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Argentine Passes Legislation to Pay Debt Locally

Argentine Passes Legislation to Pay Debt Locally

Posted by Juan Gavasa on September 11, 2014

Argentina’s lower house approved a bill that would allow the government to pay international bonds locally in an attempt to get around a U.S. court ruling that caused the nation to default for the second time in 13 years.

The measure, which would also permit overseas investors to swap their bonds for new debt issued under domestic law, was approved today by a vote of 134 to 99. The bill was passed by the Senate on Sept. 4 and now must be approved by President Cristina Fernandez de Kirchner, whose government proposed the initiative last month.

Investors may have difficulty transferring funds outside the country without U.S. intermediaries, which are banned from assisting Argentina. A U.S. judge blocked an overseas interest payment due June 30 after the government refused to comply with an order to pay holders of debt from a 2001 default at the same time it pays bondholders that accepted restructurings in 2005 and 2010. Any attempt to circumvent the ruling is illegal, U.S. District Judge Thomas Griesa said Aug. 21.

“It’s difficult to see what practical effect for resolving this problem the law could have,” Maximiliano Castillo, director at Buenos Aires-based consultancy ACM, said by phone. “This is going to cause more problems than it solves since you could be creating more holdouts and be declared in contempt of court. It will create more problems for Argentina in its relations with the U.S. and international financial institutions.”

Bond Payments

The bill would allow Argentina to deposit bond payments in state controlled Banco de la Nacion Argentina, instead of Bank of New York Mellon Corp. A $539 million payment that Argentina made by the June 30 due date remains with BNY Mellon as Griesa blocked the bank from distributing the funds.

The proposal would also allow the government to pay holders of bonds Argentina defaulted on in 2001 under the same terms as the rest of its restructured debt, regardless of whether creditors accept the swap. Bondholders can also choose to accept payments in France, instead of Argentina.

The government’s next debt payment of $200 million is due Sept. 30.

“An absolute majority was achieved, ratifying a clear position,” Cabinet Chief Jorge Capitanich said at a press conference today. “Those who voted in favor are defending the sovereignty of the nation; those who voted against agree with what the vulture funds are proposing.”

‘Many’ Bondholders

While Capitanich said Sept. 5 “many” bondholders have publicly expressed their willingness to receive payments locally, Fintech Advisory Inc.’s David Martinez is the only investor who could be found in a search for those who have made public statements backing the debt exchange proposal.

Fernandez has argued that agreeing to pay the creditors who successfully sued the country for full repayment on the defaulted debt, led by the billionaire Paul Singer’s NML Capital Ltd., would expose the nation to at least $120 billion in claims because of a clause in exchange bonds that prevents the government from voluntarily offering better terms to holdout creditors than to bondholders that accepted losses of about 70 percent.

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