A U.S. federal judge said Friday that Argentina’s attempt this week to make a debt repayment to holders of restructured bonds without simultaneously paying holdout creditors was “illegal”.
U.S. District Court Judge Thomas Griesa, who ruled in 2012 in favor of a group of hedge funds that refused to accept debt swaps and sued Argentina for full payment on their defaulted bonds, told the two sides in a hearing Friday in his Manhattan court that they should continue negotiating.
But he also insisted that Argentine must pay the holdouts in full at the same time as it makes it next scheduled payment to the holders of restructured debt.
Any attempt to make payment only to the exchange bondholders is “illegal and will not be made,” Griesa said. “Anybody who attempts to make it will be in contempt of court.”
The judge instructed Bank of New York Mellon, which processes Argentina’s debt-service payments in the United States, to return a $539 million payment that Buenos Aires deposited Thursday in its accounts at the South American country’s central bank.
The judge on Thursday ruled that there were no grounds to grant Argentina’s request for a stay of his order requiring the simultaneous payments to both the exchange bondholders and the holdouts.
He said Friday that a settlement between Argentina and the group of holdout bondholders led by New York-based Elliott Management Corp.‘s NML Capital Ltd unit would be the most “desirable” solution.
The mediator designated by Griesa to oversee the settlement talks - Daniel Pollack, an attorney who specializes in financial litigation - said upon exiting Friday’s hearing that those conversations will resume in the afternoon.
Argentina will enter into technical default if U.S. banks, in compliance with Griesa’s order, do not process its scheduled June 30 payment to the the vast majority of investors who accepted steep haircuts in 2005 and 2010 debt restructurings.
If it does not meet that deadline, the country will have an additional 30-day grace period before it would enter into a full-blown default.
In his November 2012 ruling, Griesa ordered Buenos Aires to repay more than $1.3 billion in defaulted debt to the litigating hedge funds. Including interest, the full amount owed to those bondholders is roughly $1.5 billion.
This month, the U.S. Supreme Court refused to hear the Argentine government’s challenge of that decision and also issued a separate ruling that enables NML and other bondholders to ask U.S. courts to compel Argentina to reveal the locations of assets.
Denounced by Argentina as “vulture funds,” NML and other entities acquired risky Argentine bonds at high interest rates when Buenos Aires defaulted on roughly $100 billion in debt in December 2001 - the largest sovereign default in world history - amid a financial meltdown and economic depression.
Implementation of Griesa’s order also would lead other holdout bondholders that were not part of the litigation to demand full repayment on the defaulted debt, according to Argentine President Cristina Fernandez’s administration.
Argentina says those potential claims would bring the total owed to the holdouts to some $15 billion, equivalent to half of Argentina’s foreign-exchange reserves, and push the country into default.
Fernandez said after the U.S. Supreme Court’s decision that Argentina is willing to meet its obligations to holdout bondholders, but she called for “fair and reasonable” conditions in debt negotiations.