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Citi (C) Cautioned by Argentine Government on Bond Payment - Analyst Blog

The ongoing legal tussle surrounding Citigroup Inc.C related to its Argentine bond payment seems to see no end. Following the U.S judge's ruling on Thursday barring the bank from processing payments on bonds, which were issued under Argentine law, Citigroup has been threatened by the Argentine government on Friday that the company's Argentine banking license will be revoked upon the bank's failure to process the payment. Notably, a payment of $3.7 million is due on Mar 31.

Turning down Citigroup's appeal to process payment, on Thursday, U.S. District Judge Thomas Griesa in Manhattan said the bank is restricted to process payments on the dollar-denominated Argentine exchange bonds as allowing the company to process the payments would constitute violation of Argentine law that requires the nation to treat bondholders equally.

However, the Argentine Economy Ministry in its latest statement highlighted the fact that Griesa's ruling doesn't have a legal standing as the bonds were issued under the law of Argentina. Per the statement, "Judge Griesa's order violates, again, basic legal principles and makes clear that his decisions are not grounded in the law, but in his obvious bias against Argentina." The statement also added, "It's a shameful abuse of jurisdiction."

The statement stated if Citigroup fails to distribute the funds, the company would be violating Argentine banking law and hence the government "could revoke Citibank Argentina's license to operate and even impose criminal responsibility upon its employees."

Notably, in a similar issue, in Aug 2014, the Argentina government revoked The Bank of New York Mellon Corporation's BK authorization to operate in the country. Argentina cancelled BNY Mellon's license to operate as a trustee for the government bonds as the New York based bank obliging the U.S. District Court's ruling, refused to distribute interest to the bondholders.

The Case

Argentina's warning to Citigroup follows Griesa's Thursday ruling that upheld his Jul 28, 2014 order, restricting Citigroup from processing any payment on the bonds. Consequently, Argentina defaulted on its debt after a 30-day grace period on a $539 million interest payment expired on Jul 30, 2014 owing to the court orders.

The court orders are related to the ongoing litigation between Argentina and certain 'holdout' bond investors including US hedge fund NML Capital, which refused to accept the discounted restructured bonds in the restructuring of Argentine debt following the nation's default on its sovereign obligations in 2001 and demanded full payment.

In 2012, Griesa had ruled that until Argentina settles its dispute with holdouts, it cannot service its restructured debt. Notably, in contrast to Thursday's ruling, Griesa allowed Citigroup to process "one-time" bond payments in Jul 2014, Sep 2014 and Dec 2014 as the holdout bondholders agreed to the transfers.

The Potential Impact

For Argentina, which is presently crippled with a huge debt burden, Griesa's ruling undoubtedly limits its opportunities to extract funding from the international debt markets. Griesa has recommended Argentina to settle the issues with the holdout bondholders by working with the mediator appointed by the court.

Notably, in Feb 2014, Argentina looked to sell $2 billion of dollar-denominated bonds through Deutsche Bank AG DB and JPMorgan Chase & Co. JPM . However, the new issuance did not materialize as Griesa ordered the banks to provide the necessary related documents.

Citigroup which is caught between the U.S. court order and the government of Argentina intends to undertake legal steps to get some reprieve in the long standing legal tussle. Per a company spokesperson, Citigroup would "pursue all legal measures available to comply both with (Griesa's) decision and Argentine legislation. Citi will appeal the court's decision."

While nothing can be inferred with certainty about the potential impact on Citigroup's business in Argentina, we look forward to the future course of action to be taken by Citigroup. It is a matter of time to see whether the Wall Street Banking giant comes up with something favorable satisfying both the U.S. Court as well as Argentine government or it faces similar consequences like its U.S. peer, BNY Mellon.

Citigroup currently carries a Zacks Rank #3 (Hold).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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