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Argentina hopes to reverse NY debt ruling

Published:Tuesday | November 27, 2012 | 12:00 AM
Argentina's President Cristina Fernandez. - AP

Argentina is refusing to budge in its billion-dollar debt showdown in a New York federal court, preparing an appeal yesterday that it hopes will stave off another devastating default.

Judge Thomas Griesa left Argentina without any wiggle room, ordering the government of President Cristina Fernandez to pay US$1.3 billion to the so-called "vulture funds" by December 15, even as it pursues its final appeals.

If Argentina pays the plaintiffs, lawyers representing other holders of defaulted debt, totalling more than US$11 billion, are expected to demand immediate payment as well.

If it refuses, the judge said the Bank of New York Mellon must stop payment on the quotas Argentina has religiously honoured to a much bigger group of bondholders who agreed to provide the country with debt relief in 2005 and 2010. That group, together, holds more than US$20 billion in restructured debt.

The ruling was issued just before the long Thanksgiving holiday weekend, and the consequences for Argentina were severe. The value of Argentina's restructured bonds slipped in Monday trading, and the cost of insuring this debt against default jumped 51 per cent on Friday alone, according to data from Factset.

This insurance - in the form of credit default swaps - now reflects a 75 per cent probability that Argentina will stop paying within the year, Argentina's El Cronista newspaper reported Monday.

Argentina's Economy Ministry was closed Monday for another national holiday, Sovereignty Day.

But Economy Minister Hernan Lorenzino told the pro-government Pagina12 newspaper that the appeal will restate the same arguments Argentina and others made already: that by enabling holdouts who refuse to go along with debt restructurings to tap into payments made to other innocent parties, the ruling endangers the US financial system as well as the ability of any government to rescue its people from economic crisis.

These arguments were already made by the US Federal Reserve, the Clearing House trade group of commercial banks and other interests holding US$20 billion in restructured Argentine debt, and Griesa dismissed them. Now Argentina is counting on a long-shot appeal.

Meanwhile, the judge's ruling has already made borrowing much more expensive in Argentina, not only for the government, but for any enterprise that needs financing.

And that has some analysts predicting dire consequences. Economist Arturo Porcenanski at American University in Washington told The Associated Press that he believes this could be the beginning of the end of the Fernandez government, as Argentina's deepening recession and financial turmoil lead to growing social unrest and to political crisis.

If the ruling is upheld, the Argentine government will need to pay out a total of nearly US$5.5 billion in December alone. That is more than 10 per cent of the total reserves for a country already struggling to pay salaries to public employees and maintain subsidies that have shored up vast sectors of the economy.

what's at stake

Fernandez and her ministers didn't offer any comments Monday on the case, but the president described what's at stake earlier this month as she inaugurated the opening of another factory, part of her long campaign to use reserves to revitalise Argentina's domestic economy before rewarding what she calls international speculators.

Argentina's history shows that only through growth can a country emerge from a default and pay its debts, she said.

"We won't pay debts at the cost of hunger and the exclusion of millions of Argentines, generating more poverty and social conflict so that the country explodes again," she said. "We won't pay if it means more Argentines are denied access to education, health, housing, a decent job.

"We know that debt is a key problem, but we won't pay it in any way they want. And this isn't a matter of ideologies. It's not stubbornness," the president said. "It's a cold and rational reading of the numbers and the economy. It's acknowledging with realism what the situation indicates."

- AP