NEW YORK, Aug 21 (IFR) - Argentina's latest debt swap proposal may have made resolution of its default mess an even more distant prospect, but the sovereign's bond prices still remain surprisingly robust.
Indeed the latest gambit in the long-running Argentine saga - a complicated swap that risks running afoul of US law and that most believe can't work - has hardly hit prices at all.
Argentina's dollar bonds dropped two points Wednesday when the debt swap plan was announced, but that was a far cry from the freefall that many in the market were expecting.
Discounts were trading Thursday at 79.50-81.00, down from the 83.25 seen at the Tuesday close, while Pars were quoted as low as 46.50-47.50 before actually rebounding to 49.75-50.25.
"The reality hasn't hit bond prices," said Claudia Ribeiro de Castro, a senior analyst at Oppenheimer Funds. "To see Discounts with an 80 handle seems strange."
One reason may be that most major holders of the sovereign's debt are now hedge funds and distress players who have already accepted that the Argentina fight will be a long one.
With a longer-term view, and being less worried about short-term fluctuations, they may now see no hope of a resolution until perhaps 2016, months after the next presidential election.
Until then, there may be little to do but wait.
"Investors are readjusting expectations slowly from what they thought was a short-lived technical default to what might become a fully fledged and long default," said Alejo Czerwonko, an economist in the chief investment office of UBS Wealth Management.
He called Argentina's latest proposal "yet more evidence that the willingness to negotiate with holdouts is just not there".
The legal technicalities of the debt swap proposal alone mean that investors will see no immediate resolution to a debt battle that has churned on for more than a decade.
US judge Thomas Griesa has ruled Argentina must make holdout creditors whole when it next makes a payment to holders of its restructured bonds.
After a US Supreme Court appeal failed, Argentina now wants to swap the 2005 and 2010 restructured bonds into local-law instruments in an effort to get round Griesa's ruling.
While Argentina may not fear being in contempt of US court, however, many connected to Argentina's debt will - meaning the proposal is fanciful at best, if not outright impossible.
Under the plan, Bank of New York Mellon (BNY) would be replaced as fiduciary agent on the bonds with Argentina's state-controlled Banco de La Nacion.
BNY and other intermediaries such as DTC, Euroclear and Clearstream would likely need to be all on board for the swap to work.
"Since the bonds are in global form, they have to be actually exchanged in the clearing systems," said Antonia Stolper, a partner at law firm Shearman & Sterling, which is not directly involved in the litigation against Argentina.
"If the clearing systems are enjoined from helping the exchange offer pursuant to Judge Griesa's order, it's hard to see how you actually effectuate the exchange offer."
The court would "hold in contempt anyone helping Argentina circumvent the US ruling", said Czerwonko from UBS.
"We are very skeptical that the proposed plan will be implementable," he said.
Many if not most Argentines heartily agree with the administration of President Cristina Fernandez de Kirchner, which calls the holdouts - led by NML Capital and Aurelius Capital - "vulture funds".
With the next presidential election not coming until October 2015, Kirchner has already suggested that any resolution of the fight should be left for her successor.
And many see this week's debt swap proposal as a political stunt to play to the domestic audience and not a realistic option to save Argentina from further economic turmoil.
"Argentina is an example of how domestic politics is more important than gaining access to the capital market," said Peter Lannigan, head of EM strategy at CRT Capital Group.
"Oftentimes political objectives trump what governments should be doing economically," he said.
But some observers suggest that, as the clock ticks away, Argentina may find it needs access again to the credit markets - and to dollars - before Kirchner's term expires.
And that, they say, could provoke a significant re-think in Buenos Aires.
"The economy in Argentina could put pressure on the Kirchner administration to change its stance," said John Baur, a portfolio manager at Eaton Vance, which holds Argentine debt.
"We will be looking at how that plays out - and at how Kirchner's approval ratings evolve over the next few months." (Reporting by Paul Kilby and Davide Scigliuzzo; Editing by Marc Carnegie)