Argentina’s Secret Plan to Escape Default

By Sheelah Kolhatkar

“Default is not to pay,” Argentina’s President Cristina Fernández de Kirchner declared last week during a dramatic press conference in Buenos Aires. “Conditions for default are stated in the debt emission, in the contract, and a payment block is not in it.” She was referring to the fact that a Manhattan federal judge named Thomas Griesa issued an order blocking Bank of New York Mellon, the trustee that holds $539 million in funds Argentina deposited for a bond payment due by July 30, from distributing the money to holders of the notes until Argentina settles its dispute with a group of hedge funds. Because the payment was blocked, the country was declared to be in default on its debt, sending the markets into turmoil and triggering approximately $1 billion in credit-default swaps.

An examination of the terms of the bonds, however, suggests that Argentina may have outmaneuvered everyone. There’s a way for the country to escape default and still avoid settling with Paul Singer’s Elliott Management and other hedge funds. All Argentina has to do is drop a couple of checks in the mail.

Most bonds of this nature contain a provision saying that the debtor’s obligation to make a payment is fulfilled once it delivers the money to the trustee for the bondholders, which in this case is Bank of New York Mellon. Argentina has done that, so its argument, at least publicly, is that it’s up to the actual owners of the bonds to get their money from BNY Mellon. If a judge in New York is preventing that, it’s not Argentina’s problem.

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