A fair resolution would rein in inflation and cut borrowing costs, writes Jay Newman
W hen a nation experiences a debt crisis, its leaders usually try to resolve matters as quickly as possible. Argentina is different. Almost 12 years after defaulting on more than $80bn in debt, its problems remain unresolved. Our firm, which manages money for pension funds, university endowments and others, is among the remaining holders of the defaulted debt.
For more than a decade we have made clear to the Argentine government and its lawyers that we are ready and willing to sit down and discuss a resolution. They have refused even to listen. Though the country could easily afford to pay all of its defaulted debt tomorrow, its leaders have chosen to waste the nation’s money and time waging a futile legal battle against its unpaid creditors.
This legal battle reached a head in August when the US Court of Appeals for the Second Circuit in New York unanimously rejected all of Argentina’s arguments, branded the country a “uniquely recalcitrant debtor” and ordered it to comply with its contractual obligations.
In a televised address just three days later, President Cristina Fernández begged the US Supreme Court to overturn the decision, but also vowed to defy the court if its ruling was not in Argentina’s favour. This is like threatening a judge that you will break out of jail unless your sentence is commuted. Yesterday, the court denied Argentina’s petition for review. It is time for Argentina to cease its threats and to engage.
We began investing in Argentine bonds before the 2001 default. Following the default, we hoped to reach a reasonable settlement – along with the rest of Argentina’s creditors – through a negotiated restructuring. We considered litigation to be a last resort.
We tried to engage Argentina in good-faith talks. In 2003, I had dinner with Guillermo Nielsen, then secretary of finance. My case was that Argentina would maximise the number of creditors that would participate in its restructuring if it pursued a conciliatory and open process of negotiations.
This advice was well grounded. According to the International Monetary Fund, “extensive informal discussions” between Pakistan and its creditors yielded a 99 per cent participation rate in its 1999 exchange. In 2002, 100 per cent of Moldova’s creditors agreed to its restructuring plan after “extensive negotiations” proved successful.
Like nearly every other sovereign-debt restructuring achieved through negotiations, these exchanges were completed in months. At dinner with Mr Nielsen, I offered my firm’s expertise. Far from taking our advice, his team refused to negotiate.
Instead, in 2005, Argentina offered creditors a take-it-or-leave-it bond exchange valued at roughly 25 to 27 cents on the dollar. Only about 76 per cent of the defaulted debt was tendered, much of it coming from Argentines who had little choice. More than half of foreign creditors rejected the deal.
In 2010, Argentina followed up with a second unilateral offer on even worse terms. But by that point Argentina’s conduct had demoralised most remaining creditors, causing them to sell their bonds to new buyers who took the low-ball offer. Our firm and a few others – along with thousands of small investors from Argentina, Italy and elsewhere – continued to push for a fair settlement.
Following the second exchange, we met Hernán Lorenzino, then secretary of finance, and spoke about how one might structure a transaction that would appeal to the remaining bondholders. Our cordial conversation left me with the impression that we could work together, but I heard nothing more.
Several times in 2011, colleagues and I met Alfredo Chiaradía, then Argentina’s ambassador to the US. We hoped engagement might eventually lead to more substantive discussions. However, he left his post – and our requests to meet his successors have been flatly rejected.
In addition, after many court hearings, I have asked Argentina’s lawyers to indicate to their client that we would like to negotiate. We have never had a reply.
Fair resolution of the 2001 default would deliver significant benefits to Argentina. It would rein in galloping inflation and reduce borrowing costs to the level of the country’s regional peers, allowing it to save as much as $74bn in lower interest costs in the next 10 years without any change in its current debt stock.
Similar interest savings would accrue to Argentina’s provinces and businesses. Savings for the provinces could total as much as $825m, and its businesses could save up to $2bn annually before taxes. Improved investor sentiment would lead to increased foreign direct investment, significantly boosting the nation’s economic growth prospects.
We remain willing to engage in discussions, and we believe we could reach a beneficial resolution. But we need a partner on the other side of the table. We need Argentina to be as ready as we are to consign the 2001 default to the past.
The writer is a senior portfolio manager at Elliott Management Corporation
Copyright The Financial Times Limited 2013. You may share using our article tools.
Please don’t cut articles from FT.com and redistribute by email or post to the web.
W hen a nation experiences a debt crisis, its leaders usually try to resolve matters as quickly as possible. Argentina is different. Almost 12 years after defaulting on more than $80bn in debt, its problems remain unresolved. Our firm, which manages money for pension funds, university endowments and others, is among the remaining holders of the defaulted debt.
For more than a decade we have made clear to the Argentine government and its lawyers that we are ready and willing to sit down and discuss a resolution. They have refused even to listen. Though the country could easily afford to pay all of its defaulted debt tomorrow, its leaders have chosen to waste the nation’s money and time waging a futile legal battle against its unpaid creditors.
This legal battle reached a head in August when the US Court of Appeals for the Second Circuit in New York unanimously rejected all of Argentina’s arguments, branded the country a “uniquely recalcitrant debtor” and ordered it to comply with its contractual obligations.
In a televised address just three days later, President Cristina Fernández begged the US Supreme Court to overturn the decision, but also vowed to defy the court if its ruling was not in Argentina’s favour. This is like threatening a judge that you will break out of jail unless your sentence is commuted. Yesterday, the court denied Argentina’s petition for review. It is time for Argentina to cease its threats and to engage.
We began investing in Argentine bonds before the 2001 default. Following the default, we hoped to reach a reasonable settlement – along with the rest of Argentina’s creditors – through a negotiated restructuring. We considered litigation to be a last resort.
We tried to engage Argentina in good-faith talks. In 2003, I had dinner with Guillermo Nielsen, then secretary of finance. My case was that Argentina would maximise the number of creditors that would participate in its restructuring if it pursued a conciliatory and open process of negotiations.
This advice was well grounded. According to the International Monetary Fund, “extensive informal discussions” between Pakistan and its creditors yielded a 99 per cent participation rate in its 1999 exchange. In 2002, 100 per cent of Moldova’s creditors agreed to its restructuring plan after “extensive negotiations” proved successful.
Like nearly every other sovereign-debt restructuring achieved through negotiations, these exchanges were completed in months. At dinner with Mr Nielsen, I offered my firm’s expertise. Far from taking our advice, his team refused to negotiate.
Instead, in 2005, Argentina offered creditors a take-it-or-leave-it bond exchange valued at roughly 25 to 27 cents on the dollar. Only about 76 per cent of the defaulted debt was tendered, much of it coming from Argentines who had little choice. More than half of foreign creditors rejected the deal.
In 2010, Argentina followed up with a second unilateral offer on even worse terms. But by that point Argentina’s conduct had demoralised most remaining creditors, causing them to sell their bonds to new buyers who took the low-ball offer. Our firm and a few others – along with thousands of small investors from Argentina, Italy and elsewhere – continued to push for a fair settlement.
Following the second exchange, we met Hernán Lorenzino, then secretary of finance, and spoke about how one might structure a transaction that would appeal to the remaining bondholders. Our cordial conversation left me with the impression that we could work together, but I heard nothing more.
Several times in 2011, colleagues and I met Alfredo Chiaradía, then Argentina’s ambassador to the US. We hoped engagement might eventually lead to more substantive discussions. However, he left his post – and our requests to meet his successors have been flatly rejected.
In addition, after many court hearings, I have asked Argentina’s lawyers to indicate to their client that we would like to negotiate. We have never had a reply.
Fair resolution of the 2001 default would deliver significant benefits to Argentina. It would rein in galloping inflation and reduce borrowing costs to the level of the country’s regional peers, allowing it to save as much as $74bn in lower interest costs in the next 10 years without any change in its current debt stock.
Similar interest savings would accrue to Argentina’s provinces and businesses. Savings for the provinces could total as much as $825m, and its businesses could save up to $2bn annually before taxes. Improved investor sentiment would lead to increased foreign direct investment, significantly boosting the nation’s economic growth prospects.
We remain willing to engage in discussions, and we believe we could reach a beneficial resolution. But we need a partner on the other side of the table. We need Argentina to be as ready as we are to consign the 2001 default to the past.
The writer is a senior portfolio manager at Elliott Management Corporation
Copyright The Financial Times Limited 2013. You may share using our article tools.
Please don’t cut articles from FT.com and redistribute by email or post to the web.
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