Before getting into the nuances of the current federal appeal, however, a brief trip down memory lane is in order. The bond dispute stems from Argentina's infamous 2001 debt default. The default, in which Argentina defaulted on $87 billion of its bond debt, was devastating for Argentina; the Argentinian peso, for example, quickly went from a 1:1 parity with the dollar to a 4:1 peso-dollar exchange rate; provinces began printing their own currency, grain became a preferred currency, and bartering sustained flailing businesses. Argentina's economy never fully recovered (but more about that later) and has spent the past decade delicately attempting to move the economy forward whilst always peeking over its shoulder to make sure the default doesn't thwart future progress.
So how, exactly, did Argentina address the default and bond crisis in 2001-02? For starters, it reached a deal with most bondholders under which defaulted bonds were exchanged for new bonds; the new bonds were worth 25-35% of the original bond value, they were longer-term bonds, and some were indexed to future economic growth and inflation in Argentina. Indeed, after much bluster, approximately 93% of bondholders ultimately participated in the 2005 and 2010 restructuring deals.
Those who did not take the deal, considered the "holdout bondholders," turned to the federal court system to address their grievances. They were given this avenue because the original Argentinian bond contracts stipulated that New York contract law would govern litigation disputes and specifically granted jurisdiction to the federal district court in the Southern District of New York (see paragraphs 22 and 23, on pgs 29-30 of the original bond agreement, which consent to jurisdiction within the confines of New York and governance of New York state law, respectively)
The holdout bondholder litigation has heated up in the past year or so. A good summary of the history of the bond crisis, the restructuring deals, and the ongoing litigation can be found here. Key quote below:
Last year, the federal judge handling the case ruled that Argentina must pay the full amount of outstanding bonds -- approximately $1.33 billion -- and that it cannot provide preferential treatment (as it has done to date) to the bondholders who participated in its 2005 and 2010 restructurings. Essentially, this means Argentina cannot continue to make payments on the restructured bonds while ignoring the outstanding holdout bonds. Thus far, Argentina has vowed to not pay the holdout bondholders.
(For the record, the following is in part academic because the ruling has been stayed pending appeal, but is still relevant to the extent that the Second Circuit might ultimately affirm it)
Judge Griesa's November 2012 opinion, reaffirming his February 2012 ruling, takes a hard-line approach to the repayments. First, it notes that Argentina is scheduled to make interest payments to the restructured bondholders in December 2012. It then notes that if Argentina makes 100% of those scheduled payments, it must in turn make 100% of the principal and accrued interest to the holdout bonds (i.e. the entire $1.3 billion that is the subject of the litigation):
This gives Argentina three options: making both payments, making its restructured bondholder payments and ignoring the court order, or defaulting on the restructured bonds and ignoring the court order. Argentina has warned of dire consequences should the federal courts make it pay the holdout bondholders. For example, it has claimed that such a ruling could force a default on the restructured bonds, triggering another debt crisis. Given that Argentina has over $40 billion in foreign currency reserves, however, such claims are overstated.
Argentina (and the U.S., in a friend-of-the-court filing), also argues that a ruling in favor of the holdout bondholders could affect other state-bondholder situations around the world (note: information from this paragraph comes from the October 2012 Second Circuit ruling, which can be found here). Essentially, the argument goes, states should have flexibility in dealing with debt restructuring and a ruling against Argentina discourages the type of bond restructuring deals that are necessary to address the unique circumstances of sovereign debt default. Of course, a simple counterargument is that states should be discouraged from defaulting on their debt and that the court's ruling is nothing more than the simple contract law proposition that the remedy for a breach of contract is that the injured party be paid the money it's due. Additionally, as the Second Circuit noted in its October 2012 decision (on pg 27), other states (perhaps noting the problems faced by Argentina) have negotiated better bond issuance collective action provisions that prevent holdouts from pursuing litigation when a majority of bondholders accept a restructuring. Finally, there are institutions specifically designed to help ensure the availability of loans and funds to states in need of such funds.
...which brings us to the IMF, which currently enjoys a particularly frosty relationship with Argentina. Last month, the IMF censured Argentina for intentionally producing inaccurate inflation records (drastically underreporting its true inflation) and gave the South American state until September 29th to take "remedial measures." The government took over the statistics institute in 2007, and since then, the discrepancy has been "up to 15 percentage points." As the Economist's chart notes, reported inflation is around 10% while unofficial estimates put the true inflation rate around 25%. Why, one might ask, is Argentina working so hard (firing statisticians who don't toe the party line, for example) to keep "official" inflation down? Well, it just so happens that some of those restructured bonds are linked to inflation:
When domestic politics are worrisome, many smart politicians will look elsewhere to shore up nationalist sentiment. This may well explain Argentina's recent saber-rattling over the Falkland Islands, which are set to vote in a referendum today and tomorrow over their political status as an Overseas Territory of the UK. The vote is expected to be overwhelmingly in favor of the overseas territory status; in fact, the Islanders hope the referendum "will send a firm message to Argentina that islanders want to remain British." Argentina, for its part, has ramped up rhetoric. Its foreign minister stated that the Islands would be under Argentinian control within twenty years; its vice president called the locals "territorial pirates," noting
Of course, apart from extremely powerful and emotional nationalistic sentiments on both sides of the Atlantic, another reason for renewed interest in the Falkland Islands is the potential for oil production. Given Argentina's recent interest in state-owned energy, it would not be a great leap of imagination to foresee Argentina desiring ownership of the Falkland Islands for an economic-nationalist-political coup. Of course, if you were a Falkland Islander, would you really want to ride in Argentina's coattails in light of its recent economic developments?
So how, exactly, did Argentina address the default and bond crisis in 2001-02? For starters, it reached a deal with most bondholders under which defaulted bonds were exchanged for new bonds; the new bonds were worth 25-35% of the original bond value, they were longer-term bonds, and some were indexed to future economic growth and inflation in Argentina. Indeed, after much bluster, approximately 93% of bondholders ultimately participated in the 2005 and 2010 restructuring deals.
Those who did not take the deal, considered the "holdout bondholders," turned to the federal court system to address their grievances. They were given this avenue because the original Argentinian bond contracts stipulated that New York contract law would govern litigation disputes and specifically granted jurisdiction to the federal district court in the Southern District of New York (see paragraphs 22 and 23, on pgs 29-30 of the original bond agreement, which consent to jurisdiction within the confines of New York and governance of New York state law, respectively)
The holdout bondholder litigation has heated up in the past year or so. A good summary of the history of the bond crisis, the restructuring deals, and the ongoing litigation can be found here. Key quote below:
For the last decade, Argentina and its holdout creditors have sparred in U.S. courts over the country's 2002 debt default. The creditors are suing to be repaid in full after spurning two debt swap offers accepted by about 93 percent of bondholders.
The battle only really heated up late last year, when two courts said Argentina was discriminating against the holdouts and must pay them whenever it services the restructured bonds - raising fears of a fresh default if Argentina refused to comply.
...
The rulings gave hope to the holdouts, including U.S. hedge fund Elliott Management, who have won several billion dollars in court-awarded damages but collected very little since Argentina refuses to pay and U.S. sovereign immunity laws protect most foreign assets from seizure.
Argentine President Cristina Fernandez, a combative center-leftist, vows to never pay the holdouts but will honor the bonds issued to other investors in the 2005 and 2010 restructurings.
Last year, the federal judge handling the case ruled that Argentina must pay the full amount of outstanding bonds -- approximately $1.33 billion -- and that it cannot provide preferential treatment (as it has done to date) to the bondholders who participated in its 2005 and 2010 restructurings. Essentially, this means Argentina cannot continue to make payments on the restructured bonds while ignoring the outstanding holdout bonds. Thus far, Argentina has vowed to not pay the holdout bondholders.
(For the record, the following is in part academic because the ruling has been stayed pending appeal, but is still relevant to the extent that the Second Circuit might ultimately affirm it)
Judge Griesa's November 2012 opinion, reaffirming his February 2012 ruling, takes a hard-line approach to the repayments. First, it notes that Argentina is scheduled to make interest payments to the restructured bondholders in December 2012. It then notes that if Argentina makes 100% of those scheduled payments, it must in turn make 100% of the principal and accrued interest to the holdout bonds (i.e. the entire $1.3 billion that is the subject of the litigation):
In December 2012, there are interest payments of approximately $3.14 billion due on the Exchange Bonds. Presumably, Argentina intends to pay 100% of what is owed. There are currently debts owed to plaintiffs by Argentina of approximately $1.33 billion. It should be emphasized that these are debts currently owed, not debts spaced out over future periods of time. In order to comply with the terms of the Injunctions, Argentina must pay plaintiffs 100% of that $1.33 billion concurrently with or in advance of the payments on the Exchange Bonds.The underlying principle by which Judge Griesa justifies such a formula is "pari passu" -- Latin for "with an equal step"; as Judge Griesa notes, another definition is "proportionally." It is interesting, however,, that his opinion then strains itself to put the scheduled interest payments on restructured bonds on equal footing with the principal and interest on the holdout bonds. The justification is simply:
[I]f 100% of what is currently due to the exchange bondholders is paid, then 100% of what is currently due to plaintiffs must also be paid.The term "currently due" is a tad misleading, when used in this context. One could argue that a better metric is what Argentina currently owes to restructured and holdout bondholders -- that number, in fact, might set up a better system for devising "proportionality" with respect to when and how much holdout bondholders are owed money. Of course, on this flip side, one could argue that they staked their entire litigation, with all its attendant risks, on the possibility of a loss and the reciprocal possibility of successful litigation with its attendant benefits. Because they opted not to take a restructured bond deal, these holdouts can lay claim to 100% of their owed principal and interest in one fell swoop -- that, the argument goes, is one of the consequences of defaulting on your debt.
This gives Argentina three options: making both payments, making its restructured bondholder payments and ignoring the court order, or defaulting on the restructured bonds and ignoring the court order. Argentina has warned of dire consequences should the federal courts make it pay the holdout bondholders. For example, it has claimed that such a ruling could force a default on the restructured bonds, triggering another debt crisis. Given that Argentina has over $40 billion in foreign currency reserves, however, such claims are overstated.
Argentina (and the U.S., in a friend-of-the-court filing), also argues that a ruling in favor of the holdout bondholders could affect other state-bondholder situations around the world (note: information from this paragraph comes from the October 2012 Second Circuit ruling, which can be found here). Essentially, the argument goes, states should have flexibility in dealing with debt restructuring and a ruling against Argentina discourages the type of bond restructuring deals that are necessary to address the unique circumstances of sovereign debt default. Of course, a simple counterargument is that states should be discouraged from defaulting on their debt and that the court's ruling is nothing more than the simple contract law proposition that the remedy for a breach of contract is that the injured party be paid the money it's due. Additionally, as the Second Circuit noted in its October 2012 decision (on pg 27), other states (perhaps noting the problems faced by Argentina) have negotiated better bond issuance collective action provisions that prevent holdouts from pursuing litigation when a majority of bondholders accept a restructuring. Finally, there are institutions specifically designed to help ensure the availability of loans and funds to states in need of such funds.
...which brings us to the IMF, which currently enjoys a particularly frosty relationship with Argentina. Last month, the IMF censured Argentina for intentionally producing inaccurate inflation records (drastically underreporting its true inflation) and gave the South American state until September 29th to take "remedial measures." The government took over the statistics institute in 2007, and since then, the discrepancy has been "up to 15 percentage points." As the Economist's chart notes, reported inflation is around 10% while unofficial estimates put the true inflation rate around 25%. Why, one might ask, is Argentina working so hard (firing statisticians who don't toe the party line, for example) to keep "official" inflation down? Well, it just so happens that some of those restructured bonds are linked to inflation:
Doctoring the number saved the government some $2.5 billion in payments on index-linked debt, according to an estimate by Miguel Kiguel, an economist in Buenos Aires.To make matters worse, wages have unsurprisingly not risen with the inflation -- official or unofficial. What to do in such a situation? If you're President Cristina Fernandez, declare a price freeze at supermarkets and hope for the best. This is just the latest in a series of anti-capitalist moves by President Fernandez; as reported in Illexum last April, she nationalized the country's largest oil company. All in all, the latest economic developments out of Argentina are bleak.
When domestic politics are worrisome, many smart politicians will look elsewhere to shore up nationalist sentiment. This may well explain Argentina's recent saber-rattling over the Falkland Islands, which are set to vote in a referendum today and tomorrow over their political status as an Overseas Territory of the UK. The vote is expected to be overwhelmingly in favor of the overseas territory status; in fact, the Islanders hope the referendum "will send a firm message to Argentina that islanders want to remain British." Argentina, for its part, has ramped up rhetoric. Its foreign minister stated that the Islands would be under Argentinian control within twenty years; its vice president called the locals "territorial pirates," noting
"A referendum in which the colonists will take part, the descendants of those who evicted the true inhabitants of those islands, means a disrespect to intelligence and to national and international law. . . . No brand of pirates will get hold of the sovereignty and dignity of the Argentine Republic."President Fernandez, for her part, in January 2013 wrote an open letter to British PM Cameron in which she called upon Britain to end its 180-year history of colonialism and return the islands to Argentina -- which, she notes, "was forcibly stripped" of the islands in a "blatant exercise of 19th-century colonialism." The actual history of the islands is much less clear, with evidence that both were engaging in colonial efforts of varying degrees of success in the first decades of the 19th century.
Of course, apart from extremely powerful and emotional nationalistic sentiments on both sides of the Atlantic, another reason for renewed interest in the Falkland Islands is the potential for oil production. Given Argentina's recent interest in state-owned energy, it would not be a great leap of imagination to foresee Argentina desiring ownership of the Falkland Islands for an economic-nationalist-political coup. Of course, if you were a Falkland Islander, would you really want to ride in Argentina's coattails in light of its recent economic developments?
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