Judge Says Argentina Can't Pay Some Bondholders


A U.S. federal judge on Friday called Argentina's attempt to pay holders of the country's restructured debt illegal, saying the money should be returned to Argentina.

U.S. courts have barred Argentina from paying those bondholders until the country also pays a small group of holdout creditors who didn't agree to debt-restructuring deals struck in 2005 and 2010.

Argentina on Thursday deposited approximately $539 million in both dollars and euros with the Bank of New York Mellon Corp. in order to make an interest payment due June 30 to the country's restructured bondholders.

Investors and analysts saw the move as a last-ditch effort to avoid a default on those bonds. Unless Argentina strikes a deal with the holdout creditors, which include hedge funds Elliott Management subsidiary NML Capital Ltd. and Aurelius Capital Management LP, in the coming days, it will miss an interest payment due Monday. Then, the clock starts on a 30- day grace period afforded Argentina before the lack of payment is widely recognized as a default.

U.S. District Judge Thomas Griesa said at a hearing in the Manhattan federal court on Friday that the attempted payment was a violation of court orders and that anyone who attempts to pay these bondholders would be held in contempt of court.

"I will enter whatever order necessary to nullify this reported payment" by Argentina, Judge Griesa said.

The cost of five-year credit default swap protection on Argentine sovereign bonds jumped almost 20% after Judge Griesa's remarks. The asking price for protection on $10 million of bonds for five years rose to $3.6 million upfront this afternoon from around $3.1 million at the open, according to Markit.

Argentina's Merval stock index traded 2.8% lower Friday. The price on the country's dollar bonds that mature in 2033, whose interest payment is due on Monday, dropped after the hearing to 84 cents on the dollar, from 86.5 cents at the close Thursday. The yield rose to 10.4%, from 10%, as bond yields move inversely to prices.

At the hearing, a lawyer representing BNY said the bank is aware of the court's previous ruling and hasn't attempted to send the money through to the restructured bondholders. Judge Griesa told BNY's lawyer that the money should be returned to Argentina.

Throughout the hearing, Judge Griesa was visibly frustrated by the lack of progress made in negotiations between Argentina and the holdout creditors. He criticized Argentina's request for more time to negotiate, which was filed on Monday. On Thursday, the court struck down the request, prompting Argentina Economy Minister Axel Kicillof to accuse Judge Griesa of trying to push Argentina into its second default in 13 years.

Judge Griesa said a settlement with holdouts is now unlikely before Monday.

Earlier this week, the judge appointed attorney Daniel Pollack to conduct negotiations between Argentina and the holdouts. Lawyers for the two parties met Tuesday, although no agreement was reached, according to a statement from Mr. Pollack. At the hearing on Friday, lawyers representing both Argentina and the hedge funds expressed a willingness to continue talks.

"Argentina hopes to be able to engage in discussion to resolve this dispute," said Carmine Boccuzzi, the lawyer who represented Argentina.

Robert Cohen, the lawyer who represented NML, said Argentina "defiantly and contemptuously" ignored the court's orders by making the payment. He added, "They simply ignored [the court's orders], thinking they could get away with it."

Judge Griesa also said Argentina isn't allowed to make payments to holders of restructured bonds denominated in euros. A lawyer representing the euro bondholders argued that these bonds shouldn't fall under the judge's jurisdiction because the payments never go through a U.S. bank and the bonds are governed by English law.

Separately, Judge Griesa said payments on local-law bonds, debt that is government by laws in Argentina, are allowed. A lawyer representing Citibank said the bank's Argentine branch expects a deposit for payment on the local law bonds " shortly."

Argentina defaulted on about $100 billion of debt in 2001. The country later offered holders of the defaulted bonds new securities valued at about 33 cents on the dollar. Between the two swaps, investors agreed to exchange almost 93% of the defaulted bonds.

However, a small minority of bondholders opted not to restructure their bonds and instead sued for full repayment. The holdouts have won about $1.5 billion in court awards in the case now before Judge Griesa.

Argentina tried to appeal the case to the Supreme Court, but the Supreme Court denied the appeal on June 16, leaving the country with virtually no legal options left to avoid paying the holdouts. Argentina has refused to pay the holdouts, arguing that a settlement would trigger billions in other creditor claims and bankrupt the country.

Ken Parks and Matt Wirz contributed to this article.

Write to Nicole Hong at nicole.hong@wsj.com

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  06-27-141245ET
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