Argentina: Return from Debt Mountain

Back in 2013, we provided a somewhat in-depth look at the ongoing legal battle between Argentina and debtors who declined to participate in its post-default restructuring plan.

So first, to recap: Back in 2001-2002, Argentina defaulted on its debt.  More than 90% of bondholders participated in one of the two restructurings that took place (2005 and 2010), accepting a repayment structure that would pay them a fraction of their original holdings.  Argentina steadfastly refused to make any payments to the holdout bondholders (which Argentina describes as "vulture funds").  The holdout bondholders, meanwhile, took Argentina to federal court for the full payments (the original bond agreements gave U.S. federal courts jurisdiction over any disputes).  The federal district court had ruled in the bondholders' favor in November 2012 -- mandating that Argentina pay the holdout bondholders in full if it make any payment on the restructured bonds -- but the opinion had been stayed pending appeal to the Second Circuit by Argentina.

Flash forward to August 2013: The Second Circuit upheld the district court's opinion, rejecting arguments put forth by Argentina (and the U.S. government, siding with Argentina) with respect to both the bond contract interpretation as well as sovereign immunity.  Specifically, the Second Circuit ruled that Argentina must pay the holdout bondholders in full before it makes any payments on the restructured bonds.  Importantly, it also held that anyone helping Argentina make payments on the restructured bonds in defiance of its ruling could be held in contempt of court:

Argentina could simply ignore the ruling and continue to make payments on the restructured bonds while ignoring the other ones. 

But the court also made it clear that it would view anyone who helped Argentina make such payments as “assisting in a violation of the injunction.” It directly ordered Bank of New York Mellon, the trustee for the restructured bonds, not to make the payments to bondholders if Argentina sends it the money. And it warned that others not named in the case might face legal problems if they helped Argentina.

Argentina expected the case would be heard by the U.S. Supreme Court.  In June, the Court declined -- without comment -- to heart the case.

A poster in Argentina decries the "vulture funds" of the U.S. (Source: Yahoo News)


Today, Argentina was found to be in "technical default" because its payments to restructured bondholders were thwarted by the court-issued injunction preventing payments on the restructured bonds unaccompanied by payments to the holdout bondholders.  Markets in both Argentina and the U.S. dropped today, after last-minute talks collapsed.  Argentina, meanwhile, denies that it is in default, asking restructured bondholders to demand payment from the U.S. federal court system while its chief cabinet member cried conspiracy:

“The credit rating agencies, the financial agents and opinionators who are trying to say that Argentina is in a supposed technical default are playing an absurd hoax that is aimed at destroying the restructuring process of Argentina debt,” he said.

He further went on to accuse the federal judge and the negotiations mediator of complicity in the supposed default conspiracy:

"If there's a judge who's an agent of these speculative funds, if the mediator is their agent, what is this justice you're talking about? There's a responsibility of the state here, of the United States, to create the conditions for the unconditional respect of other countries' sovereignty," he said.

Investors remain hopeful that some sort of deal will be reached in the coming weeks.  Argentina, meanwhile, must at some point backtrack from its anti-capitalist populism.  Such rhetoric is sometimes necessary in South American politics, but it is unhelpful when your country is in the midst of its second debt default in 13 years.  Argentina was able to successfully restructure the large majority of its defaulted debt.  The remaining 7% has remained a political football in Argentina, used by politicians to burnish their populist credentials.  Throughout the holdout bondholder litigation, meanwhile, Argentina has expressed indignation at the notion that the holdouts would prevail in U.S. courts (especially when the U.S. government itself sided with Argentina).  Furthermore, it has time and again expressed its lack of respect for the federal judge in charge of the case and expressed its intentions to not abide by U.S. court rulings.  This is certainly Argentina's right as a sovereign nation, unless of course it wishes to utilize the U.S. financial system to develop its economy.  If that's the case, then Argentina should meet its debt default with serious answers rather than conspiracy-laden propaganda.

Building on Trust: Why the US Isn't Getting Very Far in Israel

Israel and Hamas are, by all accounts, at war in Gaza. US Secretary of State John Kerry is in the Middle East, frantically working with Israelis and Egyptians to nail down some sort of halt to hostilities, since the United States cannot work directly with Hamas - a designated terrorist organization. He's not getting very far and it's not entirely surprising. 

(Source: Jack Guez/AFP/Getty Images via The National Post)

Kerry next travels to France, where anti-Semitic rioting has flared in recent days, to attempt to gain support for a ceasefire among European leaders. Earlier, the Israeli cabinet rejected Kerry's ceasefire proposal, which the US has since downplayed as a disagreement on final wording - that no proposal was formally put forth. Part of that rejection involves Israel asserting its objective to continue to destroy tunnels during any ongoing ceasefire. Nonetheless, Israel and Hamas have agreed to a 12-hour humanitarian ceasefire, beginning at 8 AM local time.

It's not shocking to see Israel and the US disagree lately; there's very little substance to the US-Israel relationship under the Obama administration. In fact, it could be argued that there's likely no trust at all among leadership in the two countries. Just this past week, Kerry was caught criticizing the Israeli operation in Gaza. In backtracking, Kerry could only come up with the something trite: "...war is tough. We defend Israel's right to do what it is doing..." Well, of course. In 2011, at the G20 meeting, President Obama was also caught making an offhand remark about Israeli Prime Minister Benjamin Netanyahu, suggesting that he was "fed up with him" and perhaps even agreeing with then-French President Nicolas Sarkozy that Netanyahu was a liar. Earlier in 2011, Obama rebuffed meeting Netanyahu in the US, a surprise given the close US-Israel relationship in the past. The two have met as recently as this past March, with Netanyahu clearly stating that he would do nothing that would hinder Israeli national security. The two have spent more time attempting to lecture one another than to truly discuss options for peace.

The nonexistence of any legitimate relationship clearly undermines cooperative efforts to bring peace to the region. The damage done to the relationship may prove to solely be superficial - something a change in leadership on either side (or likely both sides) may correct. At the same time, the failure to secure any significant gains, not only in Israel, but in the greater Middle East as a whole, is a legacy that the Obama administration does not desire. In addition to the current Israeli-Hamas war, there are wars, on one level or another, in Syria, Iraq, Libya, Yemen, and Mali and political strife in Egypt, Tunisia, Turkey, Bahrain, and Iran (I'm sure I missed some). The toll in Syria alone may be as high as 160,000, not something that history or the administration can (continue to) easily brush aside.

The only options that remain during Obama's final few years in office are to make significant and serious decisions. The Washington Post suggests disarming Hamas; after all, how many political parties typically have a military wing (though it is important to note that some have in the past, including Israeli ones). Such bold action will not be easy, but any easy solutions have long since passed. It is time to make difficult decisions that bring change. Only with change can there be peace.

Bahrain Expels U.S. Diplomat

Earlier this week, Bahrain, which has been criticized for its response to demonstrations during the Arab Spring, ordered the expulsion of U.S. diplomat Tom Malinowski after he dared to meet with an opposition political party. Ironically, Bahrain attempted to reaffirm its relationship with the U.S. at the same time, while the U.S. Department of State rebuked Bahrain's position and request.

This incident is an opportunity for the U.S. to reaffirm its commitments to human rights and the political process in all countries, even those that may be strategic or military allies. In agreement with the Washington Post editorial, failing to make policy positions clear could encourage other nations to challenge U.S. priorities. Otherwise, the U.S. should just as well and give up on the moral high ground that it sometimes claim to lead.