The Supreme Court has responded to Argentina’s request to have its case against hedge-fund creditors heard with a resounding, unquestionable no.
“This is the end of the line for Argentina in the judicial appeal process. It has nowhere else to turn,” said Richard A. Samp, chief counsel of the Washington Legal Foundation. “It is true that Argentina is entitled any time in the next 25 days to ask the Supreme Court to rehear its petition. But because the Supreme Court never grants rehearing petitions, there is no reason to think that the Second Circuit will wait to lift its stay until after the futile rehearing procedure has been exercised and resolved.”
Argentina was asking the court for two things that came from one specific disaster: its 2001-2002 default. At that time, a bunch of hedge funds bought Argentine debt, and a group of them, led by Elliott Management’s Paul Singer, refused to take a haircut on that debt when Argentina refinanced in 2005 and 2010. Argentina refused to pay, so the holdouts chased the country’s money around the world, even commandeering an Argentina war vessel in Ghana.
Argentina was asking the Supreme Court to reverse a decision made by a lower court that it pay every single cent it owes. It was also asking the court to stop the holdouts from discovering its money all over the world, arguing that the chase was a violation of the Foreign Sovereign Immunities Act.
But no. Denied and denied.
“America’s highest Court has spoken,” said a spokesman for the holdouts, NML. “Now it is time for Argentina to honour its commitments to its creditors, which would benefit both Argentina’s economy and its international standing.”
This was unexpected. Most analysts thought that the court would hand Argentina more time by asking for the White House’s opinion through the solicitor general.
This flat-out denial means that Argentina must default on its debt to creditors or negotiate with the “vultures.” In the meantime, the lower court that mandated Argentina pay will likely lift its stay on payment in the next few days.
That’s when things could get ugly, unless Argentina makes it clear that it’s willing to negotiate and does so before its next payment would need to be made.
And it can negotiate now, because according to its bond prospectus, it simply could not voluntarily negotiate with the holdouts until 2015. Basically, it had to have no other option.
“There has been considerable speculation that Argentina will respond to a denial of its certiorari petition by defaulting on all existing bond obligations. A decision to default would serve no one’s interests and is certainly not a decision that Argentina is “forced” to make, as it sometimes has asserted when speculating about what it would do when this day of reckoning was reached,” said Samp.
While default may not be coming, nothing has been resolved yet, and that means chaos. Major Argentine stocks Edenor and YPF fell 13% and 17%, respectively. Argentine bond yield spread over U.S. Treasurys +60bps to 7.97pps, showing that investors see the assets as more risky.
“I think negotiations will start,” says Federico Zaldua an Argentina-based trader on Itau BBA’s Latin America bond desk.
Last week he told Business Insider that he would be buying Argentine bonds during this chaotic period. Right now prices will dip, but as the situation stabilizes so will the bonds.
Then again — and this would be totally nuts — Argentina could refuse to negotiate.
As Zaldua said last week: “the disaster window is always open in Argentina.”