This Ruling Could Push Argentina Off the Cliff

By Bianca Fernet,

New York Justice Thomas Griesa ruled that Argentina must pay an additional US $5.4 billion to 500 so-called “me-too” creditors. This increases the total amount owed on defaulted debt to US $7 billion, and that number will probably increase.

While this has no immediate consequences, as Argentina’s current government has taken extraordinary steps to evade Griesa’s past rulings, it complicates the steps the next government will have to take to repair Argentina’s relationship with international capital markets.

Argentina famously defaulted on its international debt in 2001. In 2005 and again in 2010, Argentina offered bondholders a restructuring that in effect exchanged the original bonds for bonds worth 30 cents for every dollar, or a 70 percent loss in value. Holdout bondholders did not accept the terms of this restructuring, and some sold their unrestructured debt to Paul Singer’s so-called “vulture” funds like NML Capital and Elliot Management.

These funds’ team of MBA-wielding skilled attorneys systematically litigated for full repayment under the pari passu clause that requires all bondholders be treated equally. Judge Griesa ruled in favor of these holdouts and has prevented Argentina from continuing to make payments on exchanged debt until a settlement is reached by preventing financial institutions from processing payments.

This first round of “me-too” claims will not likely be the last. Estimates show that roughly US $24 billion, including interest, worth of debt was never restructured or exchanged.

These bondholders now have clear precedent and incentive to pursue legal action of their own. And while repayment of the US $1.3 billion owed to the original “vultures” was reasonable and even manageable given international reserves that hover around US $33 billion, paying out US $7 billion and especially $24 billion would definitely place the country in a precarious situation.

Argentina owes an additional US $6.6 billion on the maturing Boden 2015 bonds due this October.

Rather than address this growing group of holdout creditors, Argentina has chosen to appeal the decision on the grounds that the “me too” holdouts are in fact the original group of “vultures” – an appeal it will likely lose relatively quickly. Argentina is already in contempt of court for making repeated unapologetic attempts to evade Griesa’s ruling. It raised US $1.4 billion last month by issuing the BONAR 2014 bonds under local law, and Griesa has yet to rule definitively whether or not this constitutes foreign debt and thus would be subject to actions taken to block payment.

Argentina needs access to foreign capital to finance infrastructure and develop projects like the Vaca Muerta oil fields. Until the situation with holdout creditors is resolved, it will pay more for debt and have a limited selection of partners to work with.

Argentina is a deeply (deeply deeply) politically divided country where the practicality required to resolve this issue is unfortunately politically costly. Cristina Fernandez de Kirchner has vowed not to settle with the vultures, and as the dollar amount of debt owed rises, she can claim a moral victory and is correct in saying that if she were to make the entire repayment she would literally bankrupt the country.

But there is a massive difference between loud defiance and level-headedly negotiating a settlement. The latter is the path that will require an Argentine president to show a brand of leadership that transcends shouting empty rhetoric to weeping constituents who praise Cristina as the second coming of Jesus Christ that dances to cumbia.

Solving the problem with the holdouts will require real negotiation with Argentina’s best interests in mind. It is in Argentina’s best interests to raise future debt without the onus of potentially blocked payments that forces Argentina to offer higher interest rates and decreases the pool of potential  creditors. Likewise, Argentina’s default situation influences potential foreign direct investment, with companies and capital steering clear of Argentina in favor of less risky markets.

Whoever assumes the presidency following this year’s election already has a difficult job ahead. Debt claims piling up makes the job even more difficult, as he will be forced not only to make hard decisions and find a way to settlement, but also to dismantle the layers of rhetoric being laid down by Ms. Fernandez to justify her refusal to negotiate for her people. By Bianca Fernet, Argentina, The Bubble.

Are central banks losing control? Read…  QE Begins to Screw Investors

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  14 comments for “This Ruling Could Push Argentina Off the Cliff

  1. Michael Gorback says:

    I don’t think the ruling will push Argentina off the cliff. Argentina is well into its Thelma and Louise grand finale without it. The ruling merely pushes harder on the accelerator.

    The holdouts/vulture funds’ actions exacerbate the problem by blocking access to capital markets and strangling economic recovery. However, even a successful resolution with the holdouts would not solve the country’s problems, which are rooted in absurd economic policies that must be reversed.

    In the meantime the holdouts have to understand that a successful parasite doesn’t kill its host.

    It’s worthwhile at this point to read Dornbusch and Edwards description of the stages of economic populism. Argentina is following the script.

  2. “Argentina needs access to foreign capital to finance infrastructure and develop projects like the Vaca Muerta oil fields.”

    That way it can ‘sell’ its capital at a discount so that it can be easily wasted doing Argentina and the wasters no good.

    Argentina has been borrowing overseas for almost a century trying to develop. All attempts have failed, Argentina falls further behind, is more indebted than ever. Calling the country’s boss names doesn’t change anything: if the government makes a deal with creditors (surrenders) there will be an even deeper hole for the country to be buried in, later.

    Instead of borrowing, it should keep its capital in the ground. Argentines should learn to live within their means. If they want to demonstrate resolve the Argentines should get rid of their useless cars and tell the creditors to screw themselves.

    • Hi Steve!

      You can access foreign capital by other means than debt. Argentina could also allow private companies to enter the country.

      If you leave Buenos Aires you very quickly encounter unpaved roads and an actual emerging market, rather than just the vitriolic populism that dominated international media.

      Argentina could finance infrastructure with local debt and from having a broader corporate and individual tax base.

      The country needs money. Its valuable resources are in the ground (minerals, agriculture, etc) and if lacks the infrastructure, know-how, and capital expenditure capacity to realize this potential alone.

      Countries are not small families and the “living within your means” idea quickly collapses when you consider countries. That does not mean borrow like woah and run off on the bill – extremes on either end do no one any good.

      Hugs and kisses,

  3. Cocoabean says:

    I don’t see much difference between Argentina and Greece…

    While I abhor spendthrift socialist governments, it is better that they meet the market head on – and suffer the reduction in living standards quickly – rather than drag this out paying and paying for years or decades. Like Greece, getting entirely ‘out of debt’ was never in the cards.

    And why is a U.S. court determining the internal policies of sovereign governments?? Tell them where to go, and emerge on the other side free of international finance and, eventually, much the stronger for it.

    Stiff the creditors!

    • Hi Cocoabean!

      The U.S. court is not determining internal policies of sovereign government. Argentina’s sovereign government made the sovereign decision to issue foreign currency US dollar debt under New York law.

      By issuing in a more reliable currency under a more reliable legal system they were able to access more money at better borrowing rates, because creditors knew they couldn’t just wake up and print a bunch of pesos or change the law and decide not to pay.

      Argentina has indeed made the decision to stiff the creditors – and if they never wanted to raise debt internationally again, or participate in the international banking system, they’d be in the clear.

      What this ruling does is give banks and financial institutions a choice:

      1. Continue operating with Argentina but never have funds go through the US again
      2. Stop serving Argentina as a client until they resolve their US legal issues

      Banks and financial institutions obviously choose the first.

      Opting out of participating in the international financial system is not an option, as it is not the year 1100.

      Furthermore, no one who follows this case well actually expects Argentina to be able to make a big lump cash payment. But they must negotiate rather than throw a tantrum and refuse to sit at the adult table.

      Bianca Fernet

  4. Michael Gorback says:

    The U.S. court is not determining anyone’s internal policies. It is ruling on the status of debt issued under U.S. (actually New York) law.

    There was a window of opportunity in January after the RUFO clause expired but Crazy Cristina blew that opportunity, choosing instead to give a rabble rousing speech about how the vultures will lose their feathers.

    With elections coming in October I doubt she’ll do anything unless forced to by an internal crisis. That way she can hand this off to her successor, who will have the unpleasant but absolutely necessary task of unraveling this mess. It will shock the economy and then she can say “See? That’s why I didn’t give in to the vultures.”

    • Cocoabean says:

      “The U.S. court is not determining anyone’s internal policies. It is ruling on the status of debt issued under U.S. (actually New York) law.”

      We know that. But it’s a tough one…that doesn’t stop the plain fact that “what can’t be repaid won’t be”.

      This is not going to be repaid.

      • Michael Gorback says:

        Cocoabean, if you “knew that” why did you state otherwise?

        I made no comment as to whether the debt would ever be repaid or not, but as it stands, calling for default is moot because they have already defaulted and creditors are pursuing them in the legal system.

        Nobody forced Argentina to borrow under U.S. jurisdiction and nobody is telling them how to run their country (unlike Greece’s creditors). The U.S. court is merely ruling on a deal entered into under U.S. law. To reject the court’s ruling is to say that the law has no binding effect.

        Telling countries they should default because they’re sovereign entities creates a dangerous precedent that would erode the status of sovereign debt.

        Default is not without consequences. The country has fallen into aggressive inflation and capital controls have massively distorted the economy while access to capital markets is at a standstill and foreign reserves are running on empty. Paul Singer didn’t start capital controls; Kirchner did.

        Going forward Argentina is going to have trouble borrowing (although the previous 6 defaults didn’t seem to stop lenders). There will always be someone willing to take the risk but they will demand high interest for the risk. If they just thumb their nose and stiff the creditors lending will be even more problematic.

        If Argentina had a lick of sense they’d work out a deal with the holdouts that gave them a return on their investment and work on putting this behind them. That won’t happen any time soon because as I said before Kirchner will try to stick her successor with the tab. So Argentina can’t even begin to work this out for a minimum of 4 months, barring a major rebellion by the populace.

        • jon Laughing says:

          And if you just look at the countries that defaulted on their debts in the twentieth century what do you see? Surprise, surprise. Now try to tell Argentina that they are holding the low moral ground, and that they must repay or else. What a joke. What hypocrisy.

  5. Jerry Bear says:

    I believe that the court ruling is in fact defacto interference with Argentina, despite the legal technicalities. National sovereignity seems to have become a meaningless formality. Only big finance and multinational corporations have any real sovereignity and it always trumps national interest or popular will. I am astonished at the fact that these bond investors bought their bonds AFTER two defaults by Argentina. Whatever happened to the tradition of “Let the buyer beware” if these greedy bastards took on excessive risk for high returns and suffer loss, that is just too bad! I do not except the modern doctrine that billionaires can never be allowed to suffer losses. As for Argentina, it is a mess and has been since the days of Juan Peron. A government ruled by irrational demagoguery is never going to do well. Look at their insanely stupid and utterly unnecessary Falklands War! Oh well. I have no sympathy for the Argentine government at all. Whatever happens is just going to lead to a bigger mess for the Argentine people…….

    • Michael Gorback says:

      Jerry it’s not a “legal technicality”. In the contractual terms of the bond issuance in 1994 Argentina specifically waived any protections it would have under the the Foreign Sovereign Immunities Act.

      The bond contracts said any disputes would be resolved under New York law. They also said the country’s obligation to repay could be transferred to vulture funds that buy bonds at a discount.

      “Let the buyer beware”? Without those sorts of contractual assurances Argentina probably couldn’t have borrowed bus fare. Those who bought the bonds thought they were protected under U.S. law, thus reducing their risk. Unfortunately the Kirchner government doesn’t seem to recognize the laws of the United States of America.

      You might think it’s trivial but the SCOTUS refused to hear Argentina’s appeal.

      • Jerry Bear says:

        Then, however this mess ends, I think investors should refuse yo invest in Argentinian bonds. They are obviously backed by nothing at all, if the Argentine government can ignore U.S, courts or any other outside agency. Like I said, investors need to be careful.

  6. Petunia says:

    Argentina never pays and the “investors” know it. They always get bailed out by the IMF and others fronting for the US govt. Argentina borrows because it can and will continue doing it until the US puts a stop to it. The real story is why does the US keep funneling money into this money pit.

    • Michael Gorback says:

      Nobody has bailed out Argentina this time. While they continue to screw bondholders they are also trying to buy a new fleet of fighter jets. Talk about strange priorities! Hard to sympathize.

      Unfortunately this default has indeed come back to bite them. They don’t have the ability to borrow. The last news I saw about buying jets was about trading cattle and wheat for Chinese planes since Argentina has almost no foreign reserves.

      They are literally reduced to bartering in international markets.

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