Top debt lawyer Buchheit warns US support could divide Argentine bond market

By Marc Jones

LONDON, Oct 3 (Reuters) - One of the world’s leading sovereign debt experts, Lee Buchheit, has warned that part of the proposed U.S. support for Argentina risks creating a problematic divide in the Latin American country's bond markets.

Buchheit, who has led debt restructurings in Iraq and in Greece after its financial meltdown, told Reuters the U.S pledge to buy Argentina's bonds could lead to its preferential treatment if the repeat-defaulter ever restructured its borrowings again.

"Were the U.S. government to buy Argentine bonds in the market, it would enjoy no legal seniority over other bondholders. But it might enjoy a practical seniority by virtue of its political leverage," Buchheit said.

There is a precedent for this kind of problem, he added.

In 2012, the European Central Bank owned more than 50 billion euros ($58.7 billion) of Greek government bonds after intervening to help calm the euro zone debt crisis.

Just before the country's 200 billion euro debt restructuring happened though, those bonds were swapped for a new series of bonds so that the central bank didn't have to take losses. A mass group of bondholders then tried to sue the ECB for damages over the move, but their challenge failed.

U.S. Treasury Secretary Scott Bessent has said in recent days the U.S. is in negotiations about providing a $20 billion swap line with Argentina's central bank and is prepared to purchase the country's U.S. dollar-denominated bonds as conditions warrant.

The need has come after a thumping defeat for President Javier Milei's party in recent regional elections crashed the Argentine peso amid fears his reform efforts could unravel if upcoming national midterms prove equally disastrous this month.

Buchheit said the way for the U.S. to avoid the potential seniority complexities would be for the U.S. to concentrate on the currency swap line that Bessent has also offered up.

Kevin Daly at fund manager Aberdeen in London said another question investors are now asking is whether credit rating agencies would apply higher ratings to any series of Argentine bonds the U.S. buys should it happen, or lower ones to those it doesn't.

Ratings firms are yet to publicly spell out how they would deal with such a situation, but their focus is being drawn to the issue for a number of reasons.

"Washington is highly polarized," Joydeep Mukherji, S&P Global's managing director of sovereign ratings, said at an event on Thursday.

"The last thing anybody wants to hear in the White House is someone saying that you're using U.S. taxpayer money to bail out the hedge funds that bought Argentine debt".

($1 = 0.8522 euros)