BUENOS AIRES – Argentina’s CNV securities regulator has barred Citigroup’s local unit from operating in the country’s capital market after the bank reached a deal with holdout U.S.-based hedge funds that are seeking full payment on defaulted Argentine debt.
In a statement Friday, the CNV said Citibank Argentina did not act in accordance with Argentine law in reaching an agreement with NML Capital Ltd., a unit of Paul Singer’s Elliott Management Corp., and other hedge funds.
The CNV said the measure was adopted “taking into consideration the grave danger and uncertainty for holders of restructured debt” that accepted steep haircuts in 2005 and 2010 restructurings.
The regulator designated local financial institution Caja de Valores to process future payments to exchange bondholders.
In an agreement last week with the hedge funds and sanctioned by U.S. District Judge Thomas Griesa, Citibank Argentina agreed not to appeal Griesa’s March 12 ruling barring it from processing payments to holders of Argentina’s exchange bonds – not only those issued under U.S. and English law but also Argentine law – unless Buenos Aires simultaneously paid the holdouts.
Citi had argued prior to that decision that it should be able to process payment on restructured bonds issued under Argentine law and warned of “grave sanctions” in the South American country if it failed to do so.
As part of last week’s settlement, Citi was authorized to make two one-off payments to exchange bondholders – one due on March 31 and another on June 30 – that will facilitate its exit from Argentina’s custody business.
But Argentine President Cristina Fernandez’s administration said it fears the bank will not process those payments.
“Reading the small print, what we find here is a trap and possibly the workings of a scam to cheat (exchange) bondholders,” Economy Minister Axel Kicillof said this week.
The CNV’s measure does not affect Citibank Argentina’s commercial banking business.
Argentina and the holdout hedge funds have been locked in a longstanding legal battle that stems from a massive Argentine debt default in 2001 amid a financial meltdown and economic depression.
Those funds bought a small percentage of defaulted Argentine sovereign bonds in the wake of the nation’s 2001 economic collapse and, unlike 93 percent of creditors, refused to take part in debt restructurings in 2005 and 2010.
Griesa ruled in favor of the litigating hedge funds in 2012 and ordered Argentina to pay them $1.3 billion plus interest.
As part of that ruling, he also barred Argentina from paying the exchange bondholders without simultaneously paying the holdouts. That ruling also prevented custodian banks from processing Argentina’s attempts to pay.
Because Buenos Aires has refused to settle with what it terms “vulture funds,” it has been unable to service its debt to the vast majority of its creditors, prompting rating agencies to declare the country to be in technical default.
Tensions have been high for months between Buenos Aires and Citibank Argentina, which has been threatened with criminal and civil penalties for not processing the debt payments.
The origins of the debt problem go back to Argentina’s 1976-1983 military regime, which presided over a 465-percent expansion in public indebtedness.