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Paul Singer Will Likely Collect Most of his $1.3 Billion Even as Argentina Defaults on Debt Payments

The Global Financial Context: Paul Singer

Rating Agency Standard & Poor’s says Argentina is in default of part of its sovereign debt as of yesterday.

Argentina has failed to come to an agreement with a group of of its creditors before the end of a 30-day grace period it had, to make a scheduled $539 million interest payment to a group of bondholders. The payment was initially due June 30.

The scheduled payment was then blocked by Judge Thomas Griesa of New York’s Federal District Court, which came as the successful culmination of years of legal efforts by a number of distressed debt investors, including Paul E. Singer’s NML Capital, and Mark Brodsky’s Aurelius Capital Management, to seek payment on more than $1.3 billion of defaulted bonds (including interest) they had picked up at a big discount.

Just last June, the U.S. Supreme Court declined to get involved in the case.

Even Daniel Pollack, the man Judge Griesa had appointed as a mediator, was hoping a permanent default on the loan could be averted, saying “Default cannot be allowed to lapse into a permanent condition, ” adding “Or the Republic of Argentina and the bondholders, both exchange and holdouts, will suffer increasingly grievous harm, and the ordinary Argentine citizen will be the real and ultimate victim.”

Others thought it less of a big deal than back in 2001, when the initial, much larger defaults occurred. The New York Times today is quoting Estanislao Malic, an economist at the Center for Economic and Social Studies of Scalabrini Ortiz in Buenos Aires, as saying “Argentina has been living in a default reality for over 10 years, ” referring to its lack of access to international borrowing markets since that 2001 financial crisis. “This default is not a drastic change. Nothing much will change.”

One of the primary reasons Argentina has not entered into serious negotiations with Singer and the other hold-outs so far, is that paying them could cause Argentina even more trouble.

Under the terms of the two subsequent restructuring, in 2005 and 2010, when Argentina’s original $95 billion of sovereign debt was slashed down to about $30 billion, those who took the restructured debt at the same time insisted on a new clause, called Rights Upon Future Offers, or RUFO. Under this clause, if the Argentine government ever paid anybody more money under the old bonds, they would then be liable to pay those who had accepted the restructured bonds as well.

This clause applies until January 2015, and is a good reason for Argentina to pause before paying Singer a penny earlier.

To date, Argentina’s president Cristina Fernández de Kirchner has publicly sworn not to pay vulture investors a penny. Yesterday, the country’s economy minister Axel Kicillof said, “We will not sign any agreement that could compromise the future of Argentineans.”

However, today the Spanish newspaper El Pais is offering an alternative scenario, one that’s actually rather sophisticated. El Pais is quoting Argentinean financial daily Ámbito Financiero, who claims that the country’s private banks, meaning not the treasury of the sovereign, have reached their own private deal with the “vulture funds.” Under this deal, Argentina’s private banks will pay the holdouts the full amount owed, making the country’s default a very short-term situation.

As an agreement between private parties, if true, this would mean that the Argentinean government itself would not be legally bound by the RUFO clause should other creditors show up in the future demanding that their bonds be repaid in full as well.

This morning, however, according to El Pais, another Argentinean newspaper, La Nación, is reporting that such a deal with the private banks appears to be stalled, but not necessarily done with for good. So Paul Singer and his friends may still get some of their money yet.

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