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Argentina: The denial of 'en banc' rehearing raises the stakes of Argentina's March 29 filing

 
 
Today the NY Appeals Court denied Argentina its petition for 'en banc' rehearing (notwithstanding support for that petition from the US government). The development is a negative event for Argentine sovereign credit as it suggests little sympathy from the Court to the arguments Argentina uses in its defense against holdout creditors in the 'pari passu' litigation.
 
The denial of the 'en banc' rehearing petition is not surprising. It has been one of the underlying assumptions of our base case scenario (see Argentina: NY Court ready to slam the door of the US payment system shut in Argentina's face, Feb 28) and therefore, of our recommendation to remain underweight external debt even after bonds have underperformed significantly ytd.
 
The denial itself is unsurprising—but the timing sends a strong signal
The surprising fact is that the denial has been been decided now rather than at the same time as the judges issue a final ruling regarding the remands of the 'pari passu' case. The timing of the decision to deny rehearing can be interpreted as a warning from the Court. The order effectively raises the stakes for Argentina ahead of its March 29 filing of an alternative 'pro rata' formula.
Argentina has a choice when designing that proposal: It can signal a rigid position (insisting on its 2010 offer), thus betting that the Court will be forced to provide the flexibility ('craming down' that proposal on holdout creditors) needed to avoid risk of techncial default. Or it can design a formula that reflects compromise and gains the acceptance of holdouts and the approval of the Court. We interpret the timing of the Court's denial for a rehearing as a message to Argentina that it should not expect much flexibility from the Court if it is not willing to embrace flexibility when it designs and files its 'pro rata' payment proposal.
This interpretation is also consistent with other assumptions that we hold. Indeed, we have interpreted the Court's request for a formula from Argentina as (for the most part) reflecting due process. There were some elements of flexibility in that order but not enough to assume sympathy from the Court for Argentina's declared aspiration of craming down the 2010 offer on holdout creditors.
Furthermore, this interpretation is also consistent with our belief that one of the judge's rhetorical question at the February 27 hearing ("politicans change their mind all the time, don't they?") was not an irony, it expressed a desire. In light of this assumption we have also assumed that the Court's subsequent request for Argentina to propose a formula reflects the Court's hope that, if given time, Argentina politicians might take it upon themselves to deliver the dose of flexibility needed to resolve the conflict constructively (rather than expecting the Court to do so).
 
Argentina is left holding a "review of last resort"
In the context of the 'game of chicken' in which we are inclined to framed the 'pari passu'/'pro rata' saga, this action by the Court is a signal for Argentina to reconsider the benefits of "blinking" rather than to hold its ground and expect the other parties to "blink" first. Thus, the denial of an 'en banc' rehearing increases further our confidence in anticipating that—unless Argentina shows compromise in its formula proposal at the end of this week—a negative ruling on the remands to the 'pari passu' litigation will follow.
We do not think Argentina will 'blink'. And if not, where will the denial for 'en banc' rehearing leave the 'pari passu' litigation process?
The case is currently at the Appeals Court level and after today's decision Argentina has been handed its 3rd denial of numerous review petitions (i.e. NY certification, panel rehearing, and now 'en banc' rehearing). Those petitions sought to open new avenues of litigation to challenge the merits of the adverse 'pari passu' ruling that the Appeals Court issued on October 26.
Consequently, if in the weeks following Argentina's filing of the 'pro rata' proposal affirms its October decision on the remands of the case ('pro rata' formula and impact on financial intermediaries), the sovereign will only be left with a last resort: a petition for a 'certiorari' review from the US Supreme Court. After that, if the case is decided against Argentina the government will need to choose whether to obey the orders and pay holdouts or not doing so and falling into techncial default on restructured bonds—given the Court orders constraining payments of debt service through NY.


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