Argentina Makes Final Stand Against “Vulture Funds” As Default Looms

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The Argentinean government has submitted its final proposal to settle nearly $1.3 billion in sovereign debt to holdout creditors, offering a fresh bond swap at nearly one-sixth of the original value, reported Bloomberg on Sunday.

The South American nation submitted its plan just hours before a deadline set by Court of Appeals in New York nearly a month ago; but the new terms is already widely expected by analysts to be rejected, as it is basically the same deal offered by the nation back in 2010.

According to Joe Kogan, head of emerging-market debt strategy at Scotia Capital Markets, “the proposal itself appears intended for local Argentine consumption as the government seeks to reiterate once again that it will not pay holdouts more than what Argentina gave to exchange bondholders.”

"The court (Last November) said 'You owe the holdouts $1.3 billion. Tell us how you are going to pay that to them’…  [But] instead of answering how they will pay the full amount, Argentina responded with a plan for paying a much smaller amount," added Josh Rosner, managing director at research firm Graham Fisher & Co, to Reuters.

"Argentina is flirting with technical default, which would take a serious toll its economy,” Rosner said.

Argentina’s battle with the holdouts – mainly hedge fund – traces back to 2001, when the country defaulted on nearly $100 billion in debt. Though the Argentinean government subsequently restructured 93 percent of its defaulted bonds at a rate of 33 cents on the dollar, the remaining bondholders are demanding for full repayment.

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A court case in New York then ruled that Buenos Aires would not be allowed to repay the creditors who accepted the bond exchange, unless the holdouts also agreed on repayment.

Argentina’s Economy Minister Hernán Lorenzino then labelled the holdouts as “vulture funds” who only sought to profit by betting on a technical default.

“To pay the vultures is not only unfair but illegal in terms of our internal rules. We will continue to defend the position of Argentina in all forums and with all available legal instruments,” said Lorenzino last year.

Nonetheless, Argentina’s Vice-President Amado Boudou insisted to a press conference in Buenos Aires last Saturday that the holdouts would receive a 1,300 percent gain in five years if they accepted the ‘new’ proposal.

“Argentina’s proposal accounts for past-due amounts to bring the debt current, provides for a fair return going forward, and also gives an upside in the form of annual payments if Argentina’s economy grows,” the country’s lawyers said in its letter. “The proposal fulfils the court’s dual objectives to satisfy the pari passu clause: non-discrimination in payment priority and equal treatment among bondholders.”

A final ruling by the U.S. Court of Appeals for Argentina’s bond swap is expected anytime this week. Marcelo Etchebarne, an Argentine lawyer following the case closely, told the Financial Times that the court was unlikely to endorse Argentina’s plan.

“The 2010 offer was more punitive than the 2005 and this 2013 offer is more punitive than the 2010. From a legal perspective the court cannot ‘cram down’ the plaintiffs … [this proposal] will most likely be rejected by the court after letting plaintiffs offer a response.”