Home' Trinidad and Tobago Guardian : June 29th 2014 Contents SBG22 NEWS
SUNDAY BUSINESS GUARDIAN www.guardian.co.tt JUNE 29 • 2014
Argentina s 13-year fight with
creditors erupted in US
courts last week, and the
results were messy.
Argentina had asked the US Supreme Court
to overturn a lower court s ruling that it must
pay US$1.5 billion to hedge funds that own
bonds the country had defaulted on back in
2001. The Supreme Court refused to hear its
appeal---a victory for the hedge fund investors
whom Argentina s president, Cristina Fernan-
dez, calls "vultures."
Fernandez had said Argentina couldn t afford
to pay off the hedge funds while also making
regular interest payments to other lenders.
Late last week, signs of a possible resolution
emerged. Fernandez said she will seek a US
judge s support for resolving all of Argentina s
unpaid debts in one grand bargain.
But the time for a resolution is running out.
Argentina has one week before it s supposed
to make an interest payment to its other bond
holders on June 30. The US court said that
if Argentina made those interest payments, it
also had to give the plaintiffs their due. And
if Argentina refuses to comply, the ruling bars
US banks from handling the government s
One misstep and Argentina could slide
toward another default, an event likely to
spread trouble beyond its shores.
Just how did Argentina wind up in this
Here are some questions and answers:
Q: What happened after the Supreme
Court turned Argentina down?
A: A lot. The Supreme Court also decided
to let bondholders subpoena banks in US courts
to track down Argentina s assets abroad. The
decisions drove the country s Merval stock
index down 11 per cent last Monday.
The next day, the rating agency Standard
& Poor s cut Argentina s rating further into
junk territory: to CCC-, S&P s lowest grade
for any country.
For most countries, the rating agency s move
would be a harsh blow. It would inflate bor-
rowing costs and make it harder to finance
budgets. But Argentina s troubles are so well-
known that the downgrade came as little sur-
prise. Argentina hasn t borrowed from the
bond markets since its default in 2001.
Q: Who are the players?
A: In one corner, Argentina s government.
In the other, a group of investors led by NML
Capital, a subsidiary of Elliot Capital Man-
agement, run by billionaire Paul Singer. Singer,
a lawyer by training, has in the past successfully
sued the governments of Peru and the Republic
of the Congo to make good on their bonds.
In this case, NML and other funds bought
bonds left from Argentina s default in 2001.
Q: What do they want?
A: When the hedge funds bought the
defaulted bonds, they joined the ranks of
Argentina s creditors. Now, like lenders every-
where, they want the borrower to repay its
debts on the original terms.
The problem is, other creditors had already
agreed to cut Argentina a break in 2005 and
2010 by swapping their bonds for new ones
worth less. This helped Argentina s government
slash its debts.
The bonds acquired by Singer s group were
among those left over. In 2012, US District
Judge Thomas Griesa in New York ordered
Argentina to pay the holdouts. They re now
owed US$1.5 billion in principal and interest.
Q: Why is a US court telling a foreign
government what to do?
A: When a big business goes bust, it winds
up in bankruptcy court. By contrast, sovereign
countries have no dedicated international court
to help them strike deals with creditors. So in
agreements involving bond sales, language
typically stipulates that any legal battle must
occur in one of the two biggest financial cap-
itals: New York or London. "That s where the
money is," said Anna Gelpern, a professor of
international law at Georgetown University
and an expert on government debt.
Q: Why does this matter?
A: One worry is that forcing Argentina to
pay the holdouts would set a dangerous prece-
dent. The thinking is that it could encourage
bondholders to play tough when struggling
countries try to restructure their debts. Last
week, the International Monetary Fund warned
that the Supreme Court s decision could have
far-reaching repercussions. "We are concerned
about possible broader systemic implications,"
the IMF said.
Another concern is that the ruling upends
the usual order of things. In the past, when
some creditors had to take precedence over
others, sovereign governments typically came
before investment funds, said Mark Blyth, a
professor of international political economy
at Brown University.
"The old hierarchy really no longer applies,"
In negotiating with lenders, governments
had the threat of default on their side. Creditors
accepted restructuring deals in the certainty
that they would at least receive something.
Now, it seems, "the courts are taking away
the possibility of default," Blyth said. "It s part
of this wider push to put investors ahead of
Q: How big is Argentina s economy?
A: It s South America s second-largest
behind Brazil, according to the IMF. The IMF
puts the country s economic output for this
year at US$404 billion, or USUS$9,639 a per-
son. By contrast, the United States has a US$17
trillion economy, or US$55,000 a person,
according to the IMF s data.
Q: Argentina isn t poor. Why doesn t
the government just pay off the holdouts
and be finished with them?
A: It s not that simple. Argentina is supposed
to make an interest payment to bondholders
June 30, and the judge s verdict requires it to
pay the holdouts their USUS$1.5 billion at the
same time. If that were the entire bill, it would-
n t be a problem.
"US$1.5 billion isn t going to break Argenti-
na," said Siobhan Morden, head of Latin Amer-
ican strategy at the investment bank Jefferies.
"The problem is all the other litigants that
could join in."
Paying the hedge funds in full would likely
trigger lawsuits from other bondholders
demanding to be paid on similar terms. Buenos
Aires estimates that the liability could run up
to US$15 billion. Morden said it could approach
With nearly US$29 billion in foreign reserves,
Argentina appears to have the money to pay
its bills. But those reserves include loans to
other countries, deposits with the IMF and
other assets that aren t easily used. Take those
away, and Argentina has roughly US$16 billion
Troubled countries often find bond investors
willing to lend to them to pay other creditors.
But Argentina has been locked out of the bond
markets for more than a decade. Some investors
would probably step up to lend it money---at
painfully high interest rates.
"You can see why they have some financial
reservations about paying the holdouts," Mor-
Q: How are traders treating Argenti-
A: They re keeping a safe distance. Judging
by recent trading, bond buyers seem to think
another default is imminent. In the market
for credit default swaps, Argentina s govern-
ment debt is among the most expensive to
insure in the world.
To insure US$10 million in Argentine bonds
for five years, investors must pay US$4.4 mil-
lion up front, then an additional US$500,000
a year, according to Markit, a data provider.
Those figures imply a 71 per cent chance that
Argentina will default within five years.
Taking out insurance on debt from Brazil
looks cheap in comparison. The cost to insure
Brazil s debt runs US$139,000 for five years,
and investors have to pay nothing up front.
Q: So if Argentina defaulted on its debts
again, would it spread turmoil to other
A: Not immediately. Argentina is already
isolated from global credit markets, the usual
route for financial turmoil to spread, because
traders have been wary of just such a threat.
Over the long term, however, a default could
still cause problems for other countries. Gelpern
said her concern is that Argentina s experience
would make it harder for smaller countries to
emerge from trouble. "Other weaker countries
can t afford to wage fights for 13 years," she
ARGENTINA'S DEBT FIGHT
What it is, why it matters
US$1.5 billion isn't
going to break
problem is all the
that could join in.
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