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Analysis: Argentine debt investors may let law slide to reach deal

By Daniel Bases

NEW YORK (Reuters) - Argentina's prospects for finally closing out its 12-year-old default on $100 billion of debt will depend on more political and legal maneuvering, a motivated U.S. judge and the fatigue of investors, now that it has lost an epic battle with holdout creditors in the U.S. courts.

Negotiating a new deal with the holdouts, who have fought to exercise their investor rights through the courts, potentially violates a provision specifically written to stop anyone getting a better deal than bondholders who participated in two prior restructurings in 2005 and 2010.

"Most people are not going to do anything about it because once the issue is settled the market is likely to rally," said Varun Gosain, portfolio manager at New York-based Constellation Capital Management with investments in Argentine assets and participated in the exchanges, referring to the value of the bonds.

"But just like there are a small number of people who went after the initial restructuring terms, there will be a small number of people who will go after this claim," said Gosain, referring to any negotiated settlement. The exchange bondholders hold about $24 billion in debt that is in jeopardy of coming under a technical default.

The U.S. Supreme Court on Monday declined to hear Argentina's appeal seeking to overturn an order to pay sovereign creditors $1.33 billion, setting off a scramble in Buenos Aires on what it can do now given its legal options are exhausted.

President Cristina Fernandez vowed on Monday night that Argentina would not again default on its bonds and that it would find a way to pay exchange bondholders, the 93 percent of investors who accepted the onerous terms of Argentina's sovereign restructuring.

Exchange bondholders received between 25 and 29 cents on the dollar for their defaulted bonds. By itself, these deals are generally considered among the worst restructurings for investors in the history of sovereign defaults.

Axel Kicillof, Argentina's economy minister, is set to unveil Tuesday afternoon how Argentina plans to make its bond payments to exchange bondholders.

Kicillof has taken a conciliatory approach toward resolving some of Argentina's long-standing disputes, including a deal to pay back the Paris Club of creditor nations almost $10 billion in debt and compensate Spanish oil major Repsol for the seizure of energy subsidiary YPF.

On Tuesday, Standard & Poor's downgraded Argentina to CCC-minus, citing the heightened risk of default.

Holdout investors, led by NML Capital Ltd, a unit of billionaire Paul Singer's Elliott Management Corp, and Aurelius Capital Management have said they are willing to sit down to negotiate with Argentina.

These firms, who specialize in distressed debt investing, have used their deep pockets to press their rights in the courts. Argentina has countered that it is being extorted by the holdouts and if forced to pay would not have enough money without putting its entire economy in jeopardy.

A provision called Rights upon Future Offers precludes Argentina from voluntarily agreeing on better terms with holdouts. The provision expires Dec. 31, 2014, but lawyers following the case say the fact that Argentina is being ordered to pay means it may not apply and could offer the government a face-saving option to strike a deal.

"There is always room for interpretation but I'm not sure this can happen," said Pierre Yves-Bareau, head of emerging market debt at JPMorgan Asset management in London, which holds some of the exchange bonds. "It will be difficult for them to accept repaying a big chunk of their reserves to the holdouts. Also paying part to them won't be fair to people like us."

JUDGE'S DISCRETION

The Supreme Court's decision hurts Argentina's efforts to normalize relations with foreign investors and creditors in order to regain access to international funds.

U.S. District Court Judge Thomas Griesa, who handed down the judgment in the holdout's favor, and has been dealing with the deluge of cases brought in the New York courts, has asked on several occasions why the two sides don't sit down and finally negotiate a settlement.

Griesa has not spoken outside of court, but some who have argued in front of him say he may be willing to work around the June 30 date for the next coupon payment due exchange bondholders. His injunction, which is currently stayed, calls for all the creditors to be paid at the same time or none at all.

"Whatever hostility he harbors toward Argentina – and there's plenty of that – he has repeatedly said, 'Why aren’t you negotiating?' He has no interest in being the guy who causes Argentina to default on $25 billion, $30 billion in foreign debt," said Marco Schnabl of Skadden, Arps, Slate, Meagher & Flom who has argued before Griesa on behalf of Argentine clients.

"Injunctions are amendable. I doubt he would do it on a unilateral request by Argentina" but if both sides asked, "he would give them that in a heartbeat."

(Additional reporting by Alison Frankel in New York and Sujata Rao in London)

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