By Bianca Fernet, The Bubble:
If you read the news about Argentina last Friday, you likely encountered many of the typical “head in hands” photos or “plunging value” graphs that are traditionally displayed when markets fall. These images of hopelessness were selected to accompany news that Argentine warrants tied to GDP crashed when the National Government revised previously reported 2013 GDP growth down to 3%.
Lower growth? Falling GDP-tied warrants? 23 percent drop in value in one day? Shouldn’t we be panicking? The apocalypse is surely nigh!
Incorrect. Let’s take a look first at these warrants tied to GDP growth. Back in 2005, Argentina issued US$62 billion worth of securities in exchange for roughly US$82 billion in defaulted bonds. More GDP linked warrants were issued in 2010 as part of the restructuring package for creditors who had rejected the first restructuring. So essentially holders of defaulted bonds exchanged these arguably worthless instruments for warrants. And what are these warrants worth? As the name implies, their worth is tied to GDP growth.
Holders of warrants are to be paid annually on December 15 of each year if the following conditions are met:
- Real GDP exceeds base-case GDP
- Real annual GDP growth exceeds base-case GDP growth. In 2005, the threshold real GDP growth was 4.25 percent, and has fallen annually. This year it was 3.22 percent, and will be 3 percent by 2015 and onward.
- Total payments do not exceed a payment cap of .48 per unit of currency of the warrants.
- Warrants expire no later than 2035, but expire prior to the date at the point the payment cap of .48 per unit of currency is reached.
When the above conditions are met, the payout is calculated by:
Payment = (0.05 x excess GDP) x unit of currency x notional value of GDP-linked securities
In plain English: If 2013 GDP growth exceeds 3.22 percent, the Government has to pay. If 2013 GDP growth is as high as reported a few months ago, the Government has to pay US$3 billion. Ouch.
I wrote a piece back in September that lying about GDP has expensive and sticky consequences, and implied that the gentlemen responsible for reporting such high GDP growth were likely high on hard drugs.
These adjusted growth numbers reported by the Government are in line with growth figures estimated by private economists. The discrepancy between the new GDP data series and previous reports is explained by using a base year of 2004 to calculate, instead of a base year of 1993. Axel Kicillof reported that 2013 warrant payments will be made based on the new data series, and the numbers will be revised again in June and September.
Besides saving the Government US$3 billion, adjusting growth numbers is in line with the larger movement to bring statistical reporting back down to reality. In February, the Government reported inflation values close to what private economists estimate.
And while the warrant prices fell, the rest of the market reacted positively. Argentina’s overseas dollar bonds rallied, and local bonds under Argentine legislation went up 3.5 cents to 91.4 cents on the dollar, the highest since December. By demonstrating willingness to stop lying about growth, the Government shows a commitment and ability to pay these other obligations.
So unless you are a holder of one of these GDP linked warrants, you can take your head out of your hands and stop staring at plunging charts. Argentina will be OK for even longer based on this move.
If you are a holder of a GDP linked warrant, call a lawyer. Switching up the base year in calculating GDP is likely not legal and probably breaches your contract. This could give holders of restructured debt an incentive and legal basis for dragging the Government into court. By Bianca Fernet, The Bubble.