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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