Category Archives: English

Argentina’s debt default – Payback postponed

The Economist

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.”

The proven Buenos Aires – Argentina lawyer professionals at the Kier Joffe law firm have experience working with foreign clients involved in all kind of cases in Argentina. Buenos Aires Argentina attorney professionals are knowledgeable in almost all the practice areas of law, to service its international cases in Buenos Aires Argentina. International clients will have the confidence of knowing that the case is being handled by an experienced and knowledgeable Buenos Aires  lawyer in Argentina.

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Why Argentina’s Debt Problems Could Become An Investing Opportunity

Forbes.com – by Sara Zervos, OppenheimerFunds

As late as the early 20th century, angry investors sent warships to block the harbors of countries who had defaulted on their sovereign bond payments. That particular tactic is now behind us, butArgentina’s 2002 sovereign debt default has created a contentious game of chicken that continues even today. The decade-long saga is rife with legal twists and turns, and once again investors and rating agencies are bracing themselves for a possible Argentine default. An Appeals Court ruling on Nov. 28 delayed the day of reckoning, but come March 2013, Argentina could choose a path of technical default. Because Argentina has both the ability and willingness to repay its debt,  I will be monitoring conditions closely over the next few months for attractive Argentine investment opportunities.

The Battle Continues – But Its Effects Won’t Be Felt Globally

In the debt restructuring following the 2002 default, approximately 7% of the original bondholders remained “holdouts” – investors like hedge funds NML Capital Ltd. and Aurelius Capital Managementwho have not agreed to restructuring. Recent legal judgments have instructed Argentina to pay back –in full – these holdout investors, before the sovereign can pay any more coupons on the restructured debt (which it has been doing for years).

But who will be the first to swerve in this game of chicken? Argentine President Cristina Kirchner has claimed that paying 100% to these holdouts would violate Argentine law, which states that no holders of the defaulted bonds can be offered better terms than those accepted by 93% of investors in 2005 and 2010. The holdouts refuse to accept anything less than 100% repayment. The legal rulings are making it increasingly difficult for Argentina to find a way to continue to service debt without ceding to the holdouts.

The most likely conclusion to the drama will be a technical default that should not have widespread implications for the emerging market debt market. Emerging market countries have evolved far beyond the point where they can be considered one homogenous unit. Additionally, since the 2002 default, Argentina has been effectively shut out of the international debt market and currently makes up a mere 1.15% of the J.P. Morgan EmergingMarkets Bond Index Global.1  Argentina has stated numerous times that it wants to repay its creditors, and it has the cash to do so. The amount of money needed for holdouts is a mere $1.33 billion compared to Argentina’s current $45+ billion in international reserves. 2

Fears of Default Could Create Opportunity

This heated standoff will eventually subside, though Argentina faces serious economic pressures. Kirchner’s popularity is at a low. Domestic unions, a key support group, staged a general strike on Nov. 20 protesting low wages and insufficient retirement pensions. The International Monetary Fund recently issued a strong warning that the National Institute of Statistics and Census of Argentina should take greater care in calculating its inflation figures, which tend to vary greatly from third-party calculations.

We currently have no exposure to Argentina’s sovereign debt. However, we see global growth recovering in the coming quarters, which, in the past, has been a positive driver for Argentina’s outlook. If Argentine assets continue to cheapen due to the fear of a technical default (spreads of Argentine debt over U.S. Treasuries were near 1,200 basis points on Nov. 26)3, we believe that investors could be adequately compensated for investing in some particular bonds. Over the next few months, I will be keeping a close eye on the conditions in Argentina to identify potential investing opportunities.

The proven Buenos Aires – Argentina lawyer professionals at the Kier Joffe law firm have experience working with foreign clients involved in all kind of cases in Argentina. Buenos Aires Argentina attorney professionals are knowledgeable in almost all the practice areas of law, to service its international cases in Buenos Aires Argentina. International clients will have the confidence of knowing that the case is being handled by an experienced and knowledgeable Buenos Aires  lawyer in Argentina.

www.kierjoffe.com

 

Argentina Just Might Get Its Act Together

Forbes.com – by Lawrence Goodman

Argentina seems to be on a collision course of its own making.  Inflation is soaring and investment is on the wane.  Despite being the third largest economy in Latin America with abundant resources, Argentina no longer has access to voluntary capital inflows and the growth that funding affords.

The republic faces the threat of a currency crisis that could readily spiral to high double-digit inflation.  In years past, excessive inflation eroded incomes and wiped out the savings of individuals.  Despite intentions to benefit the poor, an unsustainable macro mix, difficult dealings with the private sector, and increasing international isolation promises to again diminish living standards.

Argentina’s foreign exchange policy and breach of international contracts represent obstacles to attracting financing for many worthy projects.  Currency is now rationed by the government.  So, an insufficient supply of available dollars threatens to stymie economic activity in the private and public sectors.  These barriers also incent foreign and local participants to move funds from Buenos Aires toMiami, Zurich or London rather than putting them to work in Argentina.

To circumvent currency limits, the private sector deftly employs a shadow exchange rate called the “blue chip swap.”  Yet, the costs of doing business via the Blue chip exchange rate are high – as securities priced in U.S. dollars must be purchased and exchanged to obtain scarce foreign currency.  In other words, there are two separate exchange rates in Argentina.

Memories of dual or multi-tiered exchange systems are limited, as they are fortunately relics of the distant past.  However, previous experiments – stretching from Argentina (1978-81 and 2001-02),Jamaica (1970-78 and 1987-94), Mexico (1982-85), and Venezuela (1984-89) – all ended poorly with a surge of inflation and shortages of basic goods and necessities.

At present, the “blue chip swap” strongly signals the risk of a roughly 40% devaluation of the peso.  So, this cumbersome and costly exchange rate management system either keeps investors sidelined or requires them to attach a hefty premium to any new undertaking.

Investment confidence is also vitally linked to adherence to the rule of law.  Unfortunately, Argentina has racked up lawsuits by individuals and institutions, and many settlements remain outstanding.  For instance, Argentina has not complied with any judgments brought by ICSID, the World Bank’s arbitral body for settling disputes.  Similarly, Argentina has refused to comply with more than 100 judgments in New York State alone ordering it to pay its creditors – including a high profile dispute with holdout creditors.

Fortunately, the government possesses the power to engineer a dramatic turnaround.

Argentina is rich in human and natural resource. Moreover, it has nurtured human resources by implementing policies dedicated to social inclusion.   It is the sixth most literate nation among the top 24 emerging markets in the world today.  On the financial front, the nation sports a strong balance sheet.  Debt is a scant 40% of GDP, well below the safe threshold of 60%.  Similarly, Argentina has grown the economy by an average 7.7% per year since the 2001/02 crisis, while widening its social safety net.

A reversal of rogue behavior on the legal front would free access to capital and help Argentina lower borrowing costs.  For instance, if Argentina’s perceived adherence to the rule of law converged with Brazil’s, as measured by theCenter for Financial Stability’s Rule of Law Index, Argentina could reduce future borrowing costs by a minimum of 735 basis points per year over ten years and open the nation to new sources of funding and growth.

Given the political will, Argentina can engineer a recovery and regain its prominence as a leading G-20 nation by fortifying its social programs through sound fiscal management; moving away from distortionary exchange rate policies; and honoring contracts.  How the Kirchner administration develops the nation’s human and natural resources will either accelerate its downward descent or set the stage for prosperity.

The proven Buenos Aires – Argentina lawyer professionals at the Kier Joffe law firm have experience working with foreign clients involved in all kind of cases in Argentina. Buenos Aires Argentina attorney professionals are knowledgeable in almost all the practice areas of law, to service its international cases in Buenos Aires Argentina. International clients will have the confidence of knowing that the case is being handled by an experienced and knowledgeable Buenos Aires  lawyer in Argentina.

www.kierjoffe.com

 

Real Estate in Buenos Aires, Argentina: What to buy now

Everyone in the real estate industry in Buenos Aires agrees.  Real estate agents, brokers, developers and construction companies all point out that the best properties to buy right now are small apartments in good locations priced between US$ 50,000 to US$ 150,000.

The current global financial situation creates uncertainty, even in Argentina where the full effects of the crisis have not been felt as strongly as in the United States and Europe.  The financial markets are unstable and the uncertainty of world economies makes it unadvisable to transfer funds abroad.   The best option for investors in Buenos Aires at the moment is real estate investment.  Property always proves to be a secure investment, at least on a medium and long term basis.  In the short term, it can provide rental income which can yield an annual return of six percent.

Mortgage loans in Argentina have virtually disappeared.  The Cámara Inmobiliaria Argentina has requested that the government reinstate mortgage loans for the middle class.  Such loans accounted for seven percent of real estate sales, but in today’s economy they have disappeared.  In addition to producing a slight drop in sales, this lack of financing forces many people, especially singles and young couples, to rent.

Currently the smartest real estate investment is the purchase or construction of smaller units, one room studios to two bedroom apartments.  Smaller units in good locations are always in high demand as rentals.  A studio apartment is now renting for $900 to $1,100 pesos per month.  Smaller units have lower maintenance costs and in many cases these costs are passed on to the renter.  Apartments in Buenos Aires can be rented with a two year lease or on a temporary basis, usually to foreigners and in US dollars.

Industry experts believe that property values will remain stable, though negotiations will be somewhat more difficult.  Those who are selling already constructed property and are not in need of immediate cash, are unlikely to lower their selling price because they know they will need to pay as much or more for another property.  Premium properties are also retaining their value.

Real estate agents and brokers believe that recent government legislation will help maintain or even stimulate their industry.  The legislation encourages Argentine citizens to legally declare assets held within the country or abroad by taxing them only one percent, as long as that capital is invested in purchasing or constructing real estate property in Argentina.   The new law gives realtors a good leverage point to use when dealing with investors that fall within the parameters of the legislation.

The proven Buenos Aires – Argentina lawyer professionals at the Kier Joffe law firm have experience working with foreign clients involved in all kind of cases in Argentina. Buenos Aires Argentina attorney professionals are knowledgeable in almost all the practice areas of law, to service its international cases in Buenos Aires Argentina. International clients will have the confidence of knowing that the case is being handled by an experienced and knowledgeable Buenos Aires  lawyer in Argentina.

www.kierjoffe.com

Real Estate: Why Mortgage Loans are Lacking in Argentina

The availability of credit in Argentina depends on the level of savings deposited in the banking system.

Mortgage lending at present is limited in Argentina because the private sector of the Argentine economy has limited savings.  The situation is further aggravated by the fact that those limited savings often don’t enter the banking system.  Fears of having funds confiscated (as they were in the economic crisis of 2001) and a loss of real buying power drive people to buy US dollars and place them in a safe deposit box or under the mattress. Others simply transfer their funds outside of the country.

When internal savings are lacking, having external savings would be an alternative.  This would mean that foreigners, individuals and companies, from different countries, would deposit funds in the Argentine banking system or purchase national savings bonds.  Since the economic crisis of 2001, however, Argentina has difficulty attracting this type of foreign investment.

This reduction in both internal and external savings greatly reduces the availability of mortgage loans with affordable interest rates.  The limited amount of mortgage lending and the high interest rates most mortgage lenders offer is keeping many middle class families from acquiring their first home or upgrading to a larger home.

The only affordable mortgage loans are subsidized government loans that charge interest rates below market values.  Funding for these subsidized government loans comes from the government’s tax revenues and other revenue sources such as the recent nationalization of private retirement funds.  If government revenues drop, the supply of government loans declines as well.  Currently, the availability of mortgage loans with reduced interest rates is dependent on the government’s limited stock.

Lower income families that might qualify for these lower interest rate loans may still be reluctant to take on the payment responsibility.  An increase in unemployment, a decline in real buying power and an uncertain labor market makes many people put off spending.  They are particularly leary of getting into large debt, as required with the purchase of a home.

To get a sense of the current loan situation, the amount of available mortgage credit has dropped by one third from the year 2000 to the present.  This reduction in mortgage lending means that the vast majority of real estate transactions will most likely continue to be done in cash.

The proven Buenos Aires – Argentina lawyer professionals at the Kier Joffe law firm have experience working with foreign clients involved in all kind of cases in Argentina. Buenos Aires Argentina attorney professionals are knowledgeable in almost all the practice areas of law, to service its international cases in Buenos Aires Argentina. International clients will have the confidence of knowing that the case is being handled by an experienced and knowledgeable Buenos Aires  lawyer in Argentina.

www.kierjoffe.com