Argentina debt crisis fears grow after US supreme court ruling

http://www.theguardian.com/world/2014/jun/16/argentina-debt-crisis-fears-us-supreme-court-ruling

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Fears of a fresh debt crisis in Argentina intensified after a ruling by the US supreme court left South America's second biggest economy facing the choice of paying so-called "vulture funds" in full or risk a fresh debt default.

Share prices fell by 6% at the start of trading in Buenos Aires and the price of Argentinian bonds fell after America's highest court refused to hear an appeal against a ruling by a lower court that came down in favour of creditors who bought up debt worth $1.3bn (£770m) at rock-bottom prices after the financial crisis of more than a decade ago.

The ruling is the culmination of a decade-long legal battle in which Argentina has sought to avoid paying creditors who refused to accept the terms of a debt restructuring that followed the country's savage financial crisis of 2001-2.

In an attempt to make the country's debt more manageable, the then government in Buenos Aires offered bondholders a deal in which they would get regular payments of interest provided they accepted a more than 70% reduction in the value of their investment. More than 92% of creditors agreed to the offer – in many cases reluctantly – but a number of hedge funds, spearheaded by Paul Singer's NML corporation held out.

Argentina argued that the funds bought most of the debt at a deep discount after the default and have sought to thwart the country's efforts to restructure in two separate debt swaps in 2005 and 2010. The country, which grew rapidly after it devalued the peso and defaulted on around $100bn of debt in 2002 but has since suffered from uncomfortably high levels of inflation, is now under pressure to come to terms with the hedge funds before the next scheduled payments on the restructured debt at the end of the month. If it refuses or fails to do so, it would technically be in default.

Argentina's president, Cristina Fernández de Kirchner, was due to make a televised address in response to the US ruling early on Tuesday, but has until now adopted a hardline approach in the legal battle, warning that it was unable to pay meet both the demands of the hedge funds and its regular interest payments. The filing to the supreme court said that if forced to pay: "Argentina will have to face, objectively, a serious and imminent risk of default."

The bondholders disputed that claim, saying in their own court filing there was evidence presented in lower courts that Argentina could afford to pay.

However, the prospect that Buenos Aires might defy the supreme court unsettled bond markets and sent the cost of insuring Argentina against default soaring.

The "upfront cost" of a five-year credit default swap surged from 36% to 46% – meaning it would cost almost half the face value of a bond to insure it each year.

In a second setback for Kirchner, the supreme court also ordered that commercial banks be forced to provide details of assets held by Argentina around the world.

Argentina has been contesting an August 2013 ruling by the 2nd US circuit court of appeals in New York, which upheld a November 2012 ruling by US district judge Thomas Griesa. He ordered Argentina to pay the $1.33bn into a court-controlled escrow account.

Debt campaigners expressed concern at the refusal of the supreme court to overturn the findings of the lower courts.

Eric LeCompte, executive director of the religious anti-poverty organisation Jubilee USA, said: "I am blown away by the decision. For heavily indebted countries trying to support extremely poor people, this is a devastating blow. These hedge funds are equipped with an instrument that forces struggling economies into submission.

"For 15 years, Republicans and Democrats have agreed that the world's poorest countries need to have their debt burdens reduced. Today, that bipartisan policy is threatened by the court's decision."