Argentine bonds fell, deepening a selloff since the countrylost a bid to reverse a U.S. court ruling that it must payholders of defaulted notes in full, as investors doubted the nationcan skirt the order and avoid default with a plan to shift overseasdebt to the local market.

The proposal last night by Economy Minister Axel Kicillof toswap securities subject to New York laws into local debt istechnically difficult and of limited appeal for many holders of therestructured notes, analysts at Credit Suisse Group AG, CitigroupInc., and Jefferies Group LLC said in reports.

“It is difficult to imagine any financial intermediariesor even legal advisories willing to take the risk of beingperceived as violating a U.S. Court order,” Citigroup's GuillermoMondino and Jeffrey Williams wrote. “A significant number of marketparticipants may have to either sell their holdings or hold on to abond that might enter technical default.”

Officials overseeing South America's second-largest economy saythe nation doesn't have sufficient reserves to pay what theyestimate could be $15 billion of claims from holders of defaultedbonds that didn't participate in two debt exchanges following thecountry's 2001 default. After the U.S. Supreme Court said June 16it wouldn't consider the case, Argentina is bound by a U.S.District Court ruling that it can't make interest payments toholders of restructured international bonds without paying thedefaulted notes as well.

Cabinet officials will meet with lawmakers today to discuss howto shift investors into local-law bonds, Kicillof told reporterslast night. The government will also send lawyers to meet with U.S.District Judge Thomas Griesa in New York to discuss the ruling, hesaid.

Yield Spread

Restructured bonds tumbled for a third day, with the extra yieldinvestors demand to own Argentine debt over Treasuries widening0.21 percentage point to 8.94 percentage points at 9:45 a.m. in NewYork. Disobeying the court order could cause a technical defaultand further isolate a country that's already experiencing slowgrowth and high inflation, said Mauro Roca, a senior Latin Americaeconomist at Goldman Sachs Group Inc.

“Of the possible scenarios, this was the most adverse,” Rocasaid in a telephone interview from New York.

Following the record $95 billion default 13 years ago, Argentinain 2005 offered to exchange its defaulted securities with bondsworth about 30 cents on the dollar and made a similar proposal in2010. Owners tendered about 92 percent of the outstanding debt. Theholdouts, including billionaire hedge-fund manager Paul Singer'sNML Capital, fought for full payment in court.

An interest payment of $907 million on restructured notes is dueon June 30. To avoid suspending payments, Argentina will askbondholders to swap debt sold under New York law into securitiesgoverned by Argentine legislation and therefore not subject to U.S.court orders.

If the government doesn't make the interest payment on therestructured notes this month, the bonds will be in default after a30-day grace period.

“Argentina officials continue to signal a workaround solution onthe difficult logistics to negotiate with holdouts,” SiobhanMorden, head of Latin America strategy at Jefferies, wrote in areport today. “Most important to bondholders is how they resolvethe legal risks to attract high participation from conversion ofNew York to local-law bonds.”

Restructured bonds due 2033 plunged 2.82 cents to 70.38 cents onthe dollar, the lowest price since March. Yields on the securitiesrose 0.55 percentage point to 12.85 percent. The spread onArgentine bonds versus Treasuries is the highest in emergingmarkets after Venezuela, according to data compiled by JPMorganChase & Co.

The upfront cost to buy protection against an Argentine defaultfor one year with credit-default swaps has soared 20 percentagepoints this week to 39.05 yesterday, according to prices compiledby CMA.

Kicillof said that complying with the U.S. ruling wouldjeopardize the country's ability to honor the restructured debt,since paying the plaintiffs the $1.5 billion they say they're owedwould trigger demands from other holdout creditors for similarterms. The estimated $15 billion in claims amounts to more thanhalf Argentina's international reserves.

Central bank reserves, which the government uses to pay itsdebt, have fallen 25 percent in the past year to $28.8 billion. InMarch, Argentina's economy contracted for the first time sinceSeptember 2012 as the government implements policies to stem adrain on central bank funds. Consumer prices rose an accumulated12.9 percent in the first five months of the year.

S&P Cut

Standard & Poor's yesterday downgraded Argentina to CCC-,nine levels below investment grade, citing the court ruling.

“A default or a distressed debt exchange pertaining tocurrently-serviced debt appears to be inevitable within sixmonths,” S&P said in an e-mailed statement yesterday.

Argentina's plan to meet with judge Griesa is a sign that thegovernment may still be considering a negotiated settlement withthe holdouts, according to Alejo Costa, a strategist at BuenosAires-based brokerage Puente Hermanos Sociedad de Bolsa SA.

“Kicillof showed willingness to negotiate, but not willing topay the $1.5 billion in cash,” Costa wrote in e-mailed comments.“If the court proposes an alternative plan perhaps there will be anegotiated solution.”

Kicillof said the government wouldn't allow hedge funds tosabotage its efforts to rebuild the country after the debt crisisin 2001. He referred to the holders of defaulted bonds as“vultures” because they seek to profit by buying distressedassets.

“Some people say that we need to negotiate with the vultures,”Kicillof said. “The vultures are vultures because they don'tnegotiate. The vultures are vultures because they go to court toget the full total of their claims.”

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