By Nicole Hong, Ken Parks and Matt Day
Stocks and bonds in Argentina tumbled following the country's
second default in 13 years, as doubts emerged about the prospects
for a bank-engineered deal to resolve a standoff with hedge-fund
creditors and government officials suggested they could take the
fight to an international court.
Aurelius Capital Management LP, one of Argentina's creditors,
played down media reports that banks were preparing to purchase the
so-called holdouts' bonds. Argentine media had reported that
private-sector banks were attempting to arrange a deal to help
Argentina pay off debt it owes the funds, which have sued for full
payment on bonds the country defaulted on in 2001.
J.P. Morgan Chase & Co. was in talks to buy bonds from a
group of hedge funds demanding full payment from Argentina, a
person familiar with the matter told The Wall Street Journal.
"Aurelius has received no such proposal that we considered
worthy of serious consideration," the hedge fund said in a
statement.
Argentina's benchmark Merval stock index was down 6.5% late
afternoon on Thursday.
Argentina's dollar-denominated bonds due in 2033, on which an
interest payment was due on Wednesday, fell to near 90 cents on the
dollar Thursday, from a closing price of 96 cents late Wednesday,
traders said. Bond yields rose to 9.7%, from 8.8%. Prices move in
the opposite direction as yields.
Still, analysts said investors were reluctant to sell while
there was prospect of a resolution.
"The expectation of a bank deal is supporting bond prices," said
Siobhan Morden, head of Latin America strategy at Jefferies LLC.
"But it's difficult to trade these headlines when you're getting
whiplashed" by sharp price moves in thin trading. "Most people have
adopted their view, taken their positions, and waited to see what
the final outcome will be, " Ms. Morden said.
Investors and analysts view a deal between banks and the holdout
creditors as the best hope to pull Argentina out of default. A U.S.
District Court has ruled that Argentina must pay the so-called
holdout creditors when it pays holders of restructured bonds.
On Wednesday, a 30-day grace period on the interest payment ran
out and Standard & Poor's Ratings Services declared the country
in default on some bonds. Fitch cut Argentina's foreign currency
rating to restricted default.
The International Swaps and Derivatives Association was to rule
on Friday whether Argentina's failure to make certain bond payments
would trigger a payout on insurance contracts linked to that
debt.
In Argentina, cabinet chief Jorge Capitanich said the country's
situation raises questions about the "precariousness of the U.S.
justice system," and said the government would take its battle to
the International Court of Justice in the Hague. Government
negotiators ended talks in New York on Wednesday with a U.S.
court-appointed mediator and flew back to Buenos Aires.
Argentina's latest default can trace its roots to the country's
decision to repudiate about $100 billion in debt during a deep
economic crisis in 2001. After years of confrontation with
creditors, investors exchanged almost 93% of their defaulted bonds
for new securities in restructurings in 2005 and 2010 that gave
them just 33 cents on the dollar.
But some investors refused to take the new bonds, with many
suing in U.S. courts for full repayment. These included hedge funds
led by Elliott Management Corp.'s NML Capital Ltd. and Aurelius
Capital Management LP, which have won about $1.6 billion after
years of litigation.
U.S. courts had jurisdiction over these lawsuits because
Argentina had agreed in some of its bond contracts to resolve any
disputes under New York law.
In a statement early Thursday, NML said the mediator "proposed
numerous creative solutions," but "Argentina refused to seriously
consider any of them, and instead chose to default."
After Argentina denounced several U.S. court rulings awarding
judgments to creditors and consistently refused to pay the
holdouts, U.S. District Judge Thomas Griesa issued an unprecedented
ruling in 2012 that barred Argentina from paying its restructured
bondholders unless it also paid the holdouts. That ruling was
upheld by the Second Circuit Court of Appeals and in June the U.S.
Supreme Court declined to hear Argentina's appeal.
Judge Griesa had scheduled a hearing on Friday. A clerk for the
judge said the hearing would discuss Argentina's default and "where
the parties go from here."
A prolonged default would pressure an economy already mired in
recession, potentially leading to higher inflation and a weaker
currency. The breakdown of negotiations complicates Argentine
President Cristina Kirchner's efforts to stabilize the economy
before she steps down in December 2015.
Argentina deposited $539 million for the interest payment on
restructured bonds with Bank of New York Mellon Corp. on June 26.
On Thursday, BNY Mellon sent a letter to bondholders explaining why
the interest payment was missed.
"The nature and timing of any future court order regarding the
funds are not yet known," the letter said.
Mr. Capitanich, the Argentine cabinet chief, argued that the
country isn't in default because it deposited the payments with the
trustee on time. Investors should pressure the bond trustee to get
their money, he said. "Many bondholders who participated in the
restructurings don't have an aggressive judicial attitude as if the
money wasn't important to them. What they ought to do is demand
their payment."
Emily Glazer, Katy Burne and Ben Edwards contributed to this
article.
Write to Nicole Hong at nicole.hong@wsj.com, Ken Parks at
ken.parks@wsj.com and Matt Day at matt.day@wsj.com