Thursday, August 21, 2014

Argentina/US: Update--Buenos Aires Continues to Ignore the Rule of Law

According to The Latin American Tribune, Argentine President Cristina Fernández’s government on Wednesday (August 20) explained its proposal to pay bondholders under Argentine law and politically sidestep a US court ruling it doesn't care for in prohibiting Buenos Aires from servicing that debt until it settles with a small group of holdout hedge funds. 

The proposal, which the President Fernández unveiled Tuesday (August 19), opens the door for these so-called “exchange bondholders,” who accepted steep haircuts in two debt swaps after the country’s massive 2001 default, to collect on the debt payments either via state-owned Banco de la Nacion Argentina or another alternate avenue of their choice.

The plan does not involve a new debt restructuring, but rather a change in the payment jurisdiction to ensure the South American country “can continue paying and the (exchange) bondholders can continue collecting,” 

Economy Minister Axel Kicillof told a press conference on Wednesday: Argentina is seeking a way to comply with its obligations to the holders of restructured debt--issued under US law--after a federal judge in New York City blocked its most recent payment to those creditors. 

US District Court Judge Thomas Griesa ruled in favor of several hedge funds, led by Elliott Management Corp.’s NML Capital Ltd. unit and Aurelius Capital Management, that sued Buenos Aires for full payment on bonds they bought at large discounts in 2002.

As part of his ruling, he barred Bank of New York Mellon, the trustee for holders of restructured Argentine debt, from disbursing the $539 million Buenos Aires deposited in June.

Argentina’s appeal of the decision reached the US Supreme Court in June 2014, but the justices declined to hear the challenge.

“They (the exchange bondholders) also can offer a way out, a solution for collecting; this bill is not compulsory,” Kicillof said of the administration’s plan. 

The bill has already been introduced to Congress, where Fernández supporters are in the majority, and her administration expects it will be passed before its next payment is due to the exchange bondholders on September 30.

“Given the scope of the difficulties Judge Griesa and the US judicial system posed as far as the collection, not the disbursement, of the debt payments, it’s reasonable that the (Argentine) Congress should have this solution that we’re proposing,” Kicillof said.

The bill proposes that two accounts be opened: one to pay the vast majority of bondholders that accepted debt swaps in 2005 and 2010 and, in a new development, a second to pay the 7.6% of holdout creditors who did not accept the writedowns, including the hedge funds that won the judgment in Griesa’s court.

The payments will be made in the currency in which the bonds are denominated. In the press conference, Kicillof again railed against Judge Griesa, who in 2012 ordered Buenos Aires to pay the hedge-fund litigants more than $1.3 billion.

The ruling, Kicillof said, is “financial and political madness” that rewards 1% of bondholders in their strategy of “harassing” Argentina.

Fernández’s administration says that full payment to the hedge funds would lead other holdout bondholders to demand the same, creating a potential liability of some $15 billion, equivalent to half of Argentina’s foreign-exchange reserves.

Kicillof urged Paul Singer, founder and CEO of Elliott Management Corp. and leader of the group of hedge funds demanding 100 cents on the dollar for Argentine bonds bought in the wake of Buenos Aires’ record-setting default, to embrace the new plan.

COMMENT: The rule of law in modern society is the only factor that separates rogue nations from those who resort to intimidation and laws of the jungle. 

Singer said that it is unlikely that he would agree to such an arrangement because he would have to settle for a 300% profit on his investment, compared with the 1,600%, he is seeking to make thanks largely to Judge Thomas Griesa’s ruling.

Argentina defaulted on roughly $100 billion in debt in December 2001--the largest sovereign default in world history--amid a financial meltdown and economic depression.

More than 92% of Argentina’s creditors accepted steep haircuts in the 2005 and 2010 debt restructurings. The origins of the debt problem go back to Argentina’s 1976-1983 military regime, which presided over a 465% expansion in public indebtedness.