‘Cristina’s World’

Argentine President Fernández prays for a just result

She just lost her appeal in the US courts, but Cristina Fernández, President of Argentina, is as determined as her adversary, billionaire hedge funder Paul Singer, to have the last word.

Fernández and Singer are wrangling over the application of the pari passu (“equal treatment”) clause in the Argentine bonds that Singer’s Elliott Management scooped up at a deep discount after Argentina defaulted in 2001.

iStock_000003565498XSmallSinger’s legal victories mean that US courts have consistently interpreted pari passu to require Argentina to pay all of its bondholders whatever they’re due.  While the vast majority of Argentina’s defaulted bonds were exchanged years ago for less than 30¢ on the dollar and are owed only a $164 million semi-annual interest payment later this month, Singer and other hold-outs who rejected the swap have been pursuing payment of the full face amount of their bonds, plus accumulated interest (about $1.4 billion), which is what they’re owed as a result of the default.  The hold-outs own a combined total of only 7% of the original $100 billion bond issue, but Singer, for example, reportedly purchased his $665 million slug for less than 30¢ on the dollar.

US Court Rulings

The US courts have ruled that Argentina may not service its restructured bonds – which are governed by New York law — without satisfying her full debt to the hold-outs.  The rulings are grounded on the notion that Argentina should live up to the bargain it made when it originally issued its bonds, which is to treat all of its bondholders equally.  The bondholders who swapped their bonds have been getting what they bargained for, so the hold-outs should too.  The rulings also expressly enjoin Argentina and its agents from arranging for payments on the bonds to be made outside the US.  The US courts know that Argentina can afford to pay the hold-outs from its existing foreign currency reserves, but simply refuses to do so.

New Swap

Last week, President Fernández proposed a new bond swap under which the holders of Argentina’s restructured bonds could exchange their bonds for new dollar-denominated bonds with identical terms but governed by Argentine law.  This gambit would at one and the same time yank the previously restructured Argentine debt out from under US law, enable Argentina – which has been frozen out of the international bond markets since its 2001 default — to affirm its commitment to honor its sovereign debt obligations and, finally, leave the hold-outs dangling in the wind with their unenforceable US court judgments.

Owners of the restructured bonds must now either agree to receive their money in Buenos Aires instead of New York or face the possibility that Argentina may not be able to service their bonds at all.

Owners of the restructured bonds must now either agree to receive their money in Buenos Aires instead of New York or face the possibility that Argentina may not be able to service their bonds at all.

Opting for Buenos Aires, however, carries with it significant risks.  For one thing, US courts are likely to deem bondholders who switch their bonds in contempt of court in light of US District Judge Thomas Griesa’s order prohibiting anyone from participating in Argentine maneuvers to skirt his rulings.  In addition, bondholders who can now turn to New York courts in any dispute with Argentina would have recourse only to Argentine courts.  Lastly, bondholders receiving dollar payments in Buenos Aires would be subject to Argentina’s recently-tightened foreign exchange controls.

“Vulture Funds”

President Fernández is adamant that the “vulture funds,” as she calls the hold-outs, should simply not be treated any better than the restructured bondholders, especially in view of what they paid for their bonds.  In her world-view, forcing Argentina to pay the hold-outs their full demands would make a mockery of the restructured debt, unleash almost $6 billion in new claims from previously inactive hold-outs and violate Argentina’s sovereignty (by overriding the ‘Lock Law’ passed by its Parliament in 2005 prohibiting Argentina from paying the hold-outs any more than the restructured bondholders).  Fernández also believes the US courts are being unfair to Argentina by not recognizing her administration’s perfect international debt service record since its initial bond restructuring in 2005.

The Big Issues

Curiously, the US government actually sides with Argentina on this issue, arguing that US court rulings favoring the hold-outs would allow minority creditors to thwart internationally-backed sovereign debt restructurings.  On a practical level, the US is also worried that its court decisions could discourage sovereign issuers from denominating their debt in US dollars and steer them away from the New York marketplace.

The International Monetary Fund also opposes the US court decisions on the ground that hold-outs can prevent sovereigns from acquiring the supermajority approvals  for restructurings they need under modern “collective action clauses.”  These new clauses – owing their origin in part to Singer’s decade-old case against Argentina – have replaced pari passu clauses in sovereign debt agreements and enable a supermajority (generally two-thirds) of a sovereign bond issue to approve a restructuring of all the bonds.

‘Hail Mary’

Paul Singer and the other hold-outs should clearly succeed in showing that the new exchange offer defies Judge Griesa’s order prohibiting Argentina (and its agents) from re-routing restructured debt payments outside the US.   President Fernández certainly knows that and may be using the proposed exchange as a ploy to get the US Supreme Court to take up her appeal and overturn the prior judgments.  This is really her last legal chance in the US and, at a key point in her address to the Argentine public announcing the new restructuring, she actually prayed to God to enlighten the US Supreme Court.

  • Sarbelio Jaime

    Excellent article Stephen, thanks you. Besides, I think there is not only the Cristina´s world, also is the world of the responsability in the goverments that starts to issue obligations or bonds and not measures the consecuenses in the no pay case. In El Salvador for example, we have been issued obligations or bonds with almost or excess of the 61% of our GDP. What will happen when we can´t pay and our creditors claim for his rights?. What will we say?. Equal treatment?. This is a irresponsability´s goverment. But for some stranger reason all goverments believe in the deep of his leader that they are untouchable and his debts must be treatment as they want.

  • Jonathan

    She also lost support of the voters, only 22% of argentinians voted for her candidates. She has failed in every front: inflation, unemployment, international relations, etc. Her government is highly corrupt and inefficient. She is now negotiating an exit. The opposition is claiming will go after the corrupt money estimated in 10 billion dollars – stolen from the argentinian people. Most of the money stolen were disguised as “commissions” for “public works”. The business who won most of the public concessions belong to her husband’s partners, Lazaro Baez, Cristobal Lopez and Electroingenieria.

    • K.M. Hendriks

      Jonathan, Despite the issues you cite and purported issues with President Fernandez’ husband’s partners, Do you believe that “US court rulings favoring the hold-outs would allow minority creditors to thwart internationally-backed sovereign debt restructurings”? I think that there are definitely other strong arguments for the US to be concerned that “collective action clauses” may trump pari passu considering “its court decisions could discourage sovereign issuers from denominating their debt in US dollars and steer them away from the New York marketplace.”