Under the looming cloud of a default, Argentina and a group of New York hedge funds that are engaged in a bitter fight over debt repayments have been ordered to meet with a court-appointed mediator “continuously” until the two sides can come to an agreement.
Judge Thomas P. Griesa of the Federal District Court in Manhattan issued the order on Tuesday, just a week before Argentina is required to make an interest payment on its restructured bonds. The judge has ruled that it cannot make that payment unless it also pays all it owes to bondholders who declined to take part in the restructuring.
The judge urged both sides to find a way to agree on a settlement. If Argentina fails to make the payment, it will enter into a fresh default on July 30.
“That is about the worst thing that I, sitting here, can envisage,” Judge Griesa said.
It is the latest chapter in a legal dispute whose origins go back to 2001, when Argentina defaulted on its bonds. While the country eventually reached a deal with investors who agreed to accept a lower amount than they were owed, a group of bondholders including Elliott Management and Aurelius Capital Management rejected the offer. They later sued Argentina, saying it must pay the full amount owed to all the holdouts.
Leading these holdout investors, Elliott Management’s NML Capital has won a series of court battles, requiring Argentina to make payments on the defaulted bonds they own. Last month, Judge Griesa told Argentina that it could not make payments on its main class of foreign bonds without making the payment to the holdouts.
On Tuesday, Judge Griesa told both sides to meet with Daniel Pollack, a lawyer who has been appointed as a mediator, “continuously until a settlement is reached.” They are scheduled to meet on Wednesday at 10 a.m. Mr. Pollack has met with representatives from both sides in recent weeks.
A spokesman for NML Capital said the firm was prepared to comply with the judge’s orders.
But Jonathan I. Blackman, a lawyer from Cleary Gottlieb who represents Argentina, argued that any talks would take time and that a settlement “cannot be done by the end of the month.” He noted that any settlement would have to include all the holdouts, including those who are not represented in the case, and pointed to a clause in the bond restructuring that gives those who exchanged their bonds the right to demand identical compensation if Argentina later makes a deal with holdouts. Argentina has said that paying the holdouts could expose it to as much as $15 billion in investor claims, which it cannot afford to pay.
That right expires at the end of 2014, and in any case applies only to “voluntary” offers from Argentina. The hedge funds contend it is obvious that any settlement would not be voluntary, so the clause would not apply.
“At the end of the day this is a sovereign country, and so it’s really hard to look at what is going on here without looking through the lens of what is going on in Argentina,” said Antonia E. Stolper, a partner at Shearman & Sterling, who is not involved in the case.
Referring to a series of ads that the government has taken out in The New York Times and comments made to Argentine newspapers calling the bondholders vultures, she added that the Argentine government “does not sound conciliatory.”
The battle has seen both sides dig in. On Tuesday, Judge Griesa at one point grew impatient with a lawyer for some of the hedge funds, Edward A. Friedman, saying “a little common sense” should prevail. That was in the context of whether he should allow interest to be paid on similar exchange bonds issued under Argentine law. The hedge funds argue such payments should be barred, but Citibank’s Argentina branch says it has to pass on the money under Argentine law.
The judge also sounded a warning about the results of a new default if the two sides could not come to an agreement.
“People will be hurt,” Judge Griesa said. “Real people, not vultures, will be hurt.”
Floyd Norris contributed reporting.