Monday, July 7, 2014

Argentina and BNY Mellon – An Update

According to this Reuters report, Argentina credited BNY Mellon’s account at the Central Bank of Argentina with $539 million on June 26 in order to make payment to bondholders. Judge Thomas Griesa wants BNY Mellon to return the money to Argentina, but BNY Mellon cannot because Argentina will not agree to the transfer. Argentina’s position is that the funds no longer belong to it but to the bondholders. BNY Mellon is caught in the middle, since it cannot forward the funds to the bondholders without being held in contempt by the U.S. court. BNY Mellon is seeking guidance from Judge Griesa about what to do.

It is possible that some holders of the restructured bonds will sue BNY Mellon for the funds. In its defense, I assume BNY Mellon will point to the judge’s order.
In addition, if this is not resolved by the end of the month, a committee that ISDA appoints will have to determine whether Argentina has defaulted on the bonds, thus setting up a complex auction process to settle credit default swaps on Argentinian debt. Observers assume that it is likely that Elliot Management’s hedge funds hold to an  unknown extent some CDS on Argentinian debt so that they will get some sort of payout even it Argentina does not do what Judge Griesa wants.

As for Judge Griesa, he appears to have done as much as he can, which is quite a bit, to pressure Argentina to settle with the holdouts. He can hold Argentina in contempt, but that would seem to be mostly symbolic, since he would find it difficult to enforce a fine or jail a sovereign country.
All in all, this is a total mess. After the financial crisis of 2008, it seems that a better system to resolve this sort of problem would be in place and a better system for making determinations of default and settlement of CDS would have been set up.

As for derivatives, whatever the merits of imposing more regulation on interest rate swaps, it was not this type of derivative that played a large role in the financial crisis. It was CDS, which I have argued elsewhere are inherently flawed contracts.      

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