Argentina and Elliot, Again

On October 7 the Financial Times published an article by Jay Newman, a senior member of Elliot Management Corporation, the vulture fund that has a long-standing dispute with Argentina, criticizing this country for what he argued was its unwillingness to negotiate with them. A couple of days later the FT published a letter from Danny Leipziger who basically pointed out that Argentina could not follow the self-interested proposals of Mr. Newman because “any deal with holdout creditors on superior terms than those accepted by the majority of creditors would open a legal can of worms.” In fact Argentina could end up worse than it is now by offering the free riders of Elliot et al a better deal than those that entered the 2005 and 2010 debt exchanges. I thought the point was obvious. Unfortunately, on October 30 newspapers in Argentina informed about a recent letter to the Argentine Ambassador in Washington from the Chairman and Ranking Member of the Subcommittee on the Western Hemisphere of the Committee of Foreign Affairs of the House of Representatives, repeating some of the points in Mr. Newman’s article.  Therefore I decided to give a more detailed answer to the several disingenuous and misleading assertions in Mr. Newman’s article.

First, I want to say that this is my personal opinion. I do not work for the Argentine government (I left a governmental position in March 2012), nor for any public or private parties involved in this case (since early 2012 I work for an international organization on global poverty and food security problems). Also I do not own Argentine debt or similar financial instruments that may cause me to benefit or lose from any resolution of the case. I am writing because I believe that the thuggish legal and political lobbying approach with which Elliot tries to bludgeon countries into submission is a moral disgrace (and in itself a significant barrier to any civilized negotiation) and its free-rider and greedy attitude to the always painful process of debt restructurings is a great threat to the adequate working of the world financial system.

Unfortunately, the warped legal “reasoning” of Judge Griesa and the Judges of the New York Second Circuit Court of Appeals has made this problem global, even though they claim that it only affects Argentina. They should know better: their rulings are legal precedents that are already affecting the property rights of third parties and compromising the position of New York as a trusted place to conduct financial businesses. Of course the Judges claimed that their rulings refer only to what Argentina can and cannot do, but then they failed to clarify what can third parties with exchanged bonds can do to protect their rights in ways that do not appear to be helping Argentina to violate the injunction; instead, they left that definition hanging in the air for a future time if and when cases are brought to their high consideration. Given the peculiar ways in which the Judges involved in the case have been interpreting the law, this option is not very reassuring. But I am digressing. Let me go back to Mr. Newman.

I will quote first from his article and then present my views to specific sections.

Mr. Newman

When a nation experiences a debt crisis, its leaders usually try to resolve matters as quickly as possible. Argentina is different. Almost 12 years after defaulting on more than $80bn in debt, its problems remain unresolved…. We began investing in Argentine bonds before the 2001 default. Following the default, we hoped to reach a reasonable settlement – along with the rest of Argentina’s creditors – through a negotiated restructuring. We considered litigation to be a last resort…. We tried to engage Argentina in good-faith talks [EDB in his article he mentions several meetings with high officials over the years: at least two Secretaries of Finance, and an Argentine Ambassador to the US]… My case was that Argentina would maximise the number of creditors that would participate in its restructuring if it pursued a conciliatory and open process of negotiations. This advice was well grounded. According to the International Monetary Fund, “extensive informal discussions” between Pakistan and its creditors yielded a 99 per cent participation rate in its 1999 exchange. In 2002, 100 per cent of Moldova’s creditors agreed to its restructuring plan after “extensive negotiations” proved successful…Instead, in 2005, Argentina offered creditors a take-it-or-leave-it bond exchange valued at roughly 25 to 27 cents on the dollar. Only about 76 per cent of the defaulted debt was tendered, much of it coming from Argentines who had little choice. More than half of foreign creditors rejected the deal….In 2010, Argentina followed up with a second unilateral offer on even worse terms… But by that point Argentina’s conduct had demoralised most remaining creditors, causing them to sell their bonds to new buyers who took the low-ball offer. Our firm and a few others – along with thousands of small investors from Argentina, Italy and elsewhere – continued to push for a fair settlement.”

Basically, the points are: a) Argentina took a long time and made an offer without consultations in 2005, b) that was grossly discounted, and c) that was accepted mainly by Argentines; d) in 2010 Argentina made again a unilateral offer that was accepted by dispirited people, while e) Elliot was all along trying to negotiate with Argentina a fair settlement. In my opinion each one of these points is untrue or at least misleading, as I will try to show below. In what follows I use material from a previous blog, where the interested reader may find more details (http://www.economonitor.com/blog/2008/09/some-reflections-on-argentinas-debt-restructuring/)

I quote Mr. Newman and then present my comments

A. “When a nation experiences a debt crisis, its leaders usually try to resolve matters as quickly as possible. Argentina is different. Almost 12 years after defaulting on more than $80bn in debt, its problems remain unresolved…”

The Argentine debt re-structuring took time because it has been the most complex in history of emerging markets (and until Lehman’s bankruptcy probably not only for emerging markets): it encompassed 152 bond issues in 7 separate currencies under 8 distinct governing laws.

Another fact that prolonged the negotiations was the existence of two general paradigms for debt resolutions, and the confusion this generated in the discussion. The previous traditional model had been the public-sector approach funded and led by international public institutions. The competing approach was called the market-based (or “moral hazard”) approach, which postulated that the private creditors and the debtor government have to work out a solution by themselves without money from the international community (which in any case was running out of money). Argentina was placed under the latter paradigm while the majority of the other cases were treated with new public money (substantial at times) and, therefore, with the involvement of public institutions (see for instance the speech on April 27, 2004 b y John Taylor, then Under Secretary of Treasury for International Affairs, addressing the Fitch Ratings’ Latin America Conference (http://www.ustreas.gov/press/releases/js1476.htm), where he explained clearly the logic of the market based approach in the case of Argentina).

In the end, and for different reasons, international organizations not only did not facilitate the debt exchange agreement with new public money, but they did not even maintain neutral flows (as originally agreed with Argentina at Dubai in September 2003), and eventually became net recipients of payments from Argentina (see below). The IMF staff kept on bringing up in the program revisions the issue of the primary surplus going forward, which, as indicated by John Taylor, was an interference with the “market based” negotiations (i.e. with neutral flows with the IFIs, if Argentina had agreed with the IMF the size of the total primary surplus, the negotiations would have been with the IMF and not, under the “market based” approach, with the bondholders). Argentine authorities manifested publicly several times their disagreement with the IMF staff in this regard. Finally, Argentina had to suspend in late 2004 the program in order to be able to close the debt exchange within the “market based” approach.

These problems were part of the confusions between the two paradigms, which greatly complicated the negotiation for Argentina. The pressure from some bondholders to interject the IMF in what was to be a market-based negotiation also hurt those same bondholders because Argentina’s negative flows with the IFIs reduced the amount of money that could have been available for the private debt offer (see the 2008 blog). Therefore, given the government’s budget constraint it follows that the haircut to the bondholders had to be larger, and therefore acceptance lower, than the other cases treated under the approach that utilized new public money.

The fact that there were two paradigms and that there was a debate about the adequacy of one or the other approach, was a source of frustration and misunderstandings, with Argentina being blamed for implications that were inherent in the paradigm of debt restructuring to which the country was assigned. The government of Argentina permanently asked, as a matter of simple consistency, that the requirements to the country and judgments about Argentina’s performance be framed within the parameters of the approach under which it was operating, and not by the results in countries that were treated with the other approach (which included substantial public funds to help them).

It should be noted that the behavior of Mr. Newman’s fund has also been crucial to block the possibility of reaching a quick resolution. They basically decided to wait for other people to accept the successive offers and then aggressively litigate and lobby hoping to get a free ride on the pain and losses of the Argentine people and of all those that participated in the 2005 and 2010 debt exchanges. They refused to participate, waiting that the number of holdouts was reduced to a level that would change the cost/benefit analysis for Argentina so the country would pay full dollar on defaulted debt for which Elliot paid cents on the dollar. Meanwhile, to increase the costs of Argentina of not accepting their offer, Elliot et al, mounted a brutal lobbying and harassing campaign against the country.

B. “We tried to engage Argentina in good-faith talks [EDB:Mr. Newman mentions several meetings with high officials over the years: at least two Secretaries of Finance, and an Argentine Ambassador to the US]… My case was that Argentina would maximise the number of creditors that would participate in its restructuring if it pursued a conciliatory and open process of negotiations…”

The debt re-structuring was done through the only practical approach given the complexity of the deal. Impartial observers at the time recognized that the only workable approach was what the Argentine government did: to hold numerous meetings (over 70 altogether) with different groups in several countries and then define and present an exchange offer that considered the different circumstances and possibilities. It was simply not feasible to negotiate with each group. It was even less appropriate to negotiate with just some specific group of bondholders, as Mr. Newman apparently wanted, who claimed to represent this or that group (in many cases with no clear mandates). I witnessed a meeting where one of the many shady characters mobilized by the scent of money was first advising Argentine officials to default (before it eventually happened), only for him to reappear later claiming that he represented X billion dollars of defaulted debt and writing insulting articles in international newspapers trashing Argentina for not negotiating with him. And this character was not the only one that approached the beleaguered Argentine authorities with a variety of claims and proposals that were impossible to assess properly. In summary, Argentina did the only feasible thing: to hold as many consultations as possible and then come up with an offer. Any other approach would have led to serious legal and operational difficulties.

C. “This advice was well grounded. According to the International Monetary Fund, “extensive informal discussions” between Pakistan and its creditors yielded a 99 per cent participation rate in its 1999 exchange. In 2002, 100 per cent of Moldova’s creditors agreed to its restructuring plan after “extensive negotiations” proved successful…”

Argentina’s payment capacity was determined by objective factors such as the collapse of Argentina’s GDP (after 4 years of recession, the country suffered an economic decline comparable to the US depression of the 1930s, far more than any country that went through restructurings), the fact that the country was making net payments to international organizations (while all of the other countries cited as examples of “good restructurings” received official money), and the need to use realistic assumptions about Argentina’s potential future performance in order to avoid further restructurings in the near term (which would have hurt both creditors and the country). Regarding the economic decline the next table includes data on Argentina, Greece, Pakistan, Moldova (the latter two cited by Mr. Newman as “good examples”) from the peak previous to the moment debt was rescheduled

2016-02-03_13-05-02
Besides, as I noted before, Argentina was placed in what was called a “market based” approach as opposed to a “bailout with public money.” Therefore Argentina was not supposed to receive net flows money from the International Financial Institutions, while all the other countries usually contrasted with Argentina did receive substantial amounts of money as part of the rescheduling. This has been the case of Pakistan (which received between 1.5-2% of the GDP in net flows), while officials flows to Argentina not only were not maintained neutral as suggested by then Undersecretary John Taylor (see before and previous blog) but was a net payer to IFIs (in about 1% of the GDP). Of course, Greece, which is the only country that has come closer to the economic depression suffered by Argentina, received a massive bailout, and still debt holders were forced to accept a large haircut. Therefore, the comparisons presented by Mr. Newman do not make any sense.In a previous blog I also showed the decline in total GDP measured in dollars, which reflects better the ability to pay (the GDP per capita indicates mostly the pain inflicted on the population by the crisis, which put limits to what the government could do).  In both metrics, Argentina was the country more affected by the economic decline. The economic crises was accompanied by widespread social unrest that led to tens of death and hundreds of injured, and by institutional disruption, with the Republic going through 5 Presidents in a matter of weeks. I remember walking through the streets of down-town Buenos Aires those days and thinking that it looked like a war zone, with burned cars and vandalized stores. That was the background against which Argentina’s authorities had to present the debt exchange.

D. “Instead, in 2005, Argentina offered creditors a take-it-or-leave-it bond exchange valued at roughly 25 to 27 cents on the dollar…”

The 2005 offer had to reflect the economic decline (particularly in dollar terms, and at the time of the default the debt/GDP ratio was almost 170%), and the fact that not only there was no new money from IFIs but Argentina was forced to pay them. By 2005, Argentina’s GDP per capita in constant local currency was still below the peak of 1998, and the whole economy in dollar terms (which better reflects the possibility of paying a dollar-denominated debt) was almost 40% below 1998 and about 30% below 2001, the year before the default. Several interested parties kept on pushing for a “better” offer. But, given the economic realities at the time, and the historical evolution of the Argentine economy, the offer presented was the one that gave some assurances that there was not going to be further restructurings in the immediate future (which would have been bad for almost everyone, except those profiting from other people’s disgrace).

More importantly, and in another demonstration of good faith, the 2005 offer included a GDP-linked coupon with the intention to share with bondholders the potential upside in case actual performance proved to be better (as it has been) than what history would have suggested. With the GDP warrant the value of the 2005 debt restructuring is not the misleading 25 to 27 cents on the dollar often quoted (and repeated by Mr Newman in his article) but about 60 cents on the dollar; in the case, of the 2010 debt exchange, the valuation was calculated at between 48 and 51 cents per dollar value of the bond (see J. F. Hornbeck. Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts.” Congressional Research Service. February 6, 2013. 7-5700. CRS. R41029).

The GDP warrants still have several years ahead when additional payments can and will be triggered, implying that the recovery rates for the 2005 and 2010 will most likely be even higher than the percentages mentioned.

E. “Only about 76 per cent of the defaulted debt was tendered, much of it coming from Argentines who had little choice. More than half of foreign creditors rejected the deal…”

The percentage of acceptance by place of emission (see my other blog) was about 81.5% in New York, 68% in UK, 64% in Germany, 94% in Japan, and almost 69% in other jurisdictions outside Argentina. That added up to 76.15% of the total eligible debt for exchange. It would take an unthinkable high number of sophisticated Argentine investors in non-Argentine jurisdictions to support Mr. Newman’s claim. But of course in their lobbying campaign anything goes (for instance their lobbying arm in Washington DC also claimed in its web site that they represented cattlemen and other people that held defaulted bonds, which, according to a WSJ article, did not even know their name was used in the web site).

F.In 2010, Argentina followed up with a second unilateral offer on even worse terms… But by that point Argentina’s conduct had demoralised most remaining creditors, causing them to sell their bonds to new buyers who took the low-ball offer.”

This completely disingenuous mischaracterization of the 2010 debt exchange as “a second unilateral offer” by the Argentine Government is crucial to maintain the pretense that Elliot always wanted to negotiate and it was ignored. I commented about the 2010 debt exchange in the blog I mentioned before and also in a recent one.

The truth is that the 2010 debt exchange was not a “unilateral offer by Argentina” but was the result of the proposal of several funds that also bought debt at discounted values after the 2002 default, but, different from Elliot et al, they really wanted to negotiate with the Argentine government, and they did.  Those funds, and not the Argentine Government, put together the 2010 offer, and it was negotiated and accepted by Argentina, exactly the opposite that Mr. Newman tries to imply.

But the business model of Elliot et al is NOT to negotiate, but to stay apart and then try to get an extraordinary return by free-riding on the previous debt exchanges and by breaking the potential resistance of the indebted country through aggressive litigation and thuggish lobbying.

This behavior does not apply only oversees but also in the US. Let me quote extensively from a Fortune article of April 9, 2012(Mitt Romney’s hedge fund kingmaker”), covering the operations of Paul Singer and Elliot.

“One of Singer’s more familiar bugaboos is Dodd-Frank.. As Singer puts it, Dodd-Frank “will diminish the predictability and protections of the rule of law….” (EDB: sounds familiar?) The FDIC sees it differently. “Dodd-Frank eliminates the ability of distressed-debt investors to manipulate the bankruptcy process through endless rounds of negotiation and legislation to get a few cents here or there,” says Michael Krimminger, the FDIC general counsel. “It clearly spells out the priority structure for paying creditors, along with the way in which they will be paid.”

The FDIC hopes the Resolution Authority process can avert a collapse of an institution like Lehman Brothers and the long, contentious bankruptcy process that followed. Elliott was a winner in that battle, which was finally resolved late last year. Elliott profited by buying up both private and public claims across the Lehman capital structure and was on the creditors’ committee of the holding company. “They are very hard-nosed, very aggressive, and sometimes inflexible,” says Harvey Miller, the Weil Gotshal & Manges partner who was the lead attorney for Lehman. “They just take a position and say, ‘That’s the way it has to be because we say so.‘”

It is clear from Mr. Newman’s article that he was received more than one time by high officials in the Argentine Government, hardly the position of an intransigent debtor that does not want to talk with its creditor. But if the only negotiating position of Elliot et al is that they want to be paid back in full or close to that, which no Argentine Government can do without going bankrupt again by reopening the 2005 and 2010 debt exchanges, then it is obvious that the culprit for not having reached any agreement is not Argentina.

F. “We began investing in Argentine bonds before the 2001 default. Following the default, we hoped to reach a reasonable settlement – along with the rest of Argentina’s creditors – through a negotiated restructuring. We considered litigation to be a last resort…”

Mr. Newman uses some contorted language to try to cover the fact that Elliot bought most (if not all) of the debt being litigated after the default (Mr. Newman says “We began investing in Argentine bonds before the 2001 default;” really? how much did you buy before?). Also, it uses language that tries to show that they were reluctant litigants (“We considered litigation to be a last resort”), when in fact they brought the first legal claim against Argentina in New York courts in 2003.

It is clear that they bought the defaulted debt with the intent to litigate and free-ride the process when others have already accepted the debt exchange, trying to bully Argentina into submission. But the fact that other funds presented an offer and it was negotiated and accepted by the Argentine government should put to rest all the disingenuous claims by Mr. Newman that “we want to negotiate but the Argentine government does not listen to us” (Oh, champerty where are you when we need you!).

Conclusion

Argentina in most strenuous circumstances put an offer that is currently valued at about 50-60% and can go higher depending on the evolution of the GDP warrants, and that reached an acceptance rate of about 92% of eligible debt. Those participating in the two debt exchange included funds that, as Elliot et al, bought debt at a discount but, different from Elliot, were willing to engage the Argentine Government and negotiate realistically.

To repeat: Argentina cannot offer Elliot et al a better offer than the previous debt exchanges without entering into a new debt crisis brought by those that entered in the 2005 and 2010 exchanges and will want the same treatment.

Besides, no self-respecting government can seat down to negotiate with people who, since at least 2006, have been funding lobbyists in the US and other countries whose only job is to trash Argentina’s reputation. Who can negotiate with people that bring 10-meter inflatable plastic rats and hand out key holders with little rats to meetings in DC where Argentine officials are participating? And that is just an anecdote.

It is true that the Argentine Government has been Elliot’s best ally in that trashing through misguided policies and a lot of unforced mistakes, fruit of ignorance and obduracy. The Argentine Government has greatly facilitated Elliot’s narrative according to which this case is about disciplining a rogue government (or country) and enforcing the rule of law.

But make no mistake: the real threat to an orderly resolution of always painful debt crises, public or private, is the behavior of Elliot et al. Frank-Dodd domestically in the US and the search in different fora (including the IMF and a recent paper by the Brookings Institution) for international debt resolution mechanisms, show clearly that Elliot et al is the main systemic problem. Unfortunately, the threat of Elliot-like behavior to the world financial system has been greatly reinforced by the massive violation of the private property of third parties implied in the rulings by Judge Griesa et al.

Elliot et al have had countless opportunities to settle the problems and make good money, as the other similar funds which negotiated with the Argentine Government did. It has been reported that Mr. Singer has angrily protested in his newsletters about the irrational attitude of the Argentine authorities when in fact it looks more like he has been irrational (and so far lost a bunch of money). Except that Elliot’s aim is to punish Argentina (without caring whether the people in that country and unrelated third parties may be hurt) just to show that no one messes up with the rich and mighty Elliot. That would be a “macho” thing, rather than a business proposition.

Now there are talks in Argentina that some of the funds that spearheaded the 2010 debt exchange may make Elliot et al an offer to settle the debt problem. This shows that Griesa et al rulings have forced third parties to take unusual measures to protect property rights that were supposed to have been settled in 2005 and 2010.

Instead of accommodating Elliot et al I wonder why those that accepted the 2005 and 2010 debt exchanges and see their property rights affected do not a) renounce unilaterally to the fiduciary structure now compromised by the rulings of Judget Griesa et al; b) open an individual account in a third bank (which under the legal opinions would be “intermediary banks”); and c) order the Argentine Government to deposit the payments in those accounts. That would not violate the rulings that according to the Second Circuit Court, affect only Argentina.

The 2002 Argentine economic crisis and the debt default was a very painful episode for everyone affected, starting with the Argentine people some of whom died, others were injured and many suffered greatly because of the social and economic collapse. Unfortunately, it is impossible to bring back to life those that died. Regarding the economic consequences we can only hope that burdens are equitably shared, considering specially the poor and vulnerable. A great step would be that Elliot-like behavior is forever banned in civilized financial systems. I also hope that the Argentine Government stops facilitating the efforts by Elliot et al to turn the spotlight away from them, where the real systemic threat lies.