Last month, Judge Thomas Griesa admonished Argentina for its default and said the event did not extinguish or reduce its obligations to bondholders, and that the country should continue negotiating with the holdout creditors via the court-appointed mediator.

Intractable Argentina seems to have paid scant regard to this advice and instead went ahead and sued the United States in the International Court of Justice, complaining that decisions by U.S. courts in its dispute with bondholders had violated its sovereignty.

Banks and hold-outs: No deal

On the side-lines, however, a group of banks, said to comprise Citigroup Inc (NYSE:C), Deutsche Bank AG (NYSE:DB) (ETR:DBK), HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) and JPMorgan Chase & Co. (NYSE:JPM), were negotiating with the holdout creditors (a group of Argentina bondholders that include NML Capital, a unit of Paul Singer’s Elliott Management, and Aurelius Capital) to buy their disputed bonds.

The talks were private, but probably intended to arrive at a settlement that ran along the following lines:

  • The banks would take over all or part of the bonds owned by the holdout group thereby satisfying Judge Griesa’s requirement that Argentina pay off the holdouts before it could pay its exchange bond holders,
  • Argentina would be therefore free to continue its payments to exchange bondholders, and re-emerge from a ‘default’ status
  • The banks would be invested in the hold-out bonds until early-date in 2015, therefore  by-passing the crucial ‘RUFO’ (Rights Upon Future Offers) clause in exchange bond-holders’ agreement,
  • Argentina thereafter redeems these bonds from the banks.

Unfortunately, these talks between the banks and the hold-outs have collapsed, according to a Reuters article. The banks were reportedly unable to secure a satisfactory price from the holdouts, nor a payment guarantee from Argentina.

Argentina bond yields climb

The news of the collapse appears to have been received badly by Argentina’s financial markets. Bond prices fell and yields consequently shot up by nearly 8% on Friday as shown in the chart below.

Argentina 4-year-bond-yield

And so does Argentina’s rhetoric…

The development appears to have driven Argentina’s politicians to exasperation and they ratcheted up the decibel level in their continuing stream of name-calling directed at the hold-out creditors.

“Today we are in the hands of an international financial power comprised of small, voracious interests that form a real international mafia,” said Argentine Cabinet Chief Jorge Capitanich.

Earlier pronouncements by President Cristina Kirchner have dubbed the litigating funds as ‘vulture funds.’ “We live in a profoundly unjust and profoundly violent world and this is also violence. Like missiles in war, financial missiles also kill,” the president had said earlier in a nationally televised address.

What now?

Argentina is technically in default, even though funds meant for paying the exchange holders are sitting in a New York bank and are frozen by Griesa.

The stalemate may drive exchange bond-holders to activate the ‘acceleration’ clause in their agreements, thereby making all due interest and principal on its defaulted bonds immediately payable by Argentina.

This might exert some pressure on the hold-outs, says Thomas Mullen, a partner at TWM Capital.

“The only leverage the current restructured bondholders have over Elliott is to accelerate,” he says. “Once this takes place, Elliott loses its advantage as being the only thorn in Argentina’s side.”