A Plan B for Argentina

April 2, 2013

What’s Argentina’s Plan B?

President Cristina Fernandez de Kirchner has said she will sell the presidential palace in Buenos Aires, if need be, to keep paying creditors who agreed to restructure the country’s debts.  But it may not come to that. Warning: this is a complicated saga with very interesting twists.

A pair of hedge fund litigants demanding $1.3 billion in payments and a New York court are making it hard for Kirchner to keep paying international bondholders. But she might contemplate asking those existing creditors to swap into Argentine law bonds, to which the writ of the New York court will not extend.

First some background. Argentina is due to pay bond coupons this week and in June. Looks like the hedge funds will decline the payment proposal Argentina made last week; this could lead to a default.

Most investors reckon this week’s payment is safe and that the crash will fall in June.  Argentina pleaded in the NY court that its own laws prohibit it from paying more to the hedge funds than it pays other creditors. Out of court it is less polite, calling the two hedge funds vultures. See here for more.

So, back to a putative Plan B. Deputy President Amado Boudou said this weekend Argentina would find a way to pay the exchange creditors irrespective of the outcome of the court hearing. That has supported bond prices. But it also suggests he may resort to local law bonds. That option, in principle, may look attractive to creditors who might otherwise find themselves holding defaulted debt again. In reality, the switch may be tough to do. Why? Here’s what Stuart Culverhouse, head of research at Exotix in London says:

  1. Changing a bond’s payment terms and jurisdiction would by itself constitute default.
  2. U.S. domiciled funds may balk at helping Argentina circumvent the ruling of a U.S. court. That would apply also to clearing houses and paying agents because the U.S. court order warns that any intermediaries assisting Argentina to re-route payments will be in contempt of Court.
  3. Local law bonds are not an attractive proposition. In effect you will be giving away some of your bondholder rights. This is because bonds will be subject to Argentine rather than New York laws, which have (so far at least) been considered the gold standard in so far as creditor protection goes.

The other problem is that local law bonds could automatically fall out of JPMorgan’s EMBI Global index of sovereign emerging debt, which 80 percent of investors in the sector benchmark to. Argentina makes up 0.9 percent of the index but going off-benchmark is not an attractive proposition, says Jeremy Brewin, a fund manager at Aviva Investors in London. He also says:

I don’t think Argentina have been sitting quietly for months and not working on Plan B… But under local law you hold all the risk… it all falls to Argentina’s ability to keep up payments in future.

Furthermore Plan B carries the risk that there will be a Plan C somewhere down the line. For instance if Argentina runs into economic difficulties it will be hard to resist pesifying the new local law bonds, ie swapping them from dollars into pesos, Brewin reckons.  And Kirchner’s problems will not end there. It is likely that many existing creditors will turn down Plan B if that involves switching to local law bonds and that means Buenos Aires risks a repeat of  the whole legal nightmare. As Brewin puts it:

Whoever refuses to take part in Plan B now will have elected to be the holdouts of the future.

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