During the past two weeks Argentina’s soccer team has rolled over its competition to advance to the World Cup Quarterfinals. Meanwhile, the team’s country has, yet again, collapsed into default.
For 12 years, Argentina has been engaged in a financial and legal row with private creditors in the US over payments on its government bonds—either long overdue or unwarranted, depending on which side you ask.
The country failed to make court-ordered payments yesterday to holders of its restructured and original—or “holdout”—debt. It is now in technical default, having missed the payment, and has a 30-day grace period to negotiate with creditors before entering true default.
Argentina’s path to financial insolvency began in the last week of 2001 when Argentina announced it was defaulting on $132 billion of its debt, which was then one-seventh of all the money borrowed by the Third World. The announcement came in the midst of the 1998-2002 Argentine depression, itself a result of poor government policy and external economic crises.
Despite the default, some US investors scooped up these seemingly worthless bonds at enormous discounts in hopes of some future payment. In 2005 and in 2010 Argentina restructured its debts and offered these bondholders swaps to replace their original bonds for new ones at downgraded terms, and 93% of investors did take up the offer. The country also passed a law forbidding payment on the original bonds.
However, a small contingent of investors opted out and insisted on payment on the original bonds. The Argentine government and many elements in the international press have since called these investors “vultures.”
Today, the figure in dispute between the vulture funds—led by Elliott Management Corp.’s affiliate NML Capital Ltd. and Aurelius Capital Management LP—and Argentina is $1.33 billion plus accrued interest, but the problem does not end at that hefty figure.
In mid-June, US District Judge Thomas Griesa ruled that Argentina must pay this sum at the same time—yesterday, June 30—it was to make scheduled payments of $832 million to holders of the restructured debts. Argentine officials characterized making the dual payments as “impossible” since they do not have enough available funds, but the US Supreme Court ruled to not hear Argentina’s appeal of this court order.
The country’s stock markets tumbled 11 percent in light of the news, while President Cristina Kirchner called the courts’ decisions “extortion.”
On Thursday, June 26, Argentina deposited $832 million at New York banks in order to meet the Monday coupon payment deadline for the restructured debts, but Griesa ruled that making and receiving these payments were illegal since no payments were made to the holdout investors.
“The absurd ruling…constitutes a sophisticated way to try and bring us to our knees before global usurers,” Economy Minister Axel Kicillof said in a televised speech.
Since Argentina failed to furbish the payments to the holdout investors, too, the money was returned to the country and Argentina entered technical default. Argentina is now in its 30-day grace period, and if there is no payment or further restructuring the country will enter “full-blown default” according to the Wall Street Journal.
Along with the protestations of those in the Argentine government, many in the press have rallied around Argentina and decried the US hedge funds and courts. In addition to condemning the “predatory funds profiteering from misery,” some say that the creditors who incurred higher risks by buying the defaulted debt should not expect due payment or be surprised by another default. These arguments, however, say nothing to the legal matter at hand—the prevailing court order which Argentina disagrees with and also failed to comply with.
An actual issue still left unanswered concerns the status of the restructured bondholders, who accepted worse terms in 2005 and 2010 to guarantee payment.
Kirchner and the UN trade agency UNCTAD contend that if Argentina does pay the holdout investors, then the country must also make full payments (i.e. pre-restructuring figures) to the restructured debt holders due a “Rights upon Future Offers” clause. This could boost Argentina’s obligations up to $15 billion according to Kirchner, or to $120 billion according to an online memo published by UNCTAD. UNCTAD also writes in the memo “copy cats will abound” based on this legal precedent, though there is not further explanation on what this statement means exactly.
Despite the chaos that would all but surely follow a default, many investors and analysts feel confident the financial disaster will be averted. Argentina’s 2033 bonds have rallied 17% this year, and the Financial Times reported that the Argentine government has already settled claims with the Paris Club of creditor nations and with Respol, a Spanish oil company.
The Financial Times reports further:
Investors have so far shrugged off the legal too-ing and fro-ing as they believe Buenos Aires’ actions and rhetoric are largely for domestic political consumption. With the economy in recession, they mask Argentina’s underlying desire to regain access to international credit to fund development of the country’s huge shale gas reserves and also avert another financial crisis.
However, since investor optimism does not necessarily translate into government rationality, Argentina’s economic fate remains in the air for the next thirty days.
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Comments
Does this mean we should be prepared for a Second Falkland Island War in the next 30 days?
Argentina can’t afford it.
Wars may be good or they may be bad, but they’re always expensive.
Sometimes one side will start a war to distract the public from the economic situation, and to justify acting against critics.
This is peculiar – it sounds like Argentina can’t make payments on its restructured bonds unless it also makes payments on its original bonds.
If so, why would any bondholder accept restructuring? If you’re not going to be paid, you might as well not be paid the full amount as not be paid a lesser amount.
The ONLY reason a bondholder would accept restructuring is so that he will be repaid something rather than nothing. That would still make Argentina a risky investment; the country’s ability to sell more bonds will be poor no matter how this episode proceeds.
My reading is that Argentina owes two sets of bondholders, those who accepted the restructured debt and those who held on to their original bonds. Argentina had declared the original bonds null and void but now the court has ordered Argentina must pay both groups in order to avoid default.
Yes, that’s how I read it. And if that’s what the court has dictated, it puts Argentina in an untenable situation – and maybe Argentina has a right to complain.
Wild overspending and miserable economic policies put Argentina in a bad position. But the court has put it in an almost impossible position. Seriously, how can Argentina magically come up with money it simply doesn’t have? All it can do is (1) borrow – and since repayment will be close to impossible, the interest on future bond offers will have to be ridiculous if there’s to be any hope of attracting investors – or (2), start cranking out paper pesos at record speed, sending itself into hyperinflation.
If the court allowed the country to pay off its new bonds, then it would have reasonable access to the international bond market and could borrow money at workable interest rates, perhaps even enough to pay off the remaining original bonds (although there’s been no public claims that it intends to do so). But if it can’t pay for its new bonds – even though willing and able to do so – then it’s just plain stuck.
The Argentine situation is complicated by the fact that it has two essentially independent economies, one based on the official Argentine peso, the other on the US dollar. Fernandez/Kirchner has been fiddling with both for the last few years, so things have been declining on all fronts.
At least that vulture mask is attractive, although real vultures don’t have such lush cranial plumage.
Since Argentina cannot pay it debts, it has one option: default. Argentina has done so 7 times since 1816. Argentina avoids paying local debt thru inflation but has a harder time dealing with hard currency debt. It is wealthy in resources but it keeps electing socialist governments.
Why people continue to lend it money is the mystery?
Expect the same with our local governments. FYI, one local Chinese government entity is now in default.
Fasten your seat belts, it’s going to be a bumpy decade!
Argentina is New Jersey’s role model. Just you wait.
Don’t cry for Argentina.
A newspaper editor I worked with had a sign over his desk:
“Lack of adequate preparation on your part
Does not necessarily constitute an emergency on my part.”
The only reason Argentina “doesn’t have the money to pay” those bondholders is because they planned to screw them all along. And the bondholders who settled with Argentina took a more than 80% haircut, I think they ended up with new bonds worth 17 cents on the US dollar and with lower interest.
It’s like going on a drunken bender for a week in Vegas and saying you “can’t afford” the mortgage. How could the lender possibly expect you to pay?
It works the other way too. If you lend money to someone driving off a cliff, you may not get paid back. Getting 17 cents on the dollar is better than no cents on the dollar. That’s all Argentine could pay and the bond holders got just that.
“Wild overspending and miserable economic policies put Argentina in a bad position. But the court has put it in an almost impossible position. ‘
No – Argentina put THEMSELVES in this position. Don’t blame the courts for it.
Don’t weep AT me…and blow snot-bubbles…Argentina.
You play with Collectivism, you eat the consequences.
Be sure to send a card to Venezuela.
Idiots.
I always thought that song from Evita should have been “Don’t Bury Me, Argentina.” After all, she didn’t take a dirt nap until Juan finally settled down for good.
That’s what you get when Madonna runs a country.
I don’t understand why Argentina is subject to the jurisdiction of an American federal district court. The article should have explained this.
I don’t understand why Argentina was not permitted to pay its restructured debt. Absent some positive rule of law forbidding it, a debtor is entitled to make payments to one creditor in preference to another creditor. The article does not adequately explain why the judge held otherwise.
It’s also not clear what remedy the Court could effectively impose if Argentina had paid the restructured creditors in defiance of the court decision.
This is an interesting case, but the article’s author should have done a better job explaining these issues.
U.S. courts have in rem jurisdiction over any Argentine property (i.e. bank accounts) which might be liable for the repayments. So for example if there is a bank with deposits owned by the Argentine government in the U.S., the U.S. court could attach those assets and put a freeze on them, then ordered them paid to the creditors after some laborious procedural hoop de doo.
Long story short, Wall Street falls under New York State legal jurisdiction. The money was borrowed on Wall Street and banks in New York facilitate this trade. As you see above, this means that once appeals have been exhausted (after twelve long years!) a New York judge can bring down the gavel as Thor’s hammer, forbidding payment to the bondholders Argentina likes (who take less money) rather than to the bondholders higher up the priority list because they won a lawsuit.
Now, as for this clause saying the restructured bond holders have to be paid full price now.. I’m told this is a basic protection clause you’d insist on with a third world country so that a government doesn’t just pay off cronies and default on the rest. (At least, to not have the civilized world view it as legal…)
The Argentines should pay their debts back with sexy babes. That’s a currency that’s always in good standing.
That depends on who’s holding the bonds.
Or the babes.
“Argentina no va a defaultear“?
The correct form is “Argentina no va a incumplir”…
And that’s from state TV…?
It’s a problem of Argentina’s own making. In the original issuance of the bonds, they could have insisted upon a clause forcing all bondholders to accept a settlement in lieu of default, but that would have meant a higher interest rate and probably less demand anyway, so they did not.
Their government is beyond just socialist and inefficient. They are also quite corrupt and mind-numbingly incompetent. And it is entirely the fault of the government that Argentina has faced any financial crises at all. Their people are industrious, their country is rich with natural resources and fertile land, and their business community innovative (and diverse, as businesses are run by immigrants from all over the world, US, Poland, China, etc.).
A good housecleaning and a free market friendly government, and Argentina would be in boom times in ten years or less.
It’s fine for Argentina. This is just a horse and pony show. they have $830 Million they have to pay off t the old creditors. Those creditors just want their money and they will take it anyway they can get. What will happen is that Argentina will swap the NYS bonds for its own local bonds and then pay them off. Those that refuse know they will not get paid. The vultures know this. They have used their trump card and then refused to make a deal, now they lose and Argentina ends up paying a little extra to service its bonds but now gets full control over repayment.
Except that they can’t, if I understand the way the banking system works correctly (which I might not, I’m not a specialist in international finance).
The money is tied up in New York and/or the banks that Argentina does business with are international entities which ALSO have ties to the NY banking system. Failure to pay means attachment to any asset which traverses through the system (which is, effectively, every international monetary transaction in the world). There are only a few non-NY international entities, and almost all of those are controlled by international pariahs (N.Korea, Iran, etc…). The Banks aren’t going to violate a Court Order. It is not good for their continued business model.
There probably isn’t any way to separately protect the monies from attachment remedies.
Also, failure to make the payment means that they lose access to the Wall St. banking system. If they choose to try to “refinance” by either selling new bonds or getting a “credit,” if they originate in a New York aligned bank those NEW monies ALSO become attachable to pay the OLD debt. I can’t think of any way to protect the “new” money from attachment from the “old” debt.
This story is leaving out a very important piece of information. Argentina is a infamous serial defaulter, so when they issued these bonds, they inserted a clause that specifically allowed them to be sued in US courts. They could have avoided this by not including that clause, but they knew it would mean less people would buy the bonds.
So, for all the cries of vulture, the real vulture is Argentina. They knew all along they could be sued in the US courts, and yet still decided to not pay. Seems sort of fraudulent to me.
imfine, the vultures probably have purchased default insurance on those bonds. If Argentina defaults, they still get paid. This is why the vultures are not making any deals.
I’m surprised that so many commenters are pro-Argentine here. As if a government who goes around nationalizing foreign investment (that Spanish oil firm) and serial defaulting is somehow the victim.
Now, if Argentina were a company, and a judge could take it over and restructure, then I’d be more sympathetic.
Whoever ends up with those bonds are going to take the local bonds regardless if a swap is triggered. I would be surprised if the Vultures had swaps, sounds pretty risky. I wouldn’t sell a vulture a swap on anything approaching reasonable terms.
I am not sympathetic to Argentina, they had this coming, but part in parcel if you know someone is a bad risk for lending money too and you do it, it’s your fault for making the deal. I see no reason why this needs to be a matter of state. the people buying these bonds took high interest rates in exchange for the risk. If the lenders were giving them a free loan, then I could see a moral obligation to assist, but not this.
I don’t know if a “default credit swap” is still in play in this particular case. That depends on who underwrote the original CDS, and if those companies are still solvent (cough, AIG, cough, Bear-Stearns) and if there wasn’t some triggering mechanism which excuses the execution of the swap.
I suppose we’ll all find out.
Argentina’s path to insolvency was started by previous governments that included the 1976-1983 civic-military dictatorship. They heavily borrowed under horrendous payback conditions, leading to the 2001 catastrophic default.
Elected in 2003, Nestor Kirchner negotiated lower bond values with 93 per cent of the country creditors in 2005 and 2010, paying those creditors regularly and in time ever since.
It paid off its debt to the IMF two years early and negotiated compensation with expropriated Repsol, more recently renegotiating its debt with the Paris Club.
The Kirchners have not sought skipping the country’s obligations. However, they negotiated with their country’s economy in mind.
As a result, Argentina grew and today’s debt in relation to the GDP is a fraction of what it was in 2001.
Paul Singer buys bonds from distressed countries for a fraction of their face value, and then sues for 100 per cent when those countries began their path to recovery. Such predatory practices, while legal, have siphoned millions from countries where a few dollars make a life-death difference.
Argentina did the right move by sending its payment by deadline. Judge Thomas Griesa’s decision to block payment to rightful creditors may come back to bite him as he has hold hostage a majority of creditors in an attempt to benefit less than 1 per cent of creditors–Singer and company. The other seven per cent did not sue.
Watch for the next chapters to unfold.
“As a result, Argentina grew and today’s debt in relation to the GDP is a fraction of what it was in 2001.”
Because it ran away and defaulted on 80 % of what they owed !
Try not to make them virtuous over it !
“Paul Singer buys bonds from distressed countries for a fraction of their face value, and then sues for 100 per cent when those countries began their path to recovery.
Bullshit. They refused to take the 90 % ‘discount’ of repayment of what they bought.
IOW – go back to your hovel down there where you live, Enrique.
Fact: Paul Singer’s vulture fund Elliot Management is the main “creditor” in this suit, having bought up lots of Argentine debt cheap after default. He’s notorious for pressing suits against the poorest countries, like Congo-Brazzaville.
Fact: Singer is a philanthropist who gives to right-wing pro-war foundations, the Republican party, and … LGBT groups. He gave the Human Rights Campaign $1.5 million to support gay rights internationally …
Fact: Argentina, the target of his extortion this time, has some of the most progressive LGBT rights laws and policies anywhere in the world.
More on the contradicitions of Singer’s vulture philanthropy? Read
http://paper-bird.net/2013/11/04/hrc-and-the-vulture-fund-making-third-world-poverty-pay-for-lgbt-rights/
and
http://paper-bird.net/2014/06/24/vultures-over-iran/
I´m not a legal expert, but as far as I can tell, Argentina made a payment to the Indenture Trust, but BoNY did nothing with it (BoNY still has the money in an account at Argentina´s Central Bank).
So, how come this is a “default” (or “technical default”) on exchange bonds? The republic actually made the payment, but the bondholder did not receive the payment because of the injunction.
I´m not sure which term is the best in this situation…