Argentina Default Bets Surge as Singer Settlement Deadline Looms
Traders are ratcheting up the odds Argentina will default as the government signals it would rather flout a U.S. court ruling than open itself to claims it says may swell to as much as $500 billion.
The country’s credit-default swaps due in three months now imply a 44 percent likelihood that debt payments will be suspended, the highest in the world and up from 28 percent a week ago, according to data compiled by Bloomberg.
Argentina has until July 30 to comply with a ruling requiring it to pay creditors led by billionaire Paul Singer, who spurned debt exchanges following its 2001 default. The presiding judge blocked payments on the restructured bonds June 30 and rejected requests for a stay this week. Argentina quadrupled its estimate of potential claims this week, citing the risk of violating a bond clause prohibiting it from giving the holdouts better terms than those in prior restructurings.
“The set of events is pointing to an increase of a probability of default,” Donato Guarino, a strategist at Barclays Plc, said by phone from New York. “We’re at the end of the ride and it’s pretty much in Argentina’s part of the court.”
Mediated talks between Argentina and the holdouts were delayed yesterday until today after the government delegation traveling from Buenos Aires said it wouldn’t arrive on time.
U.S. District Court Judge Thomas Griesa on July 22 had ordered Argentina to start “continuous” talks with the creditors. He said the nation doesn’t need a stay on his orders to pay the $1.5 billion owed to the holdouts.
Argentina had asked the 83-year-old judge to delay the ruling until after Dec. 31, when the Rights Upon Future Offers clause in the restructured bonds expires, so it can continue paying debt while it negotiates with holdouts. The country, which has $29.7 billion of foreign reserves, had said previously that the cost of claims from restructured bondholders demanding the same terms would be $120 billion.
“It’s increasingly looking like they’ll go down the technical default route until next year when the RUFO clause goes away,” Ray Zucaro, who helps manage $390 million of emerging market at SW Asset Management LLC, said by phone from Newport Beach, California. “It looks like a 70 percent chance of default.”
Zucaro said he sold his holdings of Argentine government bonds in June because investors have overestimated the chances of a settlement with creditors including Singer’s Elliott Management Corp.
Argentina’s benchmark notes due in 2033 have dropped 6.2 cents from a three-year high on July 11 to 86.3 cents on the dollar, data compiled by Bloomberg show. The bond prices have held up because investors foresee a high recovery value in the case of a default, according to Zucaro.
The upfront cost to buy protection against a default for three months with credit swaps has more than doubled in the past week to $3 million on $10 million of debt, according to data compiled by Bloomberg. The net notional outstanding of Argentine credit-default swaps has surged 32 percent to $1 billion from $756 million on April 11, data compiled by Depository Trust & Clearing Corporation show.
Tim Samples, a professor of legal studies at the University of Georgia, said Argentina may be overestimating the cost of violating the RUFO clause as a negotiating tactic.
“It seems exaggerated that a default is a better scenario than dealing with RUFO liabilities,” he said.
Fernandez seems to have decided not to pay the holdouts, Grupo BTG Pactual said in a report yesterday.
In her televised statement tonight, the president said that Argentine officials could face lawsuits if the RUFO clause is violated. Such an occurrence would destroy the country’s previous debt restructuring, she said.
“It is not that much that they are myopic about the consequences of default,” Andres Borenstein and Alex Muller-Jiskra, analysts at BTG, wrote in the report. “Rather it is fear of the legal consequences of the RUFO clause. The government wants to be 100 percent sure, and nobody could give that sort of assurance.”