Adding Insult To Injury, Argentina Is Downgraded By S&P: What Happens Next

As reported yesterday, The SCOTUS dealt a major blow to Argentina hopes it would avoid making payments on its "holdout" bonds when it enforced a lower-court ruling that said Argentina can't make payments on its restructured debt unless it also pays holdout hedge funds headed by Elliott Management, best known for briefly seizing an Argentina ship in late 2012. The immediate result was a major rout in the country's sovereign bonds, which also sent Argentina CDS soaring.

And while in a nationally televised appearance Argentina's president Kirchner last night tried to restore some stability to the situation, saying the country wouldn't default on its debt, she once again towed the old party line describing holdout demands as “extortion” and dismissing yesterday’s US supreme court ruling in their favour as “absurd”. In short: she repeated she wouldn't pay the "vulture funds."

"What I cannot do as president is submit the country to such extortion,” she said, repeatedly adding that Argentina would continue making repayments to those lenders who have agreed renegotiated settlements.

She added that, if she were to comply, the lenders who had agreed a haircut “will find a judge who will tell them that they, too, have the same rights.” That would be an outcome that would crash the Argentinian economy.

Sadly for Argentina, this would hardly be the end of it, and about an hour ago, Standard & Poor added insult to injury and lowered its long-term foreign currency rating on Argentina to CCC- from CCC+ citing a "higher risk of default on the country's foreign currency debt."

"The Argentine government has limited capacity to pay the plaintiff creditors while servicing its current debt," S&P said. The rating agency affirmed its short-term foreign currency rating at "C", saying the disruptions on payments due to the adverse court rulings were not likely to affect the government's ability to service debt issued in local currency.

As a result, yesterday's drop in bonds has continued, if at a more moderate pace, and the country's USD bond due 2024 have continued to sink in intraday trading.

One entity that is suddenly very nervous at this most recent development is none other than the de-facto perpetuator of the status quo, the IMF, which is suddenly concerned what message an Aargentina default would send to the rest of the insolvent world. As BBC reported, the IMF said it was concerned about "broader systemic implications".

Some analysts believe it is possible that the Supreme Court's ruling could encourage investors to hold out in other restructurings of sovereign debt.


"The Fund is considering very carefully this decision and, as we have said before, we are concerned about possible broader systemic implications," the IMF said. The Fund is usually closely involved in the financial restructuring of countries in trouble.

Of course, if this was not Argentina but some other insolvent country, preferably part of the artificial monetary construct known as the EU, the IMF would promptly bail the country out. Although considering the bad blood between the near broke nation and the fund, this is hardly on the Agenda.

So what is next for the cash-strapped Latin American country for which the road ahead is suddenly quite "challenging" and default appears increasing like the only way out?

For the answer we go to Citi's Jeffrey Williams who has laid out the five most likely developments.

The Supreme Court of the U.S. denied Argentina’s appeal on the pari-passu case and ruled against Argentina’s position on the Discovery case. We view this as a major blow to the over-sized expectations that the market had come to price in, with most participants expecting a call for the views of the Solicitor General. However, it need not be an altogether negative resolution in the medium term. Indeed, it may end up creating conditions for a negotiation and resolution of the Hold-Out issue at large. The spectrum of possibilities remains quite large

Likely developments:

1) The stay: Argentina is called to the Court to lay down its plans for future legal actions. If Argentina intends to request a re-hearing from the Supreme Court, the Court may want to assess the likelihood of success of that action before deciding on the stay. Furthermore, since the payment of the next coupon is on June 30th, the Court may decide to grant the intermediaries a two week advanced notice and that may effectively lift the stay after the June 30th deadline. Argentina has until July 11 to request a re-hearing of the petition.

2) An umbrella to negotiate: The Court may provide an environment to reach a good faith negotiation between Argentina and the Holdouts. This is likely to be difficult process as it will involve many different type of claim holders, not just the pari-passu case. Any such window of time is likely to be, in our opinion, relatively brief. We imagine a window of time of three months, before the September 30 coupon payments.

3) Argentina plays hardball: Cristina Kirchner (CFK) will take the stage tonight, June 16th, at 8:30pm 00pm EST. What she tells the nation is difficult to assess at this point. One possibility is that she argues that the US Courts have not understood the implications of their decisions. That Argentina enjoys the support of a long list of governments, including the US, France, Mexico, Brazil and many other governments that gave her support over the weekend. Therefore, facing a decision by Courts that are insensitive to this reality, Argentina may have no option but to comply with one of the options opened by the Court: paying nothing to any of the holders of debt. This In the government’s interpretation, this would not be an “economic default”, as Argentina has the resources and will to pay. It is but a “technical default” forced by a legal interpretation.

4) If Argentina plays hardball, then the country may or may not start negotiations in good faith with Holdouts. In one scenario, the country looks for ways to continue servicing the debt owned by exchange bondholders. This scenario was contemplated in the supposedly leaked memo that was discussed in the district court two weeks ago. Another scenario would have Argentina trying to negotiate with all holdouts to resolve the issues as comprehensively as possible.

5) A fifth scenario is that Argentina accepts the Court ruling and decides to pay holdouts the current pari-passu case. This is an unlikely circumstance, in our opinion, as Argentina has repeatedly argued that there is a grave danger that there will be a long list of claimants that will quickly litigate to receive similar treatment. Argentina argued in its Supreme Court filing that these payments could amount up to $15bn. (although we do calculate a similar maximum amount if we include judgment debt as well as debt that has not yet been presented to courts, but none of this debt may be eligible for pari passu treatment. We do not believe a settlement would necessarily represent a large drain on reserves if most of the  payment is in the form of bonds as in other recent settlements.

The road ahead remains uncertain and scenarios become increasingly challenging for Argentina. The next statements out of the country’s maximum authorities will be crucial to shed light over the course of affairs. Having said that, we think that the most likely scenarios are (3) and (4).