Argentina’s president, Cristina Fernández de Kirchner, has called the holdouts “vultures.” Argentina is refusing to pay the hedge funds’ bonds because they were not included in the bond exchanges that slashed the country’s debt load after its huge 2001 default. The bonds issued in the exchanges now make up the main class of Argentina’s foreign bonds, and the country had been paying them without hitch — until Monday.
Some legal experts said that there was still a chance that a settlement could be reached.
Although Argentina’s government has vowed it will not submit to the holdouts’ demands, it can now say to the Argentine people that it has no choice but to pay after taking its fight to the highest American court. On the other side, the holdouts may decide to concede some ground if Argentina proposes a sufficiently high payment. “The holdouts are not irrational,” said Marco E. Schnabl, a partner at Skadden, Arps, Slate, Meagher & Flom who has closely followed the case. “They are not in the business of a vendetta against Argentina. They are in the business of making money.”
An agreement, if it starts to coalesce, may take more than 30 days. But if the special master says that the talks are making real progress, Judge Griesa may decide to temporarily lift his order against Argentina, giving negotiations more time. But the holdouts will want assurances that such a “stay” will not be used by Argentina to its advantage. Lawyers for Elliott Management asserted last week in a letter to Judge Griesa that they would want compensation, if a stay was granted.
Argentina could allow a default at the end of July. The holdouts, seeing that the government has gone to such lengths, might then decide to soften their stance. Alternatively, the holdouts may hold firm until next year to see if the next Argentine government is less combative.
Argentina may also use the next 30 days to plan a bold move in which it offers to swap its main class of bonds into securities issued out of Argentina and away from Judge Griesa’s court. But the holders of the bonds may not want to agree to such an exchange. And such a swap would most likely require the cooperation of foreign financial firms that would not want to participate in any maneuver that could fall afoul of Judge Griesa. Argentina, for instance, would need to know exactly who held its bonds, and the institutions that have that information may decline to provide it to the country. “There is no way they are turning that over without the court’s O.K.,” Mr. Weisburg said. “You couldn’t do a conventional exchange offer.”