Citigroup said on Tuesday it intends to exit its custodial business in Argentina as soon as possible, amid a U.S. judge preventing it from passing on interest payments from the South American country to local bondholders.
The New York-based bank called itself the victim of an “unprecedented international conflict of laws”.
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Federal judge rejected Citigroup’s appeal
As detailed by ValueWalk, last week Federal District Judge Thomas P. Griesa rejected an appeal by Citigroup to roll back an injunction precluding the bank from making interest payments on $2.3 billion of Argentine bonds. This latest development marks a major setback for Citigroup, its bondholder clients and Argentina.
In 2001, Argentina defaulted on nearly $100 billion in bonds. Nearly everyone holding the government bonds exchanged them later for new, significantly discounted ones.
However, a group of bondholder holdouts rejected the swaps. These holdouts, including billionaire Paul Singer’s Elliot Management LP hedge fund and its NML Capital affiliate, as well as the Aurelius Capital Management hedge fund, have insisted they be paid in full if holders of exchanged bonds are paid.
U.S. District Judge Thomas Griesa’s repeated rulings in favor of the holdouts have prompted defiance from Argentina and its president Cristina Fernandez, who has labeled the holdouts as “vultures” bent on astronomical profits.
Citigroup to exit Argentina custody business
In its letter to Griesa, Citigroup said it made its decision to exit its custody business in Argentina in light of the judge’s March 12 order letting the injunction stand, and Argentina’s renewed threats to strip Citibank Argentina of its banking license and to impose criminal, civil and administrative sanctions.
In a letter to Griesa from Citigroup’s lawyer, Karen Wagner indicated Citigroup may sell portions of the business or end some customer relationships.
Citigroup as custodian is supposed to transfer interest payments to clearing houses that in turn pay bondholders.
Last month, Argentina’s plan to sell new bonds in international markets to raise approximately $2 billion was suspended. The banks appointed to handle the bond sale decided to halt the deal temporarily following a federal court request for documents describing how Argentina will obtain the proceeds from the bond sale.
Mark Weidemaier, a University of North Carolina law professor specializing in sovereign debt disputes said the March 12 order “put an end to any serious thought for Argentina to issue foreign currency debt to foreign investors”. He said: “It now becomes a waiting game. The decision gives holdouts more leverage, but it might be that the current administration in Argentina is not interested in settling, and will hand the problem to its successor”. Argentina’s president Cristina Fernandez can’t seek a third term, and her successor will take office in December.
In their letter to Griesa, Aurelius Capital Management’s lawyers urged the judge not to put the order on hold, saying Citigroup neither committed to ending its role in making bond payments, nor showed how exiting the custody business created an “emergency need” for a stay.