Argentina: The nation in ‘selective default’

11 Oct
The sexy Economics Minister with the sideburns, Axel Kilcillof

The Economics Minister with the sideburns, Axel Kilcillof

When Argentina ‘defaulted’ on $29 billion in debt, worldwide reaction tended to concentrate on the economic mismanagement by Argentina’s government, which lead to the default. But is that really fair? Rather the South American state was backed into a corner after doing its best to turn one.

The head of Argentina’s negotiating team in New York which attempted to ward off default ended up getting a lot of unexpected attention. As Axel Kilcillof announced no deal was being done, social media lit up talking about the sexy Economic’s minister with the sideburns.

He has more to him though than some striking sideburns. Since Kilcillof was appointed to the post in November 2013, Argentina’s path has changed. It’s been locked out of international markets since the 2001 default. By the end of last year dollar reserves were dwindling, capital flight was uncontrollable despite restrictions and inflation rampant.

The emerging markets crisis in January of this year hit Argentina the worst. It was the most vulnerable. The peso was devalued by 20% with Kilcillof the driver of the plan. It seemed a panic move but it was handled well and by March things were stable.

Argentina had been infamous for lying about its inflation figures, but in January they scraped the old indice and replaced it with one which the IMF considered acceptable. Believed to be over 30% for 2014, inflation is still a major issue while those figures are being disputed more and more, but after a rough start things seemed to be at least more manageable come the middle of 2014.

Argentina’s aggression towards foreign creditors and businesses softened. It agreed to pay $5 billion to Repsol for renationalising 51% of the Argentinian oil company YPF in 2012.

Another agreement was found in May with the Paris Club, of which Ireland is a member, to pay back arrears totalling around $9.7 billion.

So by June of this year, the capital reserves were up over $10 billion to just short of $30 billion, inflation was still high but stabilising, while Argentina had gotten major agreements which would help it return to international markets. One issue remained. The litigation from the holdouts.

93% of the defaulted debt from 2001 was restructured by agreements reached in 2005 and 2010. Seven per cent, some of which is made up of those who bought the debt on secondary markets on the cheap, are holding out for the full amount.

Argentina has been continuously paying the 93% it has agreements with, but it was two hedge funds (or vulture funds as they are also termed) called NML Capital and Aurelius International, which have led litigation proceedings bringing about the technical default.

They successfully convinced a US District Judge that it wasn’t fair that Argentina continued paying the 93% and not those who had restructured. Argentina appealed, it was upheld, then tried to go to the US Supreme Court and their appeal was dismissed. So it ended up both sides had till July 30 to come to an agreement or else default, which they didn’t.

Argentina, though, denies it’s in default. It’s not as a ridiculous claim as it sounds even if Standard and Poor’s says Argentina is in what it terms ‘selective default’. As Argentinian President Kirchner pointed out, a defaulter is someone who cannot pay. Argentina is willing and able to pay, so much so that it deposited $539 million to trustee Bank of New York Mellon in order to pay interest to restructured creditors.

It is the fact that payment did not reach creditors that Argentina is in default for debt of $29 billion. On orders from Judge Griesa, the payment remains frozen until an agreement with the holdouts has been found.

The funds litigating against Argentina want to maximise profit. They want full payment of $1.3 billion on debt they only paid a fraction of the price for. And NML Capital is an affiliate of Elliot International which has past form on litigating for payouts multiple times higher than the original in Congo and Peru.

In the case of NML/Elliot, their methods to discredit and force Argentina’s hand have been merciless. They had a Argentinian ship impounded in Ghana, which had 200 crew on board. Also, when Argentina agreed to open an investigation along with Iran into a Buenos Aires bombing of a Jewish cultural centre believed to be the responsibility of Iranian citizens, they published a page-long advertisements in US newspapers denouncing Argentina for cavorting with a rogue state.

The litigators have maintained from the beginning they want what they see as a fair agreement and it is Argentina which chose default, but a financial loophole hints otherwise.

Argentina’s default triggered a ‘credit event’ in the eyes of the International Swaps and Derivatives Association (ISDA). This in turn will likely trigger payouts of around one billion dollars in credit default swaps (CDS), which are insurances against defaults.

Who owns them? Well, we can’t be sure and we are only speculate, but many have rumoured that the same funds who are litigating against Argentina are also owners of some of these precious insurances. That would of course mean it was in their interests to prevent any agreement, collect the CDS when the default is declared then continue to demand full-payment from the South American state or, as is also an ongoing possibility, sell the debt to a third-party  like private banking institutions.

Another interesting thing is that one of the determinations committee members of the ISDA which decided to declare the credit event is Elliot Management Corporation whose subsidiary, as mentioned above, is NML Capital, the fund currently suing Argentina.

Argentina was caught in a bind throughout the whole negotiation due to a contractual obligation called the RUFO clause, which would mean if it paid out in full to the 7% of holdouts, the 93% could argue that they should get paid in full too, not just the haircut they agreed to. That could trigger multiple times the $1.3 billion the two hedge funds are demanding. That clause is set to expire at the end of this year.

Of course the default didn’t particularly change much except status in the short term at least. Argentina currently is in default, but if some agreement was to come soon, perhaps as rumoured between the litigating holdouts and international private banks, little damage would be done. Meetings are ongoing.

More long term it opens up a legal mess for Argentina as litigation could come across a lot of jurisdictions from all of the bondholders. It also shuts Argentina out of what it desires the most. Re-entry into capital markets at a time when the country’s economy is in recession and lack of capital may mean printing more money, thereby exacerbating inflation.

After doing much to undo its pariah status economically, a bind formed by the biases of a financial system and a Judge who didn’t give a sovereign state an inch leaving the country once again dangling.

Just when it seemed that Argentina was pulling itself back from the brink, for it to be tipped over by the profit-driven lust of funds would be a particularly bitter and sorry precedent.

It’s a good lesson though in how burning a bondholder is never truly so. More than likely, it will end up in a court somewhere with a hedge/vulture fund with assets worth billions demanding the whole payment and with full interest.


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Posted by on October 11, 2014 in Uncategorized


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