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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