The Latin American country’s latest travails highlight the complex nature of sovereign debt defaults, ‘selective’ or otherwise.
The threat of default has loomed large again for Argentina in recent months. It went right down to the wire on 30 July when it became clear that a deal wasn’t going to be reached. For the eighth time in its history the country slipped grudgingly into default, making it one of the world’s most recidivist sovereign defaulters.
First, some context: The payment problems this time stem from Argentina’s mega-default in late 2001 when the country defaulted on $95bn in government bonds. Holders of around 92 per cent of those bonds accepted restructurings worth about $0.30 on the dollar, but the remaining bondholders – a group of US-based hedge funds led by billionaire Paul Singer’s Elliott Management – refused to accept the restructuring, demanded payment in full for old bonds that weren’t exchanged and sued for full payment.
A decade-long legal battle ensued and in July President Cristina Fernández de Kirchner’s government refused to abide by the decisions of the US courts and pay the holdouts, effectively locking Argentina out of the global capital markets altogether. Thus it was with good reason that tensions were high on 30 July as the culmination of the lengthy dispute saw US District Court Judge Thomas Griesa side with the hedge funds and duly freeze a $539m interest payment from Argentina, ordering the country not to make any payments on new bonds before it paid for its previous payments,
‘Argentina is solvent and it has shown both ability and willingness to pay its debt to the bondholders. The default is the consequence of a long court battle with the holdouts’
Partner, Zang Bergel & Viñes Abogados and Secretary,
IBA Latin America Regional Forum
Although Argentina initially denied it was in default, credit rating agency Standard & Poor’s summed up the situation neatly, downgrading the country’s rating to ‘selective default’.
And there’s little doubt that this default is one of a kind, says Robert Silva, partner at Marval, O’Farrell & Mairal in Buenos Aires and Vice-Chair of the IBA Banking Law Committee.
‘The current default situation is absolutely different from any other previous Argentine default,’ he says. ‘A default situation typically arises from a lack of capacity to pay or, in limited cases, lack of willingness to pay. Neither of these seems to exist in this case. Argentina has transferred the June 30 due amounts to the proper agents and the money, instead of being delivered to the investors, has been frozen and remains – so far – with such agents. Argentina has shown so far a lack of willingness to pay hold-out creditors but never hold-ins, in other words, the restructured creditors currently holding exchange bonds.’
The legal wranglings that triggered the default are what makes it unique, according to Carolina Zang, partner at Zang Bergel & Viñes Abogados and Secretary of the IBA Latin America Regional Forum. ‘Yes, it is very significant,’ she says. ‘Argentina is solvent and it has shown both ability and willingness to pay its debt to the bondholders. The default is the consequence of a long court battle with the holdouts, and not of financial insolvency.
‘In fact, the government has transferred the funds to service the discounts bonds to the Bank of New York Mellon, but there is a restraining order from Judge Griesa that prevents the bank from making the payments to the bondholders.’
Griesa’s interpretation of the pari passu clause, which requires the country to treat all bondholders alike – therefore paying not only the interest payments owed on its restructured bonds, but also paying in full the amount owed on bonds that holders refused to restructure – has drawn strong criticism.
‘The current situation has risen from a very novel interpretation of the ‘pari passu’ claim advanced by Judge Griesa and confirmed by the Courts of Appeals of New York that requires that hold-outs are paid every time hold-ins are paid,’ says Silva. ‘I have heard many reputed New York lawyers disagree with this interpretation.’
This interpretation has probably ‘shifted the balance of risk’, he says. ‘Hold-outs are no longer chasing assets to attach that are hard to find outside Argentina but have been given a superb victim, the same bondholders that were restructured in very harsh terms and that are now not collecting because the hold-outs are not paid. A bizarre outcome by all means.’
Just over a week after the default was declared, Argentina filed a lawsuit against the US in the International Court of Justice (ICJ) claiming that US court decisions on the country’s debt have violated Argentina’s sovereignty. However, the rules state that the ICJ is only required to take up the case if the US accepts the court’s jurisdiction in the matter. It declined.
While it appeared the country was seeking a resolution through legal means, the very legality of Argentina’s proposed solution has been brought under scrutiny. In late August Griesa declared Argentina’s last-ditch debt restructuring measures ‘illegal’ and called the country ‘lawless’ a dozen times during a 75-minute hearing.
Clearly then the news on 11 September that Argentina had approved the controversial legislation was probably the last thing Griesa wanted to hear, but the next steps are far from certain. ‘It remains to be seen if the law will make a difference,’ says Silva. ‘The key is the attitude that the European clearing agencies will take toward bond exchange requests.’
The strong economic and political pressures have wedged Argentina between a rock and a hard place, stresses Zang. ‘From an economic point of view, what could trigger the RUFO clause is paying the judge’s ruling,’ she says. ‘The partial default, from an economic point of view, could put more pressure on the international reserves of the Central Bank, which in turn puts pressure on the exchange rate and the inflation rate. But from a political point of view, paying Judge Griesa’s ruling would constitute a political defeat.’
Reaching an impasse
As for the legal implications, Zang acknowledges it is difficult to see what else Argentina could do. ‘If the government does not negotiate another way to pay the vultures without affecting the rights of the bondholders, there are not many additional legal actions that can provide a way out of this situation.’
As one US litigation lawyer toldGlobal Insight, repeated attempts by the Argentine government to ask the Obama administration to intervene in the judicial process had, quite rightly, been rebuffed, since the judiciary is independent and not an instrument of the executive branch.
And as a flurry of subpoenas are being served to banks in a desperate bid to reveal information about Argentina’s accounts and transaction history, the situation seems no closer to a resolution.
‘The subpoenas are only evidence that the negotiations have not advanced and how difficult it continues to be to attach Argentina’s assets,’ says Silva.
Nevertheless, with international banks such as Citigroup, Bank of China and Industrial and Commercial Bank of China all under scrutiny, it is all too clear that what may go down as the smallest default in history will have strong implications not only for Argentina and the US, but also the global capital markets.
Ruth Green is a freelance journalist and can be reached at firstname.lastname@example.org