Argentina could soon be settling its 14-year dispute with international creditors. Curiously they don’t seem very grateful
If you’re interested in paying less to pay off your home, a 15-year mortgage is probably for you. But that doesn’t apply anymore if you stop honouring your loan, as Argentina’s discovered. The holders of $900 million worth of bonds on which the country defaulted in 2001 claim they are now due about $9 billion, including accrued interest (that’s 400 percent of the principal).
The bonds are part of a $82 billion debt package Buenos Aires failed to repay at the beginning of the last decade, in what was then the largest-ever sovereign default of all times. Most creditors subsequently agreed to exchange their defaulted debt for new securities, accepting a 65 percent write-down. Most, but not all: the remaining 7 percent refused to give up the fight, seeking full repayment through the courts instead. These die-hard creditors were dubbed the "hold-outs”.
They were helped by the fact that the bonds did not include ‘collective-action clauses’, under which what a supermajority of bondholders decide must apply to all. Free to oppose any restructuring, the hold-outs soon rallied under the banner of hedge funds, led by Elliott Management, which had bought the debt in question at a hefty discount – and were ready to go to war to get fully repaid.
The resulting acrimony led Cristina Fernandez de Kirchner, Argentina’s previous president, to call these investors “vulture funds” or “financial terrorists”. A particularly rancorous episode saw Ghanaian courts seize an Argentine naval vessel as collateral for the hedge funds in 2012. Unfortunately for Kirchner’s administration, the hold-outs enlisted the support of an American judge, Thomas Griesa, early in the process – allowing them to score victories after victories in American courts (as the bonds are written under American law).
One of Griesa’s injunctions gave the hedge funds’ their main weapon. Not only did he uphold their claim at every turn of the saga, he also forbid any banks with operations in America from facilitating payment on the restructured bonds until the hold-outs were repaid in full. His decision made it impossible for Buenos Aires to go back to international markets to raise money (no investors in its sane mind would have lent it cash). This prompted the country to default on the restructured bonds in 2014.
Such leverage has made the hold-outs confident enough to scorn any discounted offer from Buenos Aires in the past. But in a surprise move, Elliott Management and his folks yesterday agreed to settle their claim for $4.65 billion (a haircut of 25 percent). So what’s different this time around? Answer: the hold-outs lost the upper hand.
A bit less than two weeks ago, Griesa accepted to lift the injunction barring Argentina from servicing its restructured debts, under certain conditions. His change of mind followed the arrival at the presidency of Mauricio Macri, a business-friendly figure resolute to resolve the dispute. Under the new government, Argentina also managed to strengthen its negotiating position, sealing a $1.35 billion deal with Italian bondholders and securing a $5 billion bridging loan from a group of international banks.
Whether Macri’s victory turns out to be complete depends on whether Griesa’s conditions are met. The main one requires Buenos Aires to repeal a number of laws, passed in 2005, intended to prevent the government for reopening the restructuring deal it had struck then at a later date. Success on this front is not a given: the measure must be approved by Argentina’s Congress, where Macri’s party doesn’t have a majority. But the recent defection of 18 opposition deputies gives good reasons to hope.
It is not obvious what precedent the saga sets for holders of defaulted sovereign debt. But for Argentina the bottom-line is clearly positive: the country’s fiscal deficit is expected to hit 7 percent in 2016; its foreign currency reserves barely cover its financing needs for a year. Being able to tap international markets again – after feeding the vultures at a discount – would give the government a big boost. And too bad if that means ruffling a few feathers along the way.
Photo Matthias Hangst/Getty Images