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Latin America Emerging Markets Research
Argentina: Sovereigns (expectedly) and holdouts (unexpectedly) kick the "pari passu" can down the road
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Recent developments in Argentina's pari passu litigation reduce the risk that 'pari passu' litigation represents for the performing sovereign bond market. This validates an environment where bond prices can grind higher.
The developments include:
· A surprise: Plaintiffs NML requested an extension to file their reply to Argentina's appeal to the US Supreme Court. If granted (which seems likely) holdout creditors—originally scheduled to file this week—will be filing on May 7th. This delay in filingwas unexpected and goes against the rapid filing.
· A confirmation:Mexican Finance Minister confirmed our expectations that other sovereigns will be accompanying France with amicus briefs in support of Argentina's appeal (actual filings due March 24). We have been expecting that at least 3 sovereigns (the third likely to be Brazil) could file amicus briefs (see Argentina: To file pari passu amicus briefs or not to file them — that is the question faced by other sovereigns, Morgan Markets, March 14, 2014).
Both are good news for performing bondholders.
The first development (in conjunction with the fact that Argentina has 14 days after plaintiffs response to file a reply— and could also ask for an extension) suggests that the potential Supreme Court conference for deciding whether to take the case or not is likely to run up against summer recess period pushing the process out to the 2H of the year.
The second development raises awareness of cross-border implications of the pari passu case. This improves the likelihood that when the Supreme Court does convene, it opts to ask the Solicitor General for the view of the US government (given the foreign policy implications).
The request for the Solicitor General's view by the Supreme Court has been our longstanding base case scenario. Key to note is that if asked, the SG does not face any deadline to file a response.
The scenario where the litigation—and hence, the market's concern for risk of technical default associated with it—is pushed into 2015 is looking highly probable.
The reason why holdouts are embracing "delay tactics" (instead of Argentina) is unknown. But will allow markets to entertain the prospects of a negotiated solution. We are skeptical, however, because we view negotiations as a last resort option for Argentina and the persistence of the legal battle offers Argentina an alternative means to win the case.
abrazo
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