LONDON, July 29 (IFR) - Argentina will find itself in its second default of the 2000s on Thursday unless a last-minute deal is reached with holdout creditors who have rejected a debt restructuring deal.
The long-running battle between the government and the holdouts finally comes to a head at midnight Wednesday in New York, when a 30-day grace period - for a belated bond interest payment due back in June - expires.
US Judge Thomas Griesa, a key player in the dispute over the US law bonds, appointed a mediator for talks earlier this month. But Argentina and the creditors did not meet face to face.
"We are not happy that it has come to this," a source close to the holdouts told IFR on Tuesday. "We have always maintained that this can easily be resolved."
Over nearly a decade, however - since Argentina's first debt restructuring in 2005 - the country repeatedly said it would never make whole what it deemed the "vulture funds" that make up the bulk of the holdout creditors.
Many of the holdouts bought Argentine bonds at a fraction of face value as the country plunged into a financial crisis around the start of the 2000s - and they want the bonds paid in full.
But the majority of bondholders at the time accepted a 2005 debt restructuring for 25 cents on the dollar. Argentina insists that a clause in the bonds would leave it open to legal claims from those who took the deal and had not been offered the same full payment terms.
As those who accepted the exchange accounted for more than 93% of Argentina's then-bondholders, having to make them whole as well would be tremendously expensive for the country.
The source close to the holdouts insisted the argument about the clause, which expires at the end of this year, was largely without merit.
Griesa in 2012 ordered Argentina to pay the holdouts in full, a total of US$1.33bn, the next time it made an interest payment to the holders of the restructured bonds.
The US Supreme Court rejected Argentina's final appeal against that ruling on June 16 this year - just two weeks before the country was to make the June 30 payment to the exchange bondholders.
Argentina has delivered the necessary money to its trustee banks - including Bank of New York Mellon (BNY) - to pay those bondholders.
But Griesa blocked the payments from going through and warned against any attempt to subvert his ruling. The banks, wary of being found in contempt of court, have complied.
In yet another plot twist, however, the judge said Monday he would allow holders of exchange bonds in US dollars issued under Argentine law to be paid with impunity on this occasion.
He said he would allow it this time because of a technicality - the bonds in question bore the same securities identification number as other bonds Argentina issued in restitution to Spanish oil company Repsol, whose stake in Argentine energy company YPF the government nationalised in 2012.
Sources close to the situation said that, if a deal is not struck in time, BNY would notify bondholders on Thursday morning that their payments would not be delivered.
Even if an eleventh-hour agreement is reached, it is understood that it would take two days for BNY to pay bondholders via clearing houses, putting any eventual payment outside of the grace period.
At that point, cross-default clauses included in the restructuring documents would put around half, or US$29bn, of Argentina's exchanged bonds in default, lawyers familiar with the dispute told IFR.
"At least 25% of holders of each series of notes can vote to accelerate [payment on their own bond holdings]," one of lawyers said.
"The timing of that vote is uncertain, but it will all run through BNY."
Judge Griesa himself ordered a stay of his own 2012 ruling while the Supreme Court considered Argentina's appeal, in order to allow the country to keep paying its other obligations.
The holdouts - led by NML Capital, a subsidiary of Elliott Management, and Aurelius Capital - could in theory accept another stay so that Argentina could pay its exchange bondholders and possibly avert the default.
But that permission is highly unlikely to be granted, given that the two sides appear not to have got closer to a deal even after the mediator was appointed.
This hasn't prevented last-ditch attempts by some exchange bondholders, who reportedly called on Griesa on Tuesday to issue a stay - and prevent any technical default.
Some holders of the exchange bonds have even said they would waive the so-called RUFO (Rights Upon Future Offers) clause if it would help the negotiations.
But one restructuring adviser said Tuesday that a default looked to be an "ever-increasing certainty".
If no further stay is allowed, and Argentina still refuses to pay the holdouts in full, then the country looks headed to default - at least as long as the banks comply with Griesa's order.
"Exchange bondholders will ostensibly have to make a choice to push ahead with litigation due to lack of payment," the source close to the holdouts said.
"The people who lose here are the current exchange bondholders, who would have to start their own process of litigation or decide what course to take."
If the event of a default, Argentina may attempt to make another offer to swap the exchange bonds into local Argentine law instruments in order to keep receiving payments. That offer could also be extended to other holdouts.
It is uncertain if such a proposal would be acceptable to NML, Aurelius and related plaintiffs. Any malcontents could simply point to Griesa's original ruling - and demand 100% of their claims.
Some in the market think Argentina will come to an agreement with the holdouts next year anyway, after the expiration of the RUFO clause.
But for now at least, the holdouts show no sign of backing down - and even Argentina's second default since 2001 would have little immediate effect on their position.
"Nothing really changes," the source told IFR. "Our discovery, our injunction and our case all will continue as they had always been." (Reporting by Chris Spink in London; Additional reporting by Paul Kilby, Joan Magee and Davide Scigliuzzo in New York; Editing by Marc Carnegie and Natalie Harrison)