Argentina defaults – Eighth time unlucky

Cristina Fernández argues that her country's latest default is different. She is missing the point.

Aug 2nd 2014

     ARGENTINA'S first bond, issued in 1824, was supposed to have had a lifespan of 46 years. Less than four years later, the government defaulted. Resolving the ensuing stand-off with creditors took 29 years. Since then seven more defaults have followed, the most recent this week, when Argentina failed to make a payment on bonds issued as partial compensation to victims of the previous default, in 2001.

     Most investors think they can see a pattern in all this, but Argentina’s president, Cristina Fernández de Kirchner, insists the latest default is not like the others. Her government, she points out, had transferred the full $539m it owed to the banks that administer the bonds. It is America’s courts (the bonds were issued under American law) that blocked the payment, at the behest of the tiny minority of owners of bonds from 2001 who did not accept the restructuring Argentina offered them in 2005 and again in 2010. These “hold-outs”, balking at the 65% haircut the restructuring entailed, not only persuaded a judge that they should be paid in full but also got him to freeze payments on the restructured bonds until Argentina coughs up.

    Argentina claims that paying the hold-outs was impossible. It is not just that they are “vultures" as Argentine officials often put it, who bought the bonds for cents on the dollar after the previous default and are now holding those who accepted the restructuring (accounting for 93% of the debt) to ransom. The main problem is that a clause in the restructured bonds prohibits Argentina from offering the hold-outs better terms without paying everyone else the same. Since it cannot afford to do that, it says it had no choice but to default.

     Yet it is not certain that the clause requiring equal treatment of all bondholders would have applied, given that Argentina would not have been paying the hold-outs voluntarily, but on the courts' orders. Moreover, some owners of the restructured bonds had agreed to waive their rights; had Argentina made a concerted effort to persuade the remainder to do the same, it might have succeeded. Lawyers and bankers have suggested various ways around the clause in question, which expires at the end of the year. But Argentina's government was slow to consider these options or negotiate with the hold-outs, hiding instead behind indignant nationalism.

     Ms Fernández is right that the consequences of America's court rulings have been perverse, unleashing a big financial dispute in an attempt to solve a relatively small one. But hers is not the first government to be hit with an awkward verdict. Instead of railing against it, she should have tried to minimise the harm it did. Defaulting has helped no one: none of the bondholders will now be paid, Argentina looks like a pariah again, and its economy will remain starved of loans and investment.

     Happily, much of the damage can still be undone. It is not too late to strike a deal with the hold-outs or back an ostensibly private effort to buy out their claims. A quick fix would make it easier for Argentina to borrow again internationally. That, in turn, would speed development of big oil and gas deposits, the income from which could help ease its money troubles.

   More important, it would help to change perceptions of Argentina as a financial rogue state. Over the past year or so Ms Fernández seems to have been trying to rehabilitate Argentina's image and resuscitate its faltering economy. She settled financial disputes with government creditors and with Repsol, a Spanish oil firm whose Argentine assets she had expropriated in 2012. This week's events have overshadowed all that. For its own sake, and everyone else's, Argentina should hold its nose and do a deal with the hold-outs.

(http://www.economist.com/news/leaders/21610263. Adapted)

Argentina defaults – Eighth time unlucky

Cristina Fernández argues that her country's latest default is different. She is missing the point.

Aug 2nd 2014

     ARGENTINA'S first bond, issued in 1824, was supposed to have had a lifespan of 46 years. Less than four years later, the government defaulted. Resolving the ensuing stand-off with creditors took 29 years. Since then seven more defaults have followed, the most recent this week, when Argentina failed to make a payment on bonds issued as partial compensation to victims of the previous default, in 2001.

     Most investors think they can see a pattern in all this, but Argentina’s president, Cristina Fernández de Kirchner, insists the latest default is not like the others. Her government, she points out, had transferred the full $539m it owed to the banks that administer the bonds. It is America’s courts (the bonds were issued under American law) that blocked the payment, at the behest of the tiny minority of owners of bonds from 2001 who did not accept the restructuring Argentina offered them in 2005 and again in 2010. These “hold-outs”, balking at the 65% haircut the restructuring entailed, not only persuaded a judge that they should be paid in full but also got him to freeze payments on the restructured bonds until Argentina coughs up.

    Argentina claims that paying the hold-outs was impossible. It is not just that they are “vultures" as Argentine officials often put it, who bought the bonds for cents on the dollar after the previous default and are now holding those who accepted the restructuring (accounting for 93% of the debt) to ransom. The main problem is that a clause in the restructured bonds prohibits Argentina from offering the hold-outs better terms without paying everyone else the same. Since it cannot afford to do that, it says it had no choice but to default.

     Yet it is not certain that the clause requiring equal treatment of all bondholders would have applied, given that Argentina would not have been paying the hold-outs voluntarily, but on the courts' orders. Moreover, some owners of the restructured bonds had agreed to waive their rights; had Argentina made a concerted effort to persuade the remainder to do the same, it might have succeeded. Lawyers and bankers have suggested various ways around the clause in question, which expires at the end of the year. But Argentina's government was slow to consider these options or negotiate with the hold-outs, hiding instead behind indignant nationalism.

     Ms Fernández is right that the consequences of America's court rulings have been perverse, unleashing a big financial dispute in an attempt to solve a relatively small one. But hers is not the first government to be hit with an awkward verdict. Instead of railing against it, she should have tried to minimise the harm it did. Defaulting has helped no one: none of the bondholders will now be paid, Argentina looks like a pariah again, and its economy will remain starved of loans and investment.

     Happily, much of the damage can still be undone. It is not too late to strike a deal with the hold-outs or back an ostensibly private effort to buy out their claims. A quick fix would make it easier for Argentina to borrow again internationally. That, in turn, would speed development of big oil and gas deposits, the income from which could help ease its money troubles.

   More important, it would help to change perceptions of Argentina as a financial rogue state. Over the past year or so Ms Fernández seems to have been trying to rehabilitate Argentina's image and resuscitate its faltering economy. She settled financial disputes with government creditors and with Repsol, a Spanish oil firm whose Argentine assets she had expropriated in 2012. This week's events have overshadowed all that. For its own sake, and everyone else's, Argentina should hold its nose and do a deal with the hold-outs.

(http://www.economist.com/news/leaders/21610263. Adapted)