Argentina challenged a U.S. court over the weekend by proposing that "holdout" bond investors be repaid only about one sixth the money federal judges hearing the case say they are owed, setting the stage for a legal showdown in New York.
The terms offered by Argentina are the same as those accepted by bondholders who chose to participate in the country's 2010 sovereign bond restructuring. The holdouts rejected that restructuring and are holding out for full repayment.
Aside from the implications the case has for Argentina's finances, it could also have wide ramifications for the way future sovereign restructurings are carried around the world.
Argentina defaulted on $100 billion in sovereign debt in 2002 at the height of a financial crisis in Latin America's third largest economy. The bonds now under dispute were issued in New York, which is why the case is being heard in U.S. court.
Elliott Management affiliate NML Capital Ltd, one of the lead plaintiffs, has said that it will not accept 2010 terms They and other holdouts are sure to argue that Argentina's proposal does not respond to the court's request.
"The court said 'You owe the holdouts $1.3 billion. Tell us how you are going to pay that to them,'" said Josh Rosner, managing director at research firm Graham Fisher & Co in New York.
"Instead of answering how they will pay the full amount, Argentina responded with a plan for paying a much smaller amount," he said. "Argentina is flirting with technical default, which would take a serious toll its economy."
The specter of technical defaults comes from the fact that a U.S. District Court in New York has said that until the holdouts start getting paid, Argentina cannot make payments to holders of the restructured bonds.
Elliott stands currently to receive $720 million from Argentina following a New York judge's order in November, according to Argentina.
But the bonds NML could take had a market value of just $186.8 million before a major decision in the case last October favoring the holdouts, or $120.6 million as of March 1, the filing said. Argentina estimates NML paid about $48.7 million in 2008 for its stake in the bonds.
"The Republic is prepared to fulfill the terms of this proposal promptly upon Order by the Court by submitting a bill to Congress that ensures its timely implementation," Jonathan Blackman, Argentina's U.S. lawyer, wrote.
Around 92 percent of Argentina's defaulted bonds were restructured in 2005 and 2010, with bondholders receiving 25 cents to 29 cents on the dollar.
But holdouts led by NML Capital and Aurelius Capital Management have fought for years for full payment. Argentina calls these funds "vultures."
In October, the 2nd Circuit upheld a trial judge's ruling by finding Argentina had violated a so-called pari passu clause in its bond documents requiring it to treat creditors equally.
U.S. District Judge Thomas Griesa in Manhattan subsequently ordered Argentina in November to pay the $1.33 billion owed to the bondholders into an escrow account by the time of its next interest payment to holders of the exchanged debt.
The 2nd Circuit heard an appeal of that order on February 27. Two days later, it directed Argentina to provide details of "the precise terms of any alternative payment formula and schedule to which it is prepared to commit."
In its 22-page submission late on Friday, Argentina said that under a so-called par bond option, the bondholders would receive new bonds due in 2038 with the same nominal face value of their current bonds. They would pay 2.5 percent to 5.25 percent a year, Argentina said.
Bondholders would also receive an immediate cash payment similar to what it provided under the 2010 debt swap, Argentina said. And they would receive derivative instruments that provide payments when the country's gross domestic product exceeds 3 percent a year.
The par option is restricted to small investors, unlike the discount option, the more applicable fit for big investors like NML and Aurelius.
Under the discount proposal, holdouts could receive new discount bonds due in 2033 that pay 8.28 percent annually. Argentina said the holdouts would also receive past due interest since 2003 in the form of bonds due in 2017 paying 8.75 percent a year, and GDP-linked derivative units.
Blackman, Argentina's lawyer, wrote that the proposal, unlike what he called the "100 cents on the dollar immediately" formula Griesa adopted, "is consistent with the pari passu clause, longstanding principles of equity, and the Republic's capacity to pay."
It was unclear on Saturday how the court might view Argentina's proposals. The same three-judge panel had said in October, though, that the holdouts "were completely within their rights" to reject prior debt swap offers.
Euginio Bruno, a lawyer and bond restructuring expert with the law firm Estudio Garrido Abogados in Buenos Aires, said the government's Friday proposal "was within expectations, considering the legal constraints on offering anything better than the terms of the 2010 restructuring."
Argentina has a "lock law" that keeps new governments from improving the terms of previous restructurings.
Earlier in the week, the holdouts scored a victory over Argentina when the 2nd Circuit denied a full court review of its October ruling on the equal treatment provision.
The United States had backed Argentina in seeking the review, contending the 2nd Circuit's decision ran "counter to longstanding U.S. efforts to promote orderly restructuring of sovereign debt.
Argentina and holders of its restructured bonds say granting the holdouts 100 cents on the dollar could complicate future sovereign restructurings around the world.
Argentine Vice President Amado Boudou repeated on Saturday that Argentina would continue repaying investors who participated in the restructuring no matter how the U.S. court case is resolved.
"One way or another, Argentina will pay," he said.
The case is NML Capital Ltd et al v. Republic of Argentina, 2nd U.S. Circuit Court of Appeals, No. 12-105.