Argentina’s debt crisis of 2001/2002 was a profound and painful one. The 2005 restructuring proposal reflected the difficulties suffered by the country (see my blog http://www.economonitor.com/blog/2008/09/some-reflections-on-argentinas-debt-restructuring/). The acceptance reached about 74%, therefore there was still a substantial percentage of holdouts. Sometime in 2006 or 2007, and for reasons that still escape me, people from an important fund that had not participated in the 2005 debt exchange and held a significant percentage of the about 18 billion dollars not exchanged, visited me to talk about what they should do to get to an agreement with the Argentine government (at that time I represented the Government of Argentina (GOA) at the Board of Executive Directors of the Inter American Development Bank, but, as I told my visitors, the debt issue was “way above my pay grade”).
In any case they insisted and therefore I told them four things that I thought they should do: first, they should stop bad-mouthing my country because no one would negotiate under those conditions (they said that they were not behind the aggressive and negative lobbying in Washington and other capitals that tried to present Argentina in the worst possible light; rather, they attributed the campaign to (in their words) the “cowboys from ATFA,” i.e. the American Task Force for Argentina, the lobby outfit paid by Elliot and similar funds); second, I said that they should not put pressure on international organizations to stop lending to Argentina because this would make a settlement even more difficult; third, they should present a proposal and not wait for the GOA to make a first move that was banned by an Argentine law (the “Padlock Law,” or “Ley Cerrojo”); and, fourth, they should include in their offer some new money. To my surprise, that fund put together a proposal along these lines (even with new money) but then the 2007/2008 crisis intervened, forcing the elimination of the new-money component and delaying the whole process. However, that proposal eventually resulted in the 2010 debt exchange, which led to an overall acceptance of somewhat more than 91% (adding the 2005 and 2010 debt exchanges).
I mentioned this to highlight the differences in approaches by holdouts willing to negotiate and Elliot and company (“the cowboys from ATFA”), which maintained the aggressive lobbying campaign against Argentina that is an important reason for the bad blood between the parties. Now we are in another phase of the post-2010 drama, with the March 29 proposal by Government of Argentina (GOA) (see http://www.shearman.com/files/upload/NML-Capital-v-Argentina-2013-3-29-Letter-from-Argentina-to-the-Court.pdf). I have I left the government of Argentina more than a year ago (see http://www.lanacion.com.ar/1454410-confirman-que-cambia-el-delegado-argentino-en-el-bid). So my comments here do not reflect official positions or special inside information. But because I am getting increasingly frustrated by what I have read after the March 29 proposal, let me unload at least part of my frustration in the next paragraphs.
Some people complained that the offer did not present anything new with respect to the previous debt exchanges. How could have done the GOA anything different if a) it has been arguing that “pari passu” means that all bondholders must be treated equally, and that the plaintiffs do not deserve a better treatment, as would be the case under the original Judge Griesa’s ruling of a 100% payment, and b) there is still not a ruling by the Appellate Court? On the other hand, some other people complained that the GOA should not have included the GDP coupon in this offer. Again, given that it was in the previous debt exchanges, how could the GDP coupon not have been included now?
Other people have jumped to the conclusion that because Elliot and company did not accept the 2010 debt exchange, they will not accept this offer now. The fact that yesterday (April 2) the US Court of Appeals for the Second Circuit in New York sent to the holdouts the Argentine proposal offers new perspectives. Before, these holdouts (to avoid charged words such as “vulture funds” which according to many would better reflect the nature of the business model followed by the litigating funds) had a firm ruling in their favor. Now they need to evaluate what to do before knowing what the Second Circuit Court really thinks. The holdouts may well still reject the proposal. But I would argue that it would be a mistake. Those holdouts seem to be operating under some misconceptions about the legal, economic and political aspects of the case, at least as those issues are seen from the point of view of the GOA (my interpretation, of course). Therefore, it would be useful for them to reconsider.
*First, the current holdouts seem to think that if there is a second ruling against Argentina, the GOA will be able to make a better offer to the plaintiffs and be immune legally because it is not a voluntary offer but it would have been mandated by the Court. This legal interpretation is completely untested, and may lead to more litigation and not less. The GOA cannot follow this interpretation, given all the risks involved.
*Second, they seem to think that it is impossible to re-route the payments outside New York. To do so would certainly be a messy process, and it would generate uncertainty and higher risk premiums for some weeks or even a couple of months. But informed observers consider that it can be done. I think it is obvious that the GOA wants to protect the bondholders that entered the previous exchanges. So, in my opinion, it will do whatever is needed to make sure that any interruption is short and that current bond holders are made whole. It is interesting to mention (a fact noted by several analysts) that now Argentine bonds under Argentina’s law trade at a premium over those under New York law: i.e. markets consider that it is safer to have bonds under Argentina’s law than under New York law. The damage that the Judge Griesa’s ruling is inflicting on New York as a financial center is clear, and may become substantial if that ruling is upheld. Even with the short-term disruption, the medium-term benefits for Argentina of ending the multiple litigations, present and potential, in New York by re-routing payments through other centers (including Argentina) may be more than the costs. The most important medium-term costs will be borne by New York economic and financial agents, who are already unhappy with the attitude of the holdouts and with Judge Griesa’s ruling.
*Third, they seem to believe that the GOA needs to go back to the credit markets urgently, and therefore is under financial pressure to settle this claim. But this does not seem to be the case. All estimates about large fiscal deficits are exaggerated by excluding current financing from the Central Bank and the Social Security system as if they were 100% illegitimate. Between calculations that consider such financing as 100% legitimate (as the GOA does) and 100% illegitimate (as the critics argue) there is a range of possibilities for which I have not seen reasonable analyses. In any case, the GOA still has access to that financing (whatever the medium term negative consequences of such method of funding the public sector may be) and the fiscal consolidation needed to reduce deficits to very comfortable levels is not big as percentage of the GDP.
*Fourth, Elliot and company do not seem to appreciate the depth of the dislike their business model generates in many quarters, starting with the GOA, but now including the banks and bondholders held hostage by Judge Griesa’s decision, not to mention the governments of several industrialized countries facing widespread debt problems. The GOA may well think (and I am solely responsible for this guess) that as the 2001/2002 Argentina’s crisis led to the final generalization to the Collective Action Clauses (thus providing at least something positive for international finances out of Argentina’s dramatic and very painful episode), this litigation offers the chance of hammering the final wooden stake through the heart of a business model that is highly disruptive of international finances, particularly in the current circumstances. In that case, the agonizing Argentine experience would be contributing twice to a more stable process for dealing with sovereign defaults.
*Fifth, in money terms, if you a) add the difference of what Elliot paid and what would be receiving under the Argentine proposal (as shown in the calculations in that document), and b) compute the capital appreciation post settlement due to a significant decline in country risk, the current holdouts would reap a significant return. Part of the esoteric discussion about the NPV of any debt restructuring is to define what the proper discount rate is. Argentina’s discount rate has been high because of this litigation, and it has gone even higher because of Judge Griesa’s misguided ruling that made the Bank of New York Mellon and the bondholders with performing debts hostages to the Elliot claim. If Elliot and company accept Argentina’s proposal, the discount rate for a post-settlement NPV calculation will be much lower, benefiting every one. Elliot and company can continue to follow a strategy that hurts everyone, starting with New York as a financial center and future sovereign debt restructurings (but also including themselves, because they are bleeding legal and lobbying money, plus not getting their bonds paid back), or accept the reality that they will not get anything better than this offer and settle.
So we have a good equilibrium and a bad equilibrium. In my opinion, Argentina does not have legal, political, or economic room to move from what it has offered. So the only coordinating devices to move to the good equilibrium are either a more realistic ruling by the US Court of Appeals for the Second Circuit in New York, or Elliot and company accepting the offer. The fact that the New York judges sent the proposal to the holdouts makes me think that they want a “good economic equilibrium,” but are struggling with the implications of the legal issues (“do we enforce the contracts as written to show that New York follows the ‘rule of law’ or this latter approach, by rewriting the contracts of other agents, may generate a more systemic damage to New York as a financial center”?).
For the holdouts all possible scenarios seem to imply more costs than accepting the offer. Their business model is already under threat by the Collective Action Clause, irrespective of this case. The possibility that Argentina accepts an adverse ruling and pays 100% or something better than what was offered in the previous debt exchanges, does not exist. Therefore, the only reason for the holdouts not to accept is to try to inflict further pain to Argentina, even though in the process they would not receive any payment, must continue paying legal and lobbying costs, and inflict serious damage to New York as a financial center and to innocent bystanders such the financial institutions involved in processing the payments and to the bondholders that accepted the previous debt exchanges. Even vulture funds should be able to use human cost-benefit analysis.