ARGENTINA’S plans for making peace with the international financial markets had been going rather well. The country belatedly complied with decisions of the International Centre for Settlement of Investment Disputes, an arbitration body; it compensated a Spanish company, Repsol, for the expropriation of its shares in YPF, the state oil firm; and just last month it reached a settlement with the Paris Club, an informal group of government creditors. This week, however, Argentina’s path to normality became a lot harder.
On June 16th the Supreme Court of the United States declined to hear Argentina’s appeal against NML Capital, a “vulture” fund (and subsidiary of Elliott Management, a hedge fund) that snapped up cheap bonds after Argentina’s 2001 default. The bonds were governed by New York law, and the fund has since pursued the country for the payment of all principal plus outstanding interest in US courts. NML followed this “holdout” strategy instead of accepting new bonds worth one-third of the originals at the time, as creditors holding 93% of the defaulted debt did in exchanges in 2005 and 2010.
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The fund’s legal case hinges on the argument that a “pari passu” clause in the original bond documentation, which guarantees equal treatment for investors, bars Argentina from paying holders of the exchanged debt if it does not also pay the holdouts. A New York district court and appeals court backed this view, leading Argentina to petition the Supreme Court to hear the case. Minutes after dismissing that request, the Supreme Court also decided against Argentina in a separate suit, allowing NML to locate any assets Argentina may have squirrelled away abroad.
Bereft of legal recourse, Argentina is left with four ugly options. It can pay NML the full amount (as much as $1.6 billion) it demands, opening itself up to claims from other holdouts; it could try to negotiate a smaller payment with NML and other vultures; it could attempt to “reroute” its exchanged bonds so that they come under Argentine law; or it could default.
On June 17th Axel Kicillof, the economy minister, dismissed the options of full payment or outright default as unthinkable. He said that the government would attempt to reroute its exchanged bonds from New York to Argentina, away from the reach of the United States’ courts. That would allow Argentina to continue paying the creditors it struck deals with in 2005 and 2010, without paying the holdouts.
“Transferring the bonds to local law would be very difficult at the street level,” warns Henry Weisburg at Shearman & Sterling, a law firm. First Argentina must convince a majority of holders of the exchanged bonds to agree to the swap. This task may be insurmountable given that many of the current creditors are bound by rules restricting them from holding assets under foreign jurisdiction.
Carrion trade
Even if Argentina were to succeed in persuading holders of the exchanged bonds to take the plunge, any intermediary that helped facilitate the rerouting risks being held in contempt of the New York courts. Argentina would thus need to find an intermediary that is not, and has no desire to be, subject to New York law. Lastly, Argentina would need to convince Bank of New York Mellon, its current trustee, to release information about the bondholders to its new intermediary. That could put the bank into contempt; it has already said it “will comply with any court order by which it is deemed bound.”
It may be that raising the prospect of this rerouting manoeuvre is designed to give Argentina leverage in negotiations with the holdouts. On June 18th a lawyer for the country told the New York district-court judge who originally ordered the country to pay NML that Argentina was willing to haggle.
Negotiations would be complicated, however. One pitfall is technical. Argentina has in the past argued that settling with holdouts would activate a Rights Upon Future Offers (RUFO) clause in the exchanged bonds, which expires at the end of this year, meaning that they would be eligible for whatever terms the holdouts got. RUFO is only activated, NML ripostes, if the offer made to the holdouts is voluntary. Since Argentina is subject to a judgment ordering it to pay NML, it believes the courts would interpret any settlement as involuntary. Anna Gelpern, a professor of law at Georgetown University, admits the clause is open to interpretation but says: “Based on what we’ve seen from the court system so far, it is more likely to be interpreted NML’s way than Argentina’s.”
Other obstacles to a settlement are even more formidable. The first is political. Argentina’s president, Cristina Fernández de Kirchner, and her crew have fulminated against NML and the vulture funds, swearing that they would never pay or negotiate with them. Settling after making such a fuss would be a violent reversal. Then again, Ms Fernández has made other U-turns. She paid off Repsol after Mr Kicillof stated the government would not give it “even one cent” and devalued the peso earlier this year after promising not to.
A second issue is what to do with other holdouts. If Argentina settles only with NML, the other vultures will demand the same terms. Better to deal with them all at once, says Mr Weisburg of Shearman & Sterling. But that raises the biggest question of all: Argentina’s constrained finances. With its foreign-exchange reserves having dipped below $29 billion, Argentina does not have a lot of room to offer the holdouts an attractive deal.
Few outsiders will have much sympathy for Argentina’s predicament. The wider question is what effect the decisions of the United States’ courts will have on other sovereign borrowers. Some fret that the ability of struggling countries to restructure their debts has been dented. Hold-outs everywhere have greater incentive to litigate; creditors who might have otherwise accepted an exchange offer could find deals picked apart by vultures.
Others are more sanguine. Creditors have struck a blow for the sanctity of contracts and raised the costs of default, they argue. It is not clear how strong a precedent the court decisions really set. Argentina’s behaviour over the years makes it an outlier, in any case. The yields on other emerging-market debt barely budged on news of the Supreme Court decision (see chart). Ecuador, which defaulted on $3.2 billion of debt as recently as 2008, made a smooth return to bond markets this week.
Such a prospect has receded for Argentina. Argentina’s next interest payment on its exchanged bonds comes due on June 30th. If it does not find a way to satisfy the original court order, negotiate a settlement, or successfully transfer these bonds by that date, the country has only a 30-day grace period before it enters into default. “That would exacerbate Argentina’s current situation of currency distortion, inflation and economic slowdown,” says Eduardo Levy Yeyati of Elypsis, a consultancy. “In addition, of course, to quashing any hopes Argentina had of financing itself in the dollar bond markets.”
On June 16th the Supreme Court of the United States declined to hear Argentina’s appeal against NML Capital, a “vulture” fund (and subsidiary of Elliott Management, a hedge fund) that snapped up cheap bonds after Argentina’s 2001 default. The bonds were governed by New York law, and the fund has since pursued the country for the payment of all principal plus outstanding interest in US courts. NML followed this “holdout” strategy instead of accepting new bonds worth one-third of the originals at the time, as creditors holding 93% of the defaulted debt did in exchanges in 2005 and 2010.
In this section
Related topics
The fund’s legal case hinges on the argument that a “pari passu” clause in the original bond documentation, which guarantees equal treatment for investors, bars Argentina from paying holders of the exchanged debt if it does not also pay the holdouts. A New York district court and appeals court backed this view, leading Argentina to petition the Supreme Court to hear the case. Minutes after dismissing that request, the Supreme Court also decided against Argentina in a separate suit, allowing NML to locate any assets Argentina may have squirrelled away abroad.
Bereft of legal recourse, Argentina is left with four ugly options. It can pay NML the full amount (as much as $1.6 billion) it demands, opening itself up to claims from other holdouts; it could try to negotiate a smaller payment with NML and other vultures; it could attempt to “reroute” its exchanged bonds so that they come under Argentine law; or it could default.
On June 17th Axel Kicillof, the economy minister, dismissed the options of full payment or outright default as unthinkable. He said that the government would attempt to reroute its exchanged bonds from New York to Argentina, away from the reach of the United States’ courts. That would allow Argentina to continue paying the creditors it struck deals with in 2005 and 2010, without paying the holdouts.
“Transferring the bonds to local law would be very difficult at the street level,” warns Henry Weisburg at Shearman & Sterling, a law firm. First Argentina must convince a majority of holders of the exchanged bonds to agree to the swap. This task may be insurmountable given that many of the current creditors are bound by rules restricting them from holding assets under foreign jurisdiction.
Carrion trade
Even if Argentina were to succeed in persuading holders of the exchanged bonds to take the plunge, any intermediary that helped facilitate the rerouting risks being held in contempt of the New York courts. Argentina would thus need to find an intermediary that is not, and has no desire to be, subject to New York law. Lastly, Argentina would need to convince Bank of New York Mellon, its current trustee, to release information about the bondholders to its new intermediary. That could put the bank into contempt; it has already said it “will comply with any court order by which it is deemed bound.”
It may be that raising the prospect of this rerouting manoeuvre is designed to give Argentina leverage in negotiations with the holdouts. On June 18th a lawyer for the country told the New York district-court judge who originally ordered the country to pay NML that Argentina was willing to haggle.
Negotiations would be complicated, however. One pitfall is technical. Argentina has in the past argued that settling with holdouts would activate a Rights Upon Future Offers (RUFO) clause in the exchanged bonds, which expires at the end of this year, meaning that they would be eligible for whatever terms the holdouts got. RUFO is only activated, NML ripostes, if the offer made to the holdouts is voluntary. Since Argentina is subject to a judgment ordering it to pay NML, it believes the courts would interpret any settlement as involuntary. Anna Gelpern, a professor of law at Georgetown University, admits the clause is open to interpretation but says: “Based on what we’ve seen from the court system so far, it is more likely to be interpreted NML’s way than Argentina’s.”
Other obstacles to a settlement are even more formidable. The first is political. Argentina’s president, Cristina Fernández de Kirchner, and her crew have fulminated against NML and the vulture funds, swearing that they would never pay or negotiate with them. Settling after making such a fuss would be a violent reversal. Then again, Ms Fernández has made other U-turns. She paid off Repsol after Mr Kicillof stated the government would not give it “even one cent” and devalued the peso earlier this year after promising not to.
A second issue is what to do with other holdouts. If Argentina settles only with NML, the other vultures will demand the same terms. Better to deal with them all at once, says Mr Weisburg of Shearman & Sterling. But that raises the biggest question of all: Argentina’s constrained finances. With its foreign-exchange reserves having dipped below $29 billion, Argentina does not have a lot of room to offer the holdouts an attractive deal.
Few outsiders will have much sympathy for Argentina’s predicament. The wider question is what effect the decisions of the United States’ courts will have on other sovereign borrowers. Some fret that the ability of struggling countries to restructure their debts has been dented. Hold-outs everywhere have greater incentive to litigate; creditors who might have otherwise accepted an exchange offer could find deals picked apart by vultures.
Others are more sanguine. Creditors have struck a blow for the sanctity of contracts and raised the costs of default, they argue. It is not clear how strong a precedent the court decisions really set. Argentina’s behaviour over the years makes it an outlier, in any case. The yields on other emerging-market debt barely budged on news of the Supreme Court decision (see chart). Ecuador, which defaulted on $3.2 billion of debt as recently as 2008, made a smooth return to bond markets this week.
Such a prospect has receded for Argentina. Argentina’s next interest payment on its exchanged bonds comes due on June 30th. If it does not find a way to satisfy the original court order, negotiate a settlement, or successfully transfer these bonds by that date, the country has only a 30-day grace period before it enters into default. “That would exacerbate Argentina’s current situation of currency distortion, inflation and economic slowdown,” says Eduardo Levy Yeyati of Elypsis, a consultancy. “In addition, of course, to quashing any hopes Argentina had of financing itself in the dollar bond markets.”
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