On JUN 18 the US Court of Appeals for the Second Circuit lifted the stay on Judge Thomas Griesa’s (NY-Southern District) previous ruling after Argentina was denied an opportunity to have its case against bond restructuring holdout NML Capital heard by the Supreme Court two days prior.
This effectively forces Argentina to make good on $1.5B of overdue credit on JUN 30 (or be forced to via seizures of int’l assets) – the same day it owes an additional $900M to bondholders that took place in the country’s 2005 and 2010 restructurings of 92% of the country’s 2001 $95B sovereign default at 29 cents on the dollar. Moreover, the ruling prevents Argentina from prioritizing payments on restructured bonds over those of the holdout paper.
Argentine policymakers rightfully fear the ruling opens the country up to an additional ~$15B of likely claims by other holdout creditors – effectively putting more than half of the country’s $28.8B in FX reserves at risk. It’s worth noting, that Argentina uses FX reserves as it primary source of USD liquidity.
One key issue to monitor over the next week is that a clause in the aforementioned restructuring contracts prevents other bondholders from receiving better deals in subsequent negations – an option Argentine leaders have signaled they are likely to pursue.
This intention was stated less than a week after Argentine financial markets were roiled by Argentine President Cristina Fernandez de Kirchner and Economy Minster Axel Kicillof’s aggressive remarks following the decision to lift the stay; they referred to the decision as “extortion” and said they would attempt to transfer their restructured foreign law bonds to local legislation in order to skirt the ruling.
Specifically, the Buenos Aires Stock Exchange’s benchmark Merval Index dropped -10.9% and -4.9% on JUN 16 and JUN 19, respectively. The Argentine peso declined -6% the black market to 12.40 per USD on JUN 19, its first day back “trading” since JUN 13. Fast forward to today, the Merval Index is up +10.4% since last Monday (JUN 16) on what appears to be a change of heart among the Argentine brass with respect to the ruling and threats of technical default.
There’s follow-through in the bond market as well; the country’s 2021 notes have rallied 9.63 cents on the dollar from their JUN 16 low to 97.27. Argentina’s 5Y CDS have tightened -1190bps from their JUN 17 wides to 1437bps. The market likes what optically appears to be a shift, on the margin, in the direction of less-crazy policy out of the Fernandez regime. Her decision to eventually award Spain’s Respol $5.1B after their 2012 expropriation of YPF and her decision to settle $9.7B worth of obligations with the Paris Club in late-MAY is supportive of this view.
Perhaps the “Fernandez discount” is on the brink of being sustainably eroded. If that is the case, Argentina is a country that could stand to see increased international interest in its financial markets on the political change catalyst; in fact, Argentina is not unlike India or Brazil in this regard.
In addition to this, our TACRM system is giving us two thumbs up on the ARGT etf here. From a quantitative perspective, the index fund is signaling “buy” on an idiosyncratic basis and, from a top-down perspective, both EM Equities and Commodities remain “buys” at the primary asset class level. The latter is supportive of marginal improvement in Argentina’s creditworthiness due to likely improvement in the current account balance (commodities account for ~65% of Argentine exports).
We don’t think it’s prudent to build a materially sized position in Argentine stocks; nor do we think it’s a long-term holding without further color on the holdout negotiations or a continued willingness for the Fernandez government to be less crazy. Moreover, the country’s debt ladder would seem to suggest that it’s far from out of the woods; it owes $10.3B to international creditors in 2015, $12.7B in 2017 and $12.1B in 2018.
Time will tell. For now, happy squirrel hunting!
Associate: Macro Team
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