Countdown To Default!

[GS_Dirtboy]

If the Argentine Republic does not pay it's bondholders (including the holdouts - Buitres) by this Wednesday in accordance to US Judge Griesa the Republic will default. Many US papers are reporting this as a belligerent Argentina refusing to pay it's debts, again. However, that is far from the whole story and, I think, quite simply inaccurate.

The Republic is arguing that it cannot legally negotiate with the holdouts because that would trigger the RUFO clause. This clause prevents The Republic from offering a better deal to the holdouts than they offered originally to the bondholders who accepted the new payout terms. In other words, if Argentina pays more to the holdouts than they pay the other bondholders then they can be taken to court for violating the terms of the agreement. That could be Billions of Dollars at stake.

But ... if The Republic does not pay according the court order it will default. If The Republic defaults that will trigger acceleration clauses in all of it's foreign law bonds. That risks court action in multiple jurisdictions and Billions of Dollars at stake.

This could be a decision of the lesser of the two evils which, at this point, appears to be to default.

What's a good Republic to do? What do you think will happen on/or by Wednesday?

GS

 

[Gringoboy]

I haven't a clue GS, but there's a good article at The Bubble on this very subject.

 

[internationalguy]

It sure sounds like a pickle. I sure would never go for an option that would open up a can of worms and allow the people who accepted the settlement to try to sue. It would be a stupid move and it would cost a stupid amount of money.

 

[Chet]

What idiot let them issue the restructured bonds with a clause like that?

 

[citygirl]

If they are ordered to pay and it's involuntary, RUFO isn't triggered correct? This WSJ piece is obviously very slanted but I don't think it is inaccurate factually. From the piece: "...But the Rufo clause has several legal escape valves if Argentina really cares, starting with the fact that the clause bars voluntary side debt deals. Argentina has been court-ordered to make (involuntary) payments to creditors it doesn't want to make." So if that is correct, it wouldn't trigger RUFO since it is court ordered.

Full article here: http://online.wsj.com/articles/argentina-dances-with-default-1406501368

 

[Bajo_cero2]

The judge tries to sit Argentina with the vulpures to negociate face to face, this trigges RUFO.

If he enact a sentence then he has to enforce it, if he can.

The problem is that the money deposited belongs to the bondholders who accepted the reestructuración.

Argentina proposed to the vulpures to buy an insurance against RUFO, if there is no risk, then the insurance should cost pennies. But it is not the case.

If they have good will, they have to ask for a stay until RUFO ends. But this is not the case neither.

 

[Bajo_cero2]

What idiot let them issue the restructured bonds with a clause like that?

RUFO is only an explícit pari pasu, a limit in time to it, while Griesa created a privilege in favor of the vulpures.

 

[Rich One]

They are playing Chicken who will chicken out first ?. Griesa has nothing to lose he is 84, soon to retire, and will not make a penny either way....!

Using chess strategy Queen CFK has pulled back the white Bishop/Kicillof and forwarded a pawn/Lopez to threaten King Griesa, King Griesa in turn opened a side front with pawn Pollack to take the blame.

In case of default Kicillof will not be remembered forever as the culprit of the 9th, Argentine Default. Lopez will take the downfall and face a jail term? Thus they do foresee a default as an scenario. B)

 

[ARbound]

My personal take on the issue is this:

Argentina wants to pay the renegotiated debit from the swaps as it has been working hard with the IMF
and Paris Club to try and gain access to foreign capital for several months now. Building good faith
through these means lowers borrowing rates and also helps slightly stabilize the currency as the market
begins to trust the nation's solvency.

Argentina also knows it is at the end of the road legally regarding the holdouts.There's no real way to
not pay the holdouts without inturn not paying the swaps unless Argentina is to move the payments to
Buenos Aires, which in turn will eliminate the possibility of gaining access to foreign capital until at least
2015 when some of the RUFO clauses expire.

Argentina also can not pay the funds AND the swaps because, as mentioned, it will activate RUFO, which
mean the nation wouldn't go in to default, but instead likely in to bankruptcy as the BNA reserves would
only cover around 85% of the payments. It would also cause a massive devaluation, a recession and
ironically light a hyperinflation of the peso, if not the full economy resulting in the need for million peso
bills or just going straight to a Nuevo Austral/dollarization.

I see the issue as the following 3-4 terrible choices:

1. Argentina does not make any payments on Wednesday causing a second default in about about
a decade. The Dolar Blue explodes, the country has to pull it's assets from abroad back home,
and tries to wait out until ~January 2015 when it can pay the vulture funds back in full and the swaps
without activating RUFO, hoping that a wave of lawsuits does not proceed.

2. Argentina pays the vulture funds and the swaps on Wednesday, preventing a default, but opens
the chance of a RUFO clause case from most of the swaps, which in turn place the country back on
the path to default and ultimately bankruptcy as the reserves are not sufficient to cover all costs.

3. Argentina tells the vulture funds/Griesa to fly a kite, moves the payment city to Buenos Aires (assuming,
like the Italian bond holders have said, the swaps will likely collect anywhere) creates a sort of quasi default
where the nation is in technical default to one creditor but not the others. Inturn Argentina is locked out of the
US (i.e. the World's financial markets) until it makes payment to funds.

4. Argentina just defaults again.

I think the use of the RUFO clause was used as a means to encourage and assure swaps that they would only get the best
rates since they would ban themselves from interacting with the holdouts for 10 years.

We need a poll joe, but regardless, ARbound's Magic 8-Ball says:

 

[GS_Dirtboy]

RUFO is only an explícit pari pasu, a limit in time to it, while Griesa created a privilege in favor of the vulpures.

Yes, and it appears that he didn't fully understand the issue and the implications of his ruling. The RUFO question is whether an agreement or payment by the Republic to the holdouts can be seen as involuntary. If it is involuntary then RUFO isn't triggered.

Judge Griesa had the opportunity to create a win/win for everyone (including the holdouts) by postponing a decision until after December 31st. Instead, he ordered payments to everyone and created an entanglement that no one - not even he - knows how to get out of.