Cecilia Nahon: Argentina vs the Vultures

This Institute of New Economic Thinking interview describes how Argentina’s completed sovereign debt restructuring was derailed by vulture fund NML Capital in a reading of the original bonds’ pari passu clause that was contrary to well-established practice. Even the US Treasury had weighed in on the side of Argentina in an amicus brief. The interview of Argentine ambassador Cecilia Nahon by Marshall Auerbach goes into the backstory of the restructuring, that Argentina’s woes in no small measure resulted from following the IMF’s neoliberal fads du jour.

As the summary from the INET website explains:

During the 1990s, Argentina had been the poster child for Neoliberal policies—they adopted virtually the whole of the so-called “Washington Consensus” agenda lock-stock-and-barrel. They even adopted a currency board. And unlike Euroland (which also adopted something like a currency board as each member adopted a foreign currency—the euro), Argentina would have consistently met the tight Maastricht criteria on budget deficits and debts over that period. The main purpose of the austere budgets and currency board constraints was to kill high inflation. It worked. But, over that period unemployment grew and GDP growth was moderate. And because the peg was sold to the Argentinean public as “inviolable” it created great incentives to accumulate a lot of foreign debt, particularly dollar denominated. By the late 1990s, however, growth slowed making it harder for Argentina to secure the dollars required to service its growing debt burden (it peaked at 180% of GDP) and the peg was ultimately abandoned.

One of the first policy initiatives taken by then President Duhalde was a massive job creation program that guaranteed employment for poor heads of households. Within four months, the Plan Jefes y Jefas de Hogar (Head of Households Plan) had created jobs for 2 million participants which was around 13 per cent of the labour force.

But the country still had to deal with the legacy of its defaulted foreign debit, and this was the main challenge faced by the Kirchner Administration. His government did reach agreement with 92.5% of its creditors for a restructured deal (interestingly enough, using the GDP-linked growth bonds, which was part of Greece’s recent proposal to the European Union). The problem that has plagued the conclusion of this debt restructuring is a small group of funds, led by NML Limited, has rejected the settlement and secured judgment in the NY courts demanding full payment at par. The court has supported this action, which means the vast majority of the so-called ‘exchange’ bond holders, who took settlements in 2005 and 2010 after Argentina defaulted on its public debt obligations, cannot be paid until NML, who has a small amount of so-called ‘hold out’ Argentine government debt, is paid in full. What can the Argentine government do in this situation, given it has been fully servicing the exchange liabilities but claims it cannot meet the original liabilities held by NML?

Print Friendly, PDF & Email


  1. washunate

    The US court system is out of control, from sovereign debt to personal debt to the drug war to prisoner abuse.

  2. walt

    Similar to what Germany has done to Greece, starting with loaning to a country which could never pay it back.

    Europeans waged war with each other for a millennium and almost put an end to that with the formation of the EU. Now German imperialism takes the form of seizure of Greek property (calling it privatization) to protect the bad loans of her banks.

  3. Jim Haygood

    ‘A small group of funds, led by NML Limited, has rejected the settlement and secured judgment in the NY courts demanding full payment at par.’

    NML and other funds who sued own a minority of the holdout debt. The majority is held by individuals, mainly in Argentina, Italy, and elsewhere in Europe, who didn’t accept the settlement. Most of them are not sophisticated investors. They either didn’t know about the exchange offer, didn’t understand it, didn’t think it was fair, or (most likely of all) could not psychologically cope with accepting a certain loss of 70% of their principal, when it was possible to take no action and hope for something better to happen eventually.

    Everything is frozen till the Widow K leaves office in a year. Likely Argentina’s new president will act promptly to settle the matter so that all concerned can move on.

    1. Sam Covert

      “act promptly to settle the matter”

      Words that convey nothing – no insight as to what that would be and why NML would take anything less than 100%. But it does show your hatred of that “widow” and belies your allegiances.

    2. steelhead23

      I sincerely hope you are wrong on all counts. By far the majority of creditors accepted the deal. In a well constructed bond issue, a 90%+ level of restructuring acceptance should have resulted in a universal restructuring. It appears that the issue was poorly constructed – or the court’s ruling is outrageous. Frankly, I would hate to see NML prosper and support Argentina’s position.

      1. Jim Haygood

        My reference is to the holdouts — the 7%, not the 93% who accepted the two exchange offers. Hedge funds who sued are a minority of this 7% group.

        Argentina confirmed this in estimating that settling with the other holdouts (not part of the litigation) might cost $15 billion, whereas the NML case reportedly could have been settled for around $1.5 billion. But NML et al are a small minority of the total holdout group, consisting of mostly individuals.

        You are right that the bond indenture proved to be a disaster. It contains no collective action clause to enforce universal acceptance. Result: chaos.

        1. TheCatSaid

          It’s intriguing that most of the not-accepting-the-write-down creditors are private individuals, and that NML is only 7%.

          If deals were negotiated with the various creditors (perhaps considering individual agreements tailored for specific individuals, with a strong component of creative, non-financial compensation that they would agree to)–could NML still hold out and scupper the deal?

          (IOW, what is the decision-making process of the hold-outs? Is it individual, or majority-decision of the “group”? If only 1 person or entity disagrees, can they bring down the whole deal?)

  4. Chauncey Gardiner

    Interesting that the U.S. Treasury filed an amicus brief supporting Argentina’s position. Perhaps a positive sign that the worm is finally beginning to turn against those who use predatory debt, corruption and control of markets, both domestically and globally.

    … a 1600% return on investment?!! …Yes, let’s do hope that Argentina’s new president (and the very small minority of bondholders who purchased Argentina’s bonds at an incredibly deep discount in the secondary market and are seeking par plus full accrued interest) will act promptly to settle the matter so that all concerned can move on.

    Thank you for posting this video clip. Highlighted a lot. A sovereign debt restructuring mechanism at the global level would be a welcome development.

  5. susan the other

    I also thought it was interesting that the UST filed an amicus brief. One question that begins to shed its hysteria and ask a simple question is, Why are vulture funds supra-legal? IMO they should be in jail. When the world is so desperate for money that they take on debt to stimulate domestic growth it should never be undermined, or mined at all, by the “finance industry.” What a misnomer, no? But this is where we are.

  6. RBHoughton

    I thought it was settled law that if you bought government bonds for a song (in this case reportedly 7-1/2%) solely with the intent of claiming for face value, the U S Judiciary would not support you.

  7. dr frank

    Historically and now, things in Argentina are never as simple as they appear. It is possible for true things to be said in a way that is false and for good things to be accomplished by corrupt leaders. The current Argentine Administration is expert at this. It is virtually impossible to understand from outside and only slightly less difficult from inside, although politics is a passion.

    But the important story now is not about the stalemate with holdouts in American courts. That has prevented Argentina from accessing credit markets and it has now resulted in Argentina obtaining capital from China. Loans in the form of currency swaps have allowed Argentina’s central bank reserves to increase slightly. But far more importantly, in the last month Argentina signed some $50 billion of infrastructure projects, including two nuclear power plants, with financing at reportedly advantageous rates. As part of the deal, the Chinese have uncontested bid rights, plus rights to supply all materials and labor. This will cause a huge change in relations with Brazil. It will be a negative for local industry for years to come as Argentina has apparently signed away its opportunity to develop through the process of import substitution for some 50 years.
    Extraction by foreign powers is one constant in Argentine history.
    Nevertheless, Argentina is sometimes a harbinger. It would be interesting to know more about how China is conducting business, using its huge capital base, to put its heavy industrial capacity to work.

    1. TheCatSaid

      Those are significant points, completely under the radar. No one seems to be paying attention to these aspects of the developments in Argentina.

Comments are closed.