Argentina Fights Default

Argentina's messy navigation of its latest default continues – this time with an attempt to circumvent the U.S. ruling preventing it from making interest payments to bondholders. The United Nations seems like an unlikely platform for a fight between a debtor and hedge funds, but in her speech there this past Wednesday, President Fernandez ratcheted up the pressure, calling the hedge funds "terrorists". She also expressed "deep indignation" over comments from a U.S. diplomat that the country was in default.

Argentina retains its position that it is not in default – it is simply being barred from making repayment on its debt by judicial ruling (for more on the complicated dynamics of this situation, please review our previous post). The current ruling prevents Argentina from making any payments to holders of its restructured debt without also repaying in full the hedge funds that have held out of debt restructuring all these years. Having exhausted all legal challenges to the ruling, Argentina has moved on to simply avoiding the issue.

This week, the nation attempted to remove BNY Mellon as its trustee, replacing them with Nación Fideicomisos (a domestic bank). Removing BNY Mellon would alleviate the current delay in making debt repayment, as BNY is unable to transfer funds to bondholders without violating the U.S. judicial order, despite the fact that funds are on hand and ready to be delivered. A bank not subject to U.S. law would have no such problems, hence Argentina's strong move to dismiss the bank as trustee.

Insiders point out that the move is essentially a non-issue, since Nación Fideicomisos will not have access to a list of debt-holders’ due payments (and other payment details) without cooperation from BNY Mellon, which has so far indicated that it is unwilling to remove itself as trustee. BNY has served as the trustee for bonds issued under U.S., U.K. and Japanese law since 2005, giving it extensive knowledge of payment dynamics on a number of different debt issues. U.K. investors, including George Soros' Quantum Fund, are not pleased with BNY's decision, and have filed lawsuits in London demanding that it make payment to bondholders. A resolution between the U.S. and U.K. courts has not yet been decided.

Argentina is not responding positively to BNY's stance either: in addition to the full-page ads that it took out in the Financial Times and Washington Post asking BNY Mellon to resign as trustee, it also revoked BNY's authorization to operate within its borders. A payment amount of $539 million is currently frozen at BNY, who refused to comply with Argentina's request for its return this past Monday.

After its experiences with BNY, Argentina has been proactive in securing the cooperation of Citigroup's Argentine branch, which is scheduled to make payment on 'local law' bonds at the end of this month, by threatening civil and criminal action if it fails to make those payments. Citi has asked Judge Griesa for permission to make these payments; a hearing to decide the matter is scheduled for Friday the 26th.

Separately, the hedge fund plaintiffs involved in the original dispute have asked Judge Griesa to find Argentina in contempt of court for its actions in seeking to circumvent the ruling in order to make debt payments.  

With elements of political drama, legal jurisdiction fights, and the complicated role of international trustee banks, new developments in this case are sure to be worth watching.