Tag: Argentine Default

A Bill Argentina Won’t Pay

Yesterday, the South American country went into default for the second time in 13 years:

The country’s previous default, when it reneged on $81 billion in debt in 2001, is the source of its latest one. Most of its creditors exchanged their defaulted debt for new securities in two restructurings that took place in 2005 and 2010. But a few creditors took a different path. They scooped up the cheap defaulted debt in order to chase payment of full principal plus interest in the New York courts, under whose law the original bonds were written.

Led by NML Capital, a hedge fund, a group of these hold-outs – [Argentine minister Axel] Kicillof and his boss, President Cristina Fernández de Kirchner, prefer the term “vulture” funds – won an order barring Argentina from paying its exchange bondholders unless it also coughed up the $1.3 billion plus interest they wanted. That meant Argentina either had to deal with the hold-outs or stop paying the exchange bondholders, and thereby tip into default again. The Argentine government refused even to meet the hold-outs in person until July 29th, the day before a grace period on a payment to exchange bondholders expired.

Tim Fernholz finds plenty of blame to go around:

If the vulture funds had exchanged their bonds earlier, they would have made a decent profit and saved us all this mess—but there’s no law saying they had to do that. If global finance hadn’t integrated the world’s economies, Argentina wouldn’t have suffered from capital flight – but it wouldn’t have had access to capital to begin with absent that system. If Judge [Thomas] Griesa hadn’t issued his controversial order, the holdouts contracts would be unenforceable – but it will be harder for any sovereign to borrow money if lenders fear they can’t collect. And if Argentina’s various regimes hadn’t made economic policy mistakes or had simply been more pragmatic, this whole situation might never have arisen – but it’s their citizens, and likely not the leaders themselves, who will pay the stiffest price.

But Salmon isn’t too sure about that:

[A]s for the ordinary Argentine citizen, well, there’s a lot of inflation and unemployment and black-market foreign-exchange trading going on, but that’s been true for years, and it’s far from clear how much – or even whether – the default is going to exacerbate such things. Indeed, Argentina is in pretty good financial shape right now. Both the country and its corporations have relatively little debt, which means relatively little problem rolling it over. Bank deposits are stable. The exchange rate doesn’t seem any more fragile than it has been for months. Foreign reserves have actually been going up in recent weeks. In terms of day-to-day financial life in Argentina, today looks almost identical to yesterday. Nothing much has really changed.

Meanwhile, Robert Kahn looks forward:

Negotiations will continue, and there will continue to be talk of a possible deal that would end the default, including a plan where local banks buy the debt and sell it to the government. I’m deeply skeptical. Over the last 10 years, Argentina essentially has not budged from the position that holdouts would get no better deal than those that restructured. As the court cases went against them, that offer became less and less attractive to the creditors, the courts became more resistant to stays and other rulings to protect Argentina, and the gap between the parties became so vast that it is hard to imagine any side caving now. Indeed, the political cost within Argentina of the government now paying off the holdouts seems extraordinarily high, suggesting that we may need a new government before a negotiated solution is possible.