The dramatic showdown between Argentina and holders of its defaulted debt looked for a moment last week as if it was about to move one step closer to closure. Instead, the legal and financial tangle has become still more confused.
In 2001 the Argentine government reneged on $81 billion of liabilities. It staged two restructurings in 2005 and 2010, in which the owners of 93% of the defaulted debt agreed to exchange their holdings for new securities, at a 65% loss. The other creditors have held out for a better deal, which they hope to get through the courts. On March 29th, following a request by New York’s Second Circuit Court of Appeals, Argentina submitted a filing detailing how it proposed to pay these so-called “hold-outs”, who are suing it for $1.3 billion in principal and past interest. The plaintiff group, which consists of billionaire hedge funds and individual retail-investors, insists that a clause called pari passu (“equal step”) dictates that if Argentina is to continue paying back the bondholders who exchanged their defaulted debt, it must pay back the hold-outs too. Thomas Griesa, a district court judge, endorsed this argument in October. Now it is up to the appellate panel to determine how to fulfill his equal-treatment order.
In a move that frustrated many but surprised few, Argentina’s 22-page non-answer to the court was to offer the hold-outs a choice of discount bonds, par bonds or a combination of the two—essentially the same package the hold-outs have refused twice before. Argentina’s lawyers argued that the proposal satisfied the pari passu clause and asserted that plaintiffs cold not use the clause to “compel payment on terms better than those” given to the bondholders who exchanged their holdings in 2005 and 2010.
On April 2nd the court gave the plaintiffs three weeks to respond to the offer. Having spent 11 years and untold money on legal fees, the hold-outs are highly unlikely to accept such a deal, which makes it difficult for the appellate panel to accept the proposal as a genuine attempt to fulfill its request.
Choosing an alternative will be tricky. Argentina has already promised to defy any order to pay the hold-outs in full, and cautions that awarding the hold-outs their full claim could provoke “me-too” demands totaling $43 billion—more than Argentina currently holds in foreign-currency reserves. Such a ruling would have a worrisome and potentially fatal effect on future sovereign-debt restructurings worldwide, since it would eliminate incentives for accepting a haircut. A Goldilocks ruling in the middle would invite similar problems on a smaller scale.
Many believe that if the court does not accept Argentina’s proposed payment plan, Argentina will appeal to and have its case rejected by the Supreme Court. After that, few judicial avenues would remain to explore: the only choices would be to comply with the orders of the appellate court, or enter into technical default.
Most countries would scramble to avoid that. But Argentina has already sealed its reputation as a serial defaulter, making one more instance less daunting. The country doesn’t receive much external financing or foreign investment and economists suspect that defaulting would not damage the country’s GDP by more than 1.5%. That is not to say it would be painless. Argentina’s provinces and businesses would be worse hit, and consumer confidence would undoubtedly dive, propelling the black market exchange-rate even higher than its current level, 60% above Argentina’s official rate.
Should it choose to default, Argentina will also need to puzzle out how to continue paying holders of its restructured bonds—a difficult feat, but one which its leaders appear committed to undertaking. At a press conference on March 30th Amado Boudou, the vice-president (pictured above), seemed to be speaking to these “exchange-bond” holders when he insisted Argentina would continue to meet its debt obligations and affirmed his country’s “willingness and capacity” to pay, “whatever the result” of the case before the appeals court. In order to respect such a promise, Argentina would probably transfer its current New York-law bonds to Argentine law. This offer would be laughable under other circumstances, says Bret Rosen, head of Latin America research at Standard Chartered Bank. But “between getting paid something or nothing, exchange-bond holders will likely choose something, even if it comes with risks.”
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