Home' Trinidad and Tobago Guardian : February 11th 2016 Contents FEBRUARY 11 • 2016 www.guardian.co.tt BUSINESS GUARDIAN
REGIONAL | BG11
It may have taken 14 years, but the holders
of US$900 million of bonds on which Argenti-
na defaulted in 2001 soon should be repaid.
On February 2 Alfonso Prat-Gay, Argentina s
new finance minister, announced a deal with
Italian bondholders worth US$1.35 billion, or
150 per cent of the principal. The "pre-agree-
ment," which still has to be approved by
Argentina s Congress, is fairly small: It covers
only 15 per cent of the "holdouts" who rejected
restructurings in 2005 and 2010. It sets an
important precedent, however. The creditors
had been seeking US$2.5 billion, including
outstanding interest payments, and Argentina
hopes to persuade the remaining 85 per cent
to accept a similar write-down.
The omens for a wider deal, however, are
Argentina s US$82 billion sovereign default
in 2001 was the largest-ever at the time. Some
93 per cent of bondholders subsequently agreed
to exchange their defaulted debt for new secu-
rities, accepting a write-down of 65 per cent.
However, the original bonds had not included
"collective-action clauses," under which a
restructuring could be forced on all bondholders
if a certain proportion of them agreed.
The remaining creditors rejected the offer,
with some pursuing full payment through the
courts instead. A group of them, led by Elliott
Management, a hedge fund, has secured a
number of victories in courts in New York,
under whose law the original bonds were writ-
ten. One of those rulings barred Argentina
from paying interest on the restructured debt
unless it also paid the holdouts in full. The
court also forbade banks with operations in
America from facilitating such payments.
As a result Argentina defaulted on the
restructured bonds in 2014. An attempt to get
around the ruling by making payments to the
restructured bondholders in Argentina, beyond
the reach of New York s courts, fizzled. The
defaults upon defaults have restricted Argenti-
na s access to international credit markets and
hampered efforts to resuscitate its ailing econ-
In December President Mauricio Macri took
office promising to strike a deal with the hold-
outs and return the country to economic
health. It helps that a clause in the restructuring
deals obliging Argentina to extend any
improved deal it strikes with the holdouts to
all the original bondholders has expired.
After preliminary meetings in December
and January, Argentine officials opened formal
negotiations with Daniel Pollack, a court-
appointed mediator, and a number of the hold-
out bondholders in New York on February 1.
The first day of meetings lasted only four
hours, and Argentina conceded that it was
"still working" on a new offer.
Pollack estimated that the holdouts claim,
including accrued interest, now amounts to
400 per cent of the principal, a figure which
equates to US$9 billion. The holdouts have
disdained discounted offers from Argentina
in the past, and presumably would turn up
their noses at 150 per cent.
Argentina has worked hard in recent weeks
to strengthen its negotiating hand, however.
After meeting Prat-Gay on January 21 in Davos,
Treasury Secretary Jack Lew pledged that the
United States no longer would oppose lending
to Argentina at the World Bank and Inter-
American Development Bank. Argentina also
has persuaded private banks to lend it money.
On January 29 Argentina s central bank
announced that it had secured a US$5 billion
bridging loan from a group of international
banks, including HSBC, JP Morgan Chase and
That eases the immediate pressure on
Argentina, but Macri s political programme
still hinges on a return to international capital
markets. Argentina s fiscal deficit is an esti-
mated 7.0 per cent of GDP. The government
will need US$30 billion in financing this year,
according to Miguel Kiguel, director of Econ-
views, a local consultancy. The central bank,
for its part, has only US$30 billion of foreign-
"Argentina is in a race against time," he said.
"It would be very difficult to raise that kind
of money in Argentina."
Any deal with holdout creditors will have
to be approved by the Argentine Congress,
where Macri s party is in a minority. It will
take skill to sell an accord to opposition politi-
cians who have spent years resisting a com-
promise with "vulture funds" such as Elliott
Management, which bought the debt in ques-
tion at a hefty discount.
During the first round of restructuring, in
2005, Argentina introduced the "Ley Cerrojo"
(Padlock Law), which was intended to prevent
negotiations from being re-opened at a later
date. It was suspended for a year to enable a
second restructuring in 2010, but remains on
the books. The law under which Argentina
attempted to steer money to the holders of
the restructured bonds also could impede the
ratification of any new deal.
"Congress will have to repeal them," Kiguel
Many Argentines dislike the idea of reward-
ing the holdouts for their obstinacy. However,
Macri may like the idea of a distracting feud
with them even less. AP
Venezuela s economy is facing
a tsunami of bad news. The
country is suffering from the
world s deepest recession,
highest inflation rate, and
highest credit risk---all prob-
lems aggravated by plunging oil prices. Despite
all its troubles, though, until now Venezuela
has kept making payments on its US$100-
billion-plus foreign debt.
That is about to end. In recent days a con-
sensus has emerged among market analysts:
Venezuela will have to default. The only ques-
tion is when.
A Venezuela meltdown could rock financial
markets, and people around the world will
lose a lot of money. But we should all save
our collective sympathy --- both the govern-
ment in Caracas and the investors who enabled
it had it coming.
In the last few years, the Venezuelan gov-
ernment has been steadfast about staying in
good graces with its lenders. It has paid arrears
on its debt religiously, and has constantly
asserted that it will continue paying.
But it has neglected to implement the
reforms Venezuela would need to improve the
fundamentals of its economy. Its commitment
to socialist "populism" and the complicated
internal dynamics within the governing coali-
tion have paralyzed the government. It has
repeatedly postponed important reforms like
eliminating its absurd exchange rate controls
(the country has at least four exchange rates)
or raising the domestic price of gasoline (the
cheapest in the world by far). Instead, the gov-
ernment has "adjusted" by shutting off
imports, leaving store shelves all over the coun-
This strategy now seems unsustainable.
According to various estimates, in 2015
Venezuela imported about US$32 billion worth
of goods. This was a marked drop from the
previous year. This year, given current oil prices
and dwindling foreign reserves, if Venezuela
were to pay off its obligations---at least US$10
billion---and maintain government spending,
it would have to import close to nothing. In
a country that imports most of what it con-
sumes, this would ensure mayhem. That is
why all analysts predict default in the coming
The Economist has joined the chorus, saying
that "the government has run out of dollars."
In the words of Harvard professor Ricardo
Hausmann, this will be "the largest and messi-
est emerging market sovereign default since
the Argentine crisis of 2001."
One of the reasons the coming default will
be so messy is the many instruments involved,
all issued under widely varying conditions.
Part of the stock of debt was issued by PDVSA,
Venezuela s state-owned oil company, which
owns significant assets overseas (For example,
Citgo is 100 percent owned by the Venezuelan
government). Another part of the debt was
issued by the national government directly,
while another big chunk is owed to China,
under secretive terms.
The Chinese issue looms large. China s loans
to Venezuela---close to about US$18 billion,
according to Barclay s---consist of short-term
financing payable via oil shipments. As the
price of oil collapses, Venezuela needs to ship
more oil to China in order to pay them back.
Barclay s estimates that right now this is close
to 800,000 barrels per day, leaving little more
than a million barrels per day Venezuela can
sell for cash.
A default will send ripples beyond Wall
Street. Many people have been buying high-
risk, high-return Venezuelan debt for years
from pension funds in far-off countries to
small banks in developing ones. Most stand
to lose their shirts. Yet the signs that this was
unsustainable were there for all to see.
For years, Venezuela has had a massive
budget deficit, sustained only by exorbitant
oil prices. For years, analysts have been warning
that the Venezuelan government would rather
chew nails that allow the private sector to
grow. And yes, a lot of that borrowed money
was used to help establish a narco-military
It is impossible to untangle the ethical impli-
cations of all of this. Lending Venezuela money
is what business ethics professors talk about
when they question "winning at someone
else s expense." Losing money from investing
in Venezuela is akin to losing it from, say,
funding a company that engages in morally
Investors in companies with "tainted profits"
from, say, engaging in child labor or violating
human rights should not get the world s sym-
pathy, nor should they be bailed out. Similarly,
investors in Venezuelan debt have only their
hubris to blame.
In a few months, once the rubble of the
Bolivarian revolution is cleared, the discussion
will turn to how Venezuela can be helped. It
would be smart to remember that aid should
come to the Venezuelan people first. As the
scarcity of food and medicine grows, Venezuela
may become the first petro-state to face a
If and when a responsible government in
Caracas asks for foreign assistance, solving
this urgent issue should be at the top of the
agenda. Conditions on financial assistance
should privilege the interests of Venezuelans
caught in the debacle above the interests of
angry hedge fun managers or international
In other words, the Venezuelan people
should come first. The folks who enabled this
catastrophe? They can wait.
Foreign Policy Magazine
Venezuela is about to go bust
Argentina's disputed debts: Feeding the vultures
In the photo, people line up to buy basic food and household items outside a supermarket in
Caracas, Venezuela on January 21, 2016.
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