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In accordance with the Right Upon Future Offers or RUFO clause (similar to a conventional clause requiring creditors to be treated pari passu) contained in the 2005 agreement on the restructuring of the debt of the exchange bondholders (preventing Argentina from making more favourable repayments to holdouts unless the conditions are the same as for exchange bondholders), the funds paid by Argentina were not handed over to the creditors.
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There finally was no last minute agreement, meaning that Argentina has defaulted once again. The previous default was back in 2001.
On 16 June, the Southern District Court of New York, in the person of Judge Thomas Griesa, ruled that Argentina could not pay USD 539m of interest on its restructured debt (held by exchange bondholders) without paying USD 1.5bn to bondholders having refused previous bond holdouts, led by NML Capital.
In accordance with the Right Upon Future Offers or RUFO clause (similar to a conventional clause requiring creditors to be treated pari passu) contained in the 2005 agreement on the restructuring of the debt of the exchange bondholders (preventing Argentina from making more favourable repayments to holdouts unless the conditions are the same as for exchange bondholders), the funds paid by Argentina were not handed over to the creditors.
Had Argentina agreed to pay USD 1.5bn, it was at risk of activating the RUFO clause and hence of having to compensate the holders of the bonds restructured in 2005 and 2010 (who, at the time, agreed to a 70% haircut on the bonds’ nominal value), which total nearly USD 56bn (all bonds, including those not governed by US law).
Since the country’s foreign exchange reserves reached USD 29bn on 31 May 2014, one understands why Argentina opted to default, as this does not interrupt negotiations with creditors, on the contrary.
Consequences:
Cyril Regnat , Jean François Robin , Juan Carlos Rodado , August 2014
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