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It appears that Cristina Fernandez's belligerent language has compounded the situation and been taken by Griesa as an indication that the country is unwilling to respect US laws. (Photo: Casa Rosada)
Monday, December 3, 2012
Perspectives

Argentine Flexibility As Default Looms


Unless the court of appeal suspends Judge Griesa's ruling, Argentina is likely to default again next month


BY CARLOS CAICEDO
Exclusive Analysis

On November 27, 2012, Economy Minister Hernan Lorenzino said Argentina would consider some debt repayments to the holdout creditors, the bondholders that refused to join two debt restructuring deals held in 2005 and 2010.

This is a significant departure from Argentina's previous position. Until now President Cristina Fernandez was adamant that she would not pay a single dollar to the holdouts.

The U-turn reflects Argentina's precarious situation following a recent ruling by US judge Griesa ordering Argentina to pay the holdouts $1.3 billion, covering principal and accruing interest, on December 15. This is the same date Argentina is scheduled to pay $3 billion to exchange bondholders, those who took part in the debt restructuring.

Should it fail to pay the holdouts, Judge Griesa has threatened to seize Argentinian funds held in US accounts meant for the repayment of exchange bondholders. However, Argentina appears prepared to default on repayments to those who agreed to previous haircuts than to yield fully to the holdouts. 

It is highly unlikely that Argentina would repay the holdouts' debt at face value as that would require Congress' authorization and it would provoke challenges from those bond holders that accepted large haircuts in Argentina's original debt restructuring.

The sudden conciliatory approach is likely to be part of the legal strategy adopted by Argentina's lawyers in New York in their efforts to successfully appeal Griesa's ruling.

It appears that Cristina Fernandez's belligerent language has compounded the situation and been taken by Griesa as an indication that the country is unwilling to respect US laws.

By showing some flexibility towards the holdouts Argentina would strengthen its case before the appeal court. Unless the court of appeal suspends Griesa's ruling, Argentina is likely to default again next month.

Carlos Caicedo is head of the Latin America division at Exclusive Analysis, a UK-based global risk consultancy. 

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