By Bianca Fernet, Argentina
Ah 2015. Just smell it in the air. A new year has begun, a year long anticipated by close followers of the Argentina debt debacle. At midnight on 31 December 2014, the Rights Upon Future Offers (RUFO) clause expired, meaning that if Argentina’s government wanted to, they could now pay the holdouts, or vultures, without having to pay the holders of exchanged bonds the same amount, thus bankrupting the country.
Will Argentina Pay? That is the headline du jour this week. The answer is no, Argentina will obviously not pay, not as long as Cristina Fernández de Kirchner is President…. Here is everything you need to know about RUFO:
In 2001, Argentina suffered a crushing economic crisis. It defaulted on roughly US $93 billion. In 2005 and again in 2010, Argentina offered holders of defaulted bonds a restructuring. Bondholders who participated in the restructuring received exchange bonds worth roughly 30 percent of the bonds’ original face value, and began to receive payments regularly and immediately. 93 percent of bondholders accepted the restructuring and are holders of these exchange bonds. 7 percent did not accept the restructuring, and some of them went on to sell their bonds to hedge funds known as “vultures” that exist to buy defaulted debt and sue for full value.
Argentina’s USD bonds are issued under New York law in the United States. In 2012, courts ruled that paying the exchange bondholders and not the holdouts was in violation of the pari passu clause requiring that all bondholders be treated equally. A whole slew of appeals failed to reverse the decision, and in June 2014 Argentina faced a situation that looked like this:
- If Argentina continued to pay exchange bondholders without paying the holdouts, US financial institutions would be barred from processing the payments. This would result in the payments not reaching the bondholders and getting stuck in banking limbo, and a technical default. This is what happened.
- If Argentina paid the holdouts full face value, this would trigger the RUFO clause. Argentina would have had to pay the exchange bondholders full face value as well, which would have decisively crippled the country.
- If Argentina made no payments to anyone they would still have defaulted, but would not have had the moral claim inherent in option 1.
- There were private sector options on the table, whereby private Argentine banking groups offered to pay the holdouts. If Argentina had accepted this option, the holdouts would have been paid but the private sector and “pro-business” groups villainized by this administration would have taken the credit for saving the country.
By selecting option 1, Argentina demonstrated a willingness to pay and claimed the moral high ground.
And to be fair, option 2 was not really an option. Option 4 was the best option on the table for the economic health of the country and the well-being of its people, but President Cristina Fernández de Kirchner paints herself as the second coming of Evita Perón and Jesus Christ all rolled into one, and it is neither revolutionary nor messianic to accept help from the dirty filthy capitalists.
So now that RUFO is no more, Argentina could pay the holdouts the roughly US $1.2 billion owed and pick back up making payments to the holders of exchange bonds. And that would make sense to someone with a sound grasp of economics with the best interests of the nation in mind. According to the Central Bank, Argentina closed out the year of 2014 with over US $31 billion in reserves – US $2 billion higher than when the default occurred in June and RUFO was cited as a reason not to pay. Reaching an agreement with the holdouts would be an important step towards restoring relations with the rest of the world. Furthermore, it would allow the nation more access to international capital that would be crucial in solving real issues like high inflation and the parallel currency problem that discourages and complicates investment and businesses that need to import and export anything.
But Cristina will not pay because she said she won’t. It’s really that simple. This administration’s claim on power is embedded in an emotionally-charged “us versus them” ideology. During the 2014 World Cup, games were almost exclusively shown on public channels that had no advertising except government-paid propaganda denouncing the evils of the vulture funds, trumpeting the glory and success of now state-owned YPF, and showcasing sweet grandmothers and happy families whose lives depend on Kirchernerism. Abroad Cristina has gone to the Hague and the UN to denounce the evils of the “vulture funds”, and at home she rants more than weekly on the Cadena Nacional (like the State of the Union Address) against these holdouts out to destroy Argentina. But not on her watch.
Axel Kicillof, Cristina’s Economy Minister, went so far as to state that RUFO is a trap and that the options for the holdouts are already on the table – no new offer will be made.
Love her or hate her, Cristina is an exceptionally skilled politician. And politics are not about economics, they are about maintaining your power base. In this case, Cristina has galvanized a populist throng of die-hard supporters around an ideology that view foreign “powers” and businesses as diametrically opposed to a healthy and prospering Argentina. To make a deal with the holdouts now would be akin to Barack Obama outlawing birth control and ending welfare, or the Taliban coming out in favor of religious plurality and women’s rights.
Cristina Fernández de Kirchner settling with the holdouts would be ridiculous.
The real question is which of 2015’s presidential candidates, Mauricio Macri, Sergio Massa, or Daniel Scioli, can find the right way to package settling with the holdouts to voters next year so Argentina can finally move on from this stupidity. By Bianca Fernet
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But why SHOULD Argentina pay the vultures any more than was paid to the 93% who accepted the restructuring? To do so will only encourage more vulture-like activity in the future. Besides that, the vultures will still make out like the bandits they are, having paid pennies on the dollar for their holdings. The vultures’ “suffering” may consist of a 300% return instead of a 1000% return. Tough!
The socialist populist Latin American buffoon 3 stooges Kirchner, Maduro and Morales are at it again.
Maduro is in real trouble in Venezuela the tinder box with shortages of everything including toilet paper or something. Brother in helm Morales in Bolivia is a loon who stated that “Chicken causes baldness and homosexuality”.
Quixotic sister Cristina does not want to pay the Argentinian debts now? Maybe next up is nationalization of foreign companies? Ideology may sound good for now to whip up the crowd/votes but wait till excrements hit the fan and the country degenerate into anarchy but then again maybe that’s what the socialist want anyway. Be careful what you wish for…
Hey but then again the sheeples in US got conned into hope and change hoax followed by so socialist sounding forward mantra.
Dr. Paul Craig Roberts (from the Reagan admin.): 1) “The violence that Washington has unleashed on Venezuela almost simultaneously with Ukraine is testimony to Washington’s stark criminality.” 2) “South America has always consisted of a tiny Spanish elite with all the money and power ruling over large majority populations of indigenous peoples who have not had political representation. In Venezuela, Chavez broke this pattern. An indigenous president was elected who represented the people and worked in their behalf instead of looting the country.” 3) “Chavez was hated by Washington and demonized by American presstitutes. When Chavez died of cancer, Washington celebrated.” 4) “Washington began the attack on Maduro by attacking the Venezuelan currency and driving down its value in currency markets.” 5) “If Washington reconquers Venezuela and Ecuador, Bolivia will be next. Then Brazil. Washington has its sights on Brazil, because the country is a member of the BRICS (Brazil, Russia, India, China, South Africa), and Washington intends to destroy this organization before the countries can establish a trading bloc that does not use the US dollar.”
even a socialist country will feel the wrath of the world bankers
I say hooray to them for standing up to the Bankers, like ICELAND did
If the vultures weren’t so greedy/stupid they would have taken the same route as the bond holders that got 30 cents on the dollar, instead they’ve got nothing.
If I borrow ten dollars from you do I not deserve to get my ten dollars back? If you don’t give me my ten dollars back as promised and you justify it by saying I don’t need it as bad as you that makes it right? What planet are you people living on. If people do not keep their promises and that is rationalized as OK soon nobody will loan any one anything and trade will stop. Back to barter town Mad Max.
Well that is why bonds pay interest – to compensate for the risk of default.
It’s up to the lender to evaluate the risk and make the decision to lend based on that – if the risk pays off they get the higher interest rate and therefore a higher return. If not, well that’s why it’s called risk.
@Jim Levitt – Now, bond issuers typically include a collective bargaining clause overtly stating that if a majority of bondholders agree to a restructuring, the rest must accept it as well. This will not likely be an issue in the future.
What I objected to in your article was the idea that, because Argentina could now LEGALLY pay the vultures far more than it had negotiated to pay the other 93% of bondholders, that it SHOULD pay the vultures that much greater sum. Why should the Kirchner government change its position at this point? Besides being politically insane domestically, doing so risks blowing up the negotiated settlement with all the other bondholders, which would decimate Argentina’s reserves. No, it’s time for the vultures to climb back down the ladder. They’ll rake in large profits even at the negotiated price, because they bought up the bonds for far less than the 30 cents on the dollar that the negotiated price will generate. Those guys (Paul Singer, for example) have caused death and misery around the world (Democratic Republic of the Congo, for starters) by demanding full payment on bonds they didn’t buy in the first place (and whose risk was screaming evident when they did buy them), from countries that can least afford to pay.
A collective bargaining clause in future bond contracts will be beneficial. If such clauses sideline the vultures completely, all the better. They’re worse than mafia loan sharks.