Argentina has won a reprieve against having to pay US$1.33 billion ($1.58 billion) next month to "holdout" investors who rejected a restructuring of its defaulted debt and have waged a long legal battle to be paid in full.
A US appeals court granted an emergency stay order on Wednesday that gives Argentina more time to fight a debt ruling favouring the holdout creditors and eases investor fears of a new default as early as next month.
Last week, US District Judge Thomas Griesa ordered Argentina to deposit the US$1.3b payment by December 15 for investors who rejected two restructurings of bonds left over from its massive 2002 default.
Griesa's order raised the risk of a technical default on about US$24b worth of debt because it meant that if Argentina sticks to its position of not paying the holdouts, it would also be barred from paying investors who agreed to take a severe haircut in two debt exchanges in 2005 and 2010.
Branding the holdouts "vulture funds", the government has vowed never to pay them and it swiftly appealed Griesa's ruling.
Argentina argued that, if left to stand, the order would make future restructurings impossible for countries facing debt crises because creditors would have no incentive to exchange their bonds at a discount.
However, some legal experts said Griesa's order would not have such broad ramifications because Argentina hurt its own cause in refusing to pay the holdouts, and that Griesa's ruling focused on the government's behaviour in this specific case.
Griesa has often voiced frustration with Argentina in court and was riled by recent statements from government officials saying that the country would defy his orders.
In its decision on Wednesday, the 2nd US Circuit Court of Appeals put off until well into 2013 a ruling on whether or not Argentina will have to pay in full the holdouts who refused to participate in its two restructurings, which paid less than 30 cents on the dollar.
"The extension of the stay brings back rationality and due process to a litigation that was being rushed through in a manner that understated the importance of the huge precedent that the district judge was seeking to set," said Vladimir Werning, an emerging markets economist at JPMorgan in New York.
Both Argentina and bondholders who took part in the debt exchanges filed appeals to the 2nd Circuit against Griesa's order. The appeals court will hear oral arguments on February 27.
Argentina's economy ministry said the appeal court's decision "ensures normal performance of Argentina's debt payments in December".
"The threat of default has been removed for now," said Ignacio Labaqui of emerging markets consultancy Medley Global Advisors.
"This is really good news for Argentina and exchange bond holders," he added. "The ruling came faster than expected, which sends the message that Griesa's decision may have been too harsh, from the point of view of the appeals court."
Lead holdout investors Elliott Management Corp and Aurelius Capital Management both declined to comment.
Lawyers for the holders of Argentina's exchanged bonds, who will now be paid a combined US$3.3b in December as scheduled, welcomed the 2nd Circuit's order.
"The stay ensures that the exchange bondholders will receive their rightful payments through December, and until the Court can carefully consider the significant issues and interests that are involved before rendering its final ruling," said the statement from law firm Boies Schiller & Flexner LLP.
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