By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen
Today is technically the drop-dead date for Argentina to work out an agreement to pay off vulture funds that long ago purchased their distressed debt, or else the country will go into default for the second time in thirteen years. 11th-hour negotiations with a mediator have yielded no results thus far. WSJ divines momentum from the length of the mediation session, which is pretty weak tea.
The default would actually be to the exchange bondholders, who already hold agreements with Argentina for restructured debt payments going back to the 2001 default. Judge Thomas Griesa prevented the country from making a scheduled interest payment to the exchange bondholders without the vulture funds getting their $1.5 billion first (the vultures paid roughly $48 million for the distressed debt, so it’s a huge payday).
Argentina, which has already made the scheduled interest payment to its bond trustee (Griesa has blocked the transfer to the exchange bondholders), objects to paying out the vultures because of RUFO (“rights upon future offers”) clauses that would force them to pay all creditors at the same rate, instead of at the agreed-to reduced levels. Argentinian leaders believe this could add $15 billion in liabilities.
Before demanding no additional payments before working things out with the vulture funds, however, Judge Griesa added an asterisk for money owed to oil companies:
Argentina will be permitted to make a one-time-only payment this week on some dollar-denominated bonds issued under that nation’s law, the U.S. judge overseeing a legal battle over defaulted bonds ruled.
U.S. District Judge Thomas Griesa in Manhattan federal court said yesterday he’ll allow the payment to go forward because bonds issued in a settlement involving the Spanish oil company Repsol SA — where payments aren’t subject to court orders — can’t be immediately distinguished from a group of dollar bonds issued in the country’s 2005 and 2010 debt restructurings. Payments on the latter securities can’t be made unless holdout creditors are paid at the same time.
The idea here is that the Repsol bonds aren’t related to the current situation. Well, neither are the previously negotiated bond payments to other creditors, really! This entire holdup comes from Paul Singer and NML Capital seeking a big payday after they scooped up Argentine debt at fire-sale prices. Only Judge Griesa decided to link that to the other creditors, and now he’s trying to scramble out of some of the residual effects of his decision, because some exchange bonds and the Respol bonds cannot be distinguished from one another.
Argentina also paid the wealthy “Paris Club” nations this week, showing a willingness to put their debts behind them. But this flow of funds raises the question of what sits inside and outside Griesa’s order. Mark Weidemaier calls it the incredible, magical shrinking injunction.
For this and other reasons, Georgetown law prof Adam Levitin places the blame for this expected default squarely on Griesa:
Distressed debt investment funds that buy into repudiated sovereign debt know exactly what they are doing and the risks they are taking. Their goal is to extract payment from the debtor by being a sufficiently squeaky wheel that the debtor will pay to make the investor go away […]
The real blame lies with the U.S. courts, which should never have touched the issue. By overplaying its hand, NML exposed the fecklessness of the U.S. court system when dealing with a foreign sovereign. Although the Argentine bonds are governed by New York law and provide that Argentina consents to New York jurisdiction, there’s no way to bind a sovereign to its promise of complying with court orders any more than there is to its promise of payment. What the Leviathan gives, it can take away.
By humoring the NML litigation, U.S. courts have gotten themselves into a high-stakes game of chicken with a sovereign state. This is a game the U.S. courts cannot and should not win. It’s a basic prudential principle that courts abstain from cases where they lack the ability to administer an appropriate remedy. In this case, the courts cannot administer an appropriate remedy. The U.S. courts may be able to prevent, or at least impede, Argentina’s other bondholders from being paid, but they cannot force Argentina to pay NML on its defaulted bonds.
Exactly. Paul Singer can have as much fun as he wants trying to squeeze profit out of old Argentine debt (while he waits for the world to be destroyed by an electromagnetic pulse, anyway). But courts which have almost no ability to compel a judgment should not pick a side in such a power play. And you have to believe that the reason the courts got involved was that Argentina did the unthinkable, by thumbing its nose at the world and living to tell the tale. Now they must face a penalty for such intransigence. It’s not enough that they’ve been locked out of the capital markets for a decade. Suffering must ensue as well. (See Michael Hudson on this point.)
Incidentally, the RUFO clause expires at the end of this year, just five months from now. With everyone well aware of this fact, the exchange bondholders recognize that they would get their payments after December 31 (not to mention interest on the missed payments until then), and since they’ve been waiting for years for this money, they can probably stand to wait a bit longer. Several bondholders vowed in a plea to stay the injunction that they would be willing to waive their RUFO rights. (Some, like Josh Rosner, believe that since Argentina is being forced into negotiations with the vulture fund under duress, the RUFO clauses wouldn’t get triggered anyway.)
Griesa hasn’t ruled on this latest stay request, but the point here is that Argentina, seeing few better options, has seemingly decided to sit tight until 2015, when the RUFO problem goes away. As President Christina Kirchner has said, they’ve already paid the exchange bondholders; the judge is simply holding up the transfer. And her administration is telling anyone who will listen that there wouldn’t be much fallout in the event of default. I don’t know how true that is – this doesn’t look like a great outcome – but the country believes they have other means to borrow (China just came forward with an offer), having already been locked out of the capital markets anyway. They see the near-term pain of default as the least-worst outcome compared to the long-term problem of additional claims. Politically, there’s value in defying the West, particularly the unsavory vulture fund characters. And they simply don’t believe the repercussions will approach the initial default in 2001–and they’re probably right. It’s not like the country has no history of economic upheaval. To wit:
Many ordinary Argentines are taking the threat of default in stride.
“I’ve lived through so many crises I can’t be bothered to worry about this,” said Mariano Torga, 70, an electrician who works in a repair shop.
Heck, if devaluation ensues, as is likely, it’s probably good for attracting tourists.*
That throws it to Singer and his holdout associates on how to let things play out. In the event of default, Argentina might even have grounds to say they can’t afford to pay off the vulture funds at par. I doubt highly that Singer blinks after being at this for so long, but a last-minute kick-the-can to January isn’t implausible.
And since the legal implications of this fight are so insane, as they make any future sovereign debt renegotiation that in any way comes into contact with America irrelevant, kicking the can should be the preferred outcome not just for Argentina but the entire world. As Jayati Ghosh said a couple weeks ago:
This possibility of default is embedded into credit contracts through the interest rate, with interest rate spreads operating as the market estimate of the probability of a default. So those who are seen as less likely to be able to repay are forced to pay higher interest rates, in both formal and informal credit transactions. A creditor who has been demanding and receiving a higher interest rate based on this probability cannot then demand full repayment as a right, since the contract reflected that very likelihood. So the ruling actually negates the basic principles upon which all credit markets function.
Should be a wild day, but the courts have already ensured an outcome that will produce some form of sadness.
P.S. See also Felix Salmon’s excellent debunking of the hash the financial press has made out of this story, and why Argentinian bond prices have actually gone up lately despite the increased likelihood of default.
*Full disclosure: I have several family members in Argentina and will be visiting in November, so if they want to devalue and stretch my tourist dollar, I’m not going to exactly say no. But I’d rather see this end with a safe landing for innocent people who don’t really deserve the punishment they’re about to endure.
Obviously Judge Griesa has never read http://www.phrases.org.uk/meanings/the-law-is-an-ass.html
The NYT this morning does a Dealbook backgrounder that doesn’t even mention the $48 million or why the vulture funds are called vultures–styling them simply as “the hedge funds” (“the hedge funds, which it [Argentina] has called vultures”). Guess these key facts weren’t fit to print.
Dean Baker slams the same Times article
What if the whole point is to make U.S. courts able to administer “an appropriate remedy”, i.e. give the U.S. courts a de jure overlordship over other countries? Not saying that is the case. This goes hand in hand with the various sanction regimes that the U.S. is forcing on its minions to conform to using, in part, law courts to enforce these sanctions.
Haven’t read the inside dope on the Mercosur bash in Caracas, but I’m guessing that when the widow K. took the temperature among her peers, the support was a little more pro forma than she expected.
Argentina’s neighbors have seen this before. In 2002, Argentina’s default took down its smaller neighbor Uruguay (with one-tenth the population) along with it. In complete contrast to Argentina, Uruguay took a proactive approach to negotiating and rescheduling its debt, and quickly regained its credit rating.
A dozen years later, Argentina still lives the marginal life of a roguish Venice Beach street juggler who’s defaulted on his car loan, and has to park eight blocks from home so the repo man won’t grab it. The result is anything but theoretical: Aerolineas Argentinas can’t serve New York for fear that its aircraft would be seized by creditors, leaving the pax cooling their heels with their suitcases stacked on the taxiway at JFK.
Politically, though, there’s the compensation of getting to blame the country’s manifold ills on external enemies.
Argentina should take a clue from its Mercosur neighbors. Ol’ Rod Stewart could have been talkin’ about Uruguay when he sang:
Them homesick blues and radical views
haven’t left a mark on you
You wear it well
A little out of time but I don’t mind
Yeah, those intransigent Argentinians, not willing to give those speculators their 3,000+% payday…how dare they!
Here’s the Argentinian theme song (give me Paul Simon over Rod Stewart anyday):
More from La Nacíon on the Argentine proposal to be presented today:
Economic Minister Axel Kicillof won’t be alone today on the last day of negotiations with vulture funds before the expiry of the grace period. There will also be a director of the [Argentine] Association of National Banks (Adeba), who traveled to New York especially to present to the holdouts an offer of a guarantee fund of US$ 250 million.
The Argentine bank organization is headed by the president of Macro, Jorge Brito. It led the response to the government’s request, having more leeway than its counterparts in foreign banks.
Yesterday’s negotiations with the banks, coordinated by the head of the central bank (BCRA), Juan Carlos Fabrega, were confirmed this morning by the financial manager of Banco Piano, Francisco Ribeiro Mendoça.
In an interview with Radio Del Plata, Ribeiro Mendoça stated that “a director of Adeba traveled to the U.S. to present this proposal,” but did not mention who it was. He also said that the initiative “was not dreamed up in 24 hours” and, though he didn’t say it was a special request of the government, affirmed that there is support from the Casa Rosada. “No one takes a decision of this nature without a wink from the state,” he said.
The Adeba banks agreed to raise $250 million in sovereign bonds to incorporate into a trust, which would serve to negotiate with vulture funds for the purchase of part of their holdings of defaulted securities.
In turn, the idea is to request the vulture funds to agree to the reimposition of a stay suspending Judge Griesa’s judgment that would force the country to pay about $1.5 billion.
Thus, Argentina could circumvent default and at the same time, avoid triggering the RUFO (Rights Upon Future Offers) clause, which enables bondholders who accepted swaps in 2005 and 2010 to reopen their claims if the government makes a better deal with another creditor. The clause applies until December this year.
“Adeba’s intention is to pave the way. We’re working along the lines of generating a fund to contribute to establishing a stay,” said Ribeiro Mendoça in the radio interview, adding: “The idea is to get to the first of January.”
Indy Tlr – But Argentina actually has the 1.3Bn owed to pay off the bonds. They just want to haggle the debt down. The earlier debt holders caved in to take $0.30 on the dollar in some cases.
The “vulture bondholders” bought the notes on the cheap but want full value.
This crisis is all about bullshit machismo crap.
Argentina has at least $29 Bn in dollar currency reserves at this point
Skippy…. wellie Jim old boy… seems the money is not really the operational issue but. how sovereign nations feel about getting bent over, by a few cowboys, and their pet cattle in the Judiciary. Especially after repeated experiences from the same sources, bullying has been attributed to low self esteem – insecurity complexes… you know….
Your quasi-entertaining daily gossip column can’t distract from the fact that an already very rich man is about to become richer from nothing more than adroit use of a dysfunctional legal system. Doesn’t that bother you just a little bit?
Then again, “entertainment pays more than education”, right Jim? Especially in somnambulation nation. Pandora’s box is bulging on this one.
This was a response to Jim Haygood.
And it’s a good one.
“Vulture funds”, “hedge funds”, whatever.
It is one guy, Paul Elliott Singer.
A charming resume that one. Clearly the poor man needs a lot more money.
I’ve just read of profile of the guy:
He seems to be not a nice but a good guy. His fight to get payment is in fact really a fight against corruption:
Au demeurant, l’intransigeance de M. Singer s’accompagne d’une conviction : si les pays ciblés ne peuvent honorer leurs dettes, c’est parce que leurs gouvernements, le plus souvent corrompus, préfèrent faire disparaître les sommes dues.
En 2006, dans ses efforts pour récupérer des créances du Congo-Brazzaville, Elliott accumule les preuves du train de vie luxueux du président Denis Sassou-Nguesso, avant de les faire fuiter auprès d’une ONG.
And he supports the gay cause!
Mais il a aussi consacré plus de 425 000 dollars au soutien du mariage gay, après le coming out de l’un de ses fils.
Nice find, mon pote. En anglais:
‘Moreover, the intransigence of Mr. Singer is accompanied by a conviction that if the target countries can’t pay their debts, it’s because their governments, often corrupt, prefer to make the sums due disappear.
‘In 2006, in his efforts to recover debts due from Congo-Brazzaville, Elliott accumulated evidence of the lavish lifestyle of President Denis Sassou-Nguesso, before leaking it through an NGO.’
Beauty is in the eyes of the beholder…from the same article:
May, in Paris, the financial markets Authority condemned (fined?) the Elliott fund a record fine of 16 million euros for Insider dealings on the company Autoroutes Paris-Rhin-Rhône in 2010 titles. A first for Paul Singers’ Fund, who is more used to being among the complainants on the docket. Elliott appealed.
“a fight against corruption”????? “a GOOD guy”?????
He doesn’t FIGHT corruption, he takes advantage of it. He searches it out. And, these days, it’s not all that hard to find.
Neither he (nor Haygood) gives two sh*ts HOW the debt got there. Doesn’t matter. He bought it cheap and now wants it paid in full.
Capitalism. What a concept.
He’s been causing all sorts of heartburn in the tech sector, buying up enough stock to be a major pain in the ass and force the firm to unload products he believes are impacting the firms bottom line. Problem is that a lot of the firms he’s been taking stakes in are in very mature segments where there is little growth.
You keep glossing over that the hedge funds own only a minority of the holdout debt. The majority of holdouts are original buyers consisting of individuals (primarily in Argentina, Italy and Germany) and pension funds who invest on behalf of employees and retirees.
Hard to characterize retired grannies as vultures. If a final NML/Aurelius settlement next year serves as a model for the rest of the holdouts, they will be able to afford a better grade of cat food.
Oh Yeah…Right…The beneficent champion of the little guy (and gal). I also heard that he walks on water and has pledged all of his ‘profits’ to eradicate poverty and hunger everywhere.
“The magic of Compound Interest” signs a joint vulture(I meant venture) with “The magic of PR”.
Retired folks forced to survive on cat food are victims of people like him everywhere, here and there!
A Re-habilitated Gordon Gekko: GREED, for lack of a better word is DESPICABLE!
“The majority of holdouts are original buyers consisting of individuals (primarily in Argentina, Italy and Germany) and pension funds who invest on behalf of employees and retirees (citation omitted)”
Why on earth would a pension fund or individual not accept a reduced return during the restructuring and rather hold the defaulted bonds to 0 in the hope that the corrupt US courts would bail them out a decade later when the vulture funds take a shot at a 3,000% return?
And you keep “glossing over” the fact that all those “grannies” feasting on enhanced catfood will do so at the expense of many more who have no food at all. Oh well, debts must be repaid.
Remember THAT when they come knocking at YOUR door for the debts that Obama has so legitimately and conscientiously run up in YOUR name. As if you had anything to say about it. “Military ‘junta'” is just another way of saying MIC: Israel, Iraq, Afghanistan, Bosnia, Somalia, Yemen, Libya…….and maybe Ukraine and Russia and Iran.
What the hell is the matter with you, Haygood?
Seems to me that bonds have a risk factor. And that the bonds the hedge fund bought at less than pennies on the dollar had extreme risk. It seems that the hedge fund expected the US court to bail it out.
If the other bond holders agreed to reduced payments why doesn’t this apply to the hedge fund bonds too? It seems they want to eat their cake and have it too.
There’s a rumor floating around, which I saw on MoA, that President Kirschner seeks to revoke the Argentine citizenship of Israeli-Argentine dual citizens. I don’t take it as credible, mainly because I can’t trace it back past a hastily slapped-together Tumblr page. The timing seems calculated to encourage Israeli capital flight.
This must have been the EMP Mr. Singer was blathering about.
Coming out the other side of this all I can hope is that they never deal with the north again. Plenty of farmland, plenty of people, plenty of resources. Latin America should dump its debts to the north all at once. A modest payback for over 150 years of bullying and exploitation.
Over at Zero Hedge: Argentina Defaults
From Zero Hedge: Argentina Defaults. (I’d include the link but NC’s moderation process won’t allow it.)
Re-commented too soon. My bad.