Top U.S. court won't hear Argentina bond dispute appeal

Reuters

By Lawrence Hurley and Hugh Bronstein

WASHINGTON/BUENOS AIRES, Oct 7 (Reuters) - The U.S. SupremeCourt on Monday declined to hear a preliminary appeal filed byArgentina over its battle with hedge funds that refused to takepart in two debt restructurings stemming from the country'scatastrophic 2002 default.

While not good news for President Cristina Fernandez, thecourt's decision did not alter a lower U.S. court's stay on aruling ordering Argentina to pay the funds 100 cents on thedollar for the defaulted paper they hold.

Funds that reject the lower payments offered by Argentina'srestructured bonds and demand full repayment of original debttotaling $1.3 billion have filed suits that have bounced aroundU.S. federal courts for more than a decade and could continuewithout final resolution for another year.

World markets are watching the case for the implications itmight have on future sovereign debt restructurings. TheInternational Monetary Fund has voiced fear that if Argentina isforced to pay the holdouts, it would make it more difficult forcash-strapped countries to re-negotiate their bond obligations.

Market reaction to the Supreme Court announcement was muted,with economists stressing the importance of the maintenance ofthe stay. Argentina's sovereign risk spread tightened 7 basispoints to 998 over safe-haven U.S. Treasuries while the rest ofJP Morgan's Emerging Market Bond Index Plus was flat at344 basis points, indicating that Argentina remains the biggestdefault risk in the market.

"The Supreme Court's decision to not hear our appeal duringthis session does not change anything," Finance Secretary AdrianCosentino said in a statement, citing litigation pending inlower U.S. courts, which could lead to another request for highcourt review next year.

Considering that Argentina can make all the same legalpoints in its next petition to the Supreme Court as it did inthe one rejected on Monday, local analysts said it wasreasonable that the high court was reluctant to enter the legalimbroglio while lower court appeals are still unresolved.

"It's the logical outcome," said Buenos Aires-basedeconomist Guillermo Nielsen, who as finance secretary helpedpush through Argentina's debt restructuring in 2005.

FERNANDEZ SIDELINED

Fernandez is to be operated on Tuesday for a cerebralhematoma, taking her out of action in the midst of the courtbattle and three weeks before a key mid-term election that willdetermine the clout she enjoys in Congress during her final twoyears in office..

Fernandez vows never to pay the holdouts, whom she deridesas "vultures" for picking over the bones of the 2002 default,which pushed millions of middle class Argentines into poverty.

The refusal to pay the holdouts in the face of a final U.S.court order to do so could pave the way for another default, asArgentina would be blocked from paying the holders ofrestructured bonds as well.

Easily re-elected in 2011 on promises of more governmentintervention into Latin America's No. 3 economy, Fernandez hasseen her popularity wane due to high inflation andconfidence-sapping foreign exchange controls meant to haltcapital flight.

END GAME

Monday's Supreme Court ruling means it will not at this timereview an October 2012 decision by the 2nd U.S. Circuit Court ofAppeals in New York in which the court said the Argentinegovernment had broken a contractual obligation to treatbondholders equally.

The Supreme Court's refusal to get involved means litigationin lower courts continues, with Argentina able to seek highcourt review again at a later date when there is a final rulingin the appeals court.

In August, that court issued another ruling, upholding alower court's order that Argentina pay the bondholders $1.3billion. The court stayed its decision pending possible SupremeCourt review. Argentina also has asked the appeals court toreconsider its decision.

"If the stay is maintained, the likelihood of a technicaldefault is low, at least in the near term," said IgnacioLabaqui, who analyses Argentina for Medley global Advisors.

The case's end-game has meanwhile shifted to the politicalarena in Buenos Aires, where the ailing Fernandez is in thetwilight of her second term and faces a likely poor showing byher candidates in the Oct. 27 mid-term election, said GaryKleiman, of emerging markets consultancy Kleiman International.

"With these judicial and political power setbacks, acompromise solution to the long holdout saga involving at leastindirect negotiations could finally be on the horizon," he said.

In two restructurings, in 2005 and 2010, creditors holdingaround 93 percent of Argentina's debt agreed to participate indebt swaps that gave them 25 cents to 29 cents on the dollar.

But bondholders led by hedge funds NML Capital Ltd, a unitof Paul Singer's Elliott Management Corp, and Aurelius CapitalManagement went to court, seeking payment in full.

The case before the Supreme Court was Argentina v. NMLCapital, 12-1494.

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