EspañolAs occurred 13 years ago, Argentina has defaulted again on its international obligations. Yesterday, arduous negotiations between Argentina’s representatives and her creditors failed to bring an agreement, and the national debt is now in “selective default,” as confirmed yesterday with a downgrade from credit agency Standard & Poor’s.
The Argentinean government reacted by pointing the finger at the US justice system: “Here we are before a malpractice by the US judiciary; all three levels of [US] government are responsible for this,” said Cabinet Chief Jorge Capitanich on Thursday morning.
Behind the default lies a legal thriller located in New York which has been taking place the last 8 years.
1. Five Presidents in One Week: The Clash Begins
In the last week of 2001, Argentina had five presidents, some of whom ruled for just a few hours. The resignation of then-president Fernando de la Rúa, from the Radical Civic Union — one of Argentina’s oldest, middle-of-the-road parties — created a tsunami of chaos at the helm.
On December 23, the Legislative Assembly appointed Peronista Adolfo Rodríguez Saá as the third of the presidents in quick succession. During his seven-day tenure, he announced that the government was going to default on its US$132 billion debt — at that time the largest default in the history of global economics. The announcement was received with unanimous applause from lawmakers, and a gleeful, albeit temporary, atmosphere surrounded the words of Saá.
In 2005, Argentina proposed to the holders of the defaulted bonds an exchange for new bonds, and 75 percent of the bondholders accepted the agreement. Five years later, in 2010, the Argentinean government made a similar debt-restructuring offer. After the two phases, 93 percent of creditors had accepted the terms, which included a haircut of 75 percent.
2. Who Are the Holdouts, the “Vulture Funds”?
The remaining bondholders, those who weren’t satisfied with the Argentinean proposal, are called the holdouts, and they represent 7 percent of the total debt or US$15 billion. Of these bondholders, 10 percent are distress-credit funds, the so-called vulture funds. These funds, in particular, have resorted to aggressive tactics to collect the debt, including the seizure Argentina’s assets across the world. Even the Liberty Frigate, a navy training vessel, was withheld in Ghana for more than two months.
3. What Happened at the Trial in the United States?
The holdouts’ bonds were issued under New York legislation, a common practice among countries with a weak rule of law, to guarantee the payment of the obligations. In other words, the judicial disagreements were to be resolved in US court.
US District Judge Thoma Griesa last year ordered that if Argentina were to pay the restructured debt, they would also have to pay the holdouts, and at the full value of their debts. After exhausting all judicial avenues, Argentina’s central government said that they would not be able to pay the holdouts, and they sought to invoke a clause in the restructuring agreement.
4. How Do Argentineans Say They Paid Their Obligations?
In late June, days before the deadline for interest payments on the restructured bonds, the Argentinean government deposited $539 million in the Bank of New York Mellon, the US bank in charge of distributing the money to the bondholders. However, Griesa told the bank that the deposit had to be reversed to comply with his decision.
The judge suggested the Argentinean government engage in conversations with the holdout funds, and he appointed Daniel Pollack as a mediator. Last week, the most intense negotiations took place, but the parties couldn’t reach a solution. That led to Argentina’s official default on the restructured bonds on Wednesday.
5. How Do Argentineans Say They Cannot Pay the Holdouts?
Argentina has invoked the Rights Upon Future Offers (RUFO) clause, in the restructured agreements, as an impediment to complying with Griesa’s decision. This clause forbids the government from offering the holdouts better conditions than those agreed to with the restructured-bondholders.
This clause, if triggered, means Argentina would face judicial claims of up to US$500 billion, since every bondholder would have the legal right to demand the full payment of the original amount. However, economic and legal analysts point out that the RUFO clause is just an excuse. It is only enforceable in the case of voluntary repayment offers from the Argentinean government, while Griesa’s payment order is not at all voluntary.
6. How Will the Default Impact Argentina?
There are tough times ahead. A default will mean a larger disparity between Argentina’s official and black foreign-currency markets. We will see more regulations on the already impeded purchase of foreign currency, less investment, and an accelerated devaluation and recession. June’s official figures already confirmed that the Argentinean economy is in recession.
7. How Will the Default Impact the Global Economy?
The default is unlikely to have a notable impact on the global economy. It will, however, impact neighboring economies. As Ricardo Rodríguez Silvero, a Paraguayan economist, explains, “We are talking about the second largest and influential country in the region, after Brazil. Paraguay is small when standing next to Argentina, but … our economy is Mercosur’s strongest. It is going to have a moderate impact, but it will not be a catastrophic scenario. We will face both good and bad news.”
The legal decision and its implications, rather than the default itself, have generated criticism among some organizations. According to the United Nations, the decision “threatens profound consequences for the international financial system.” Similarly, the Council on Foreign Relations, one of the most influential think tanks in US foreign policy, stated that “the ruling will make it more difficult for countries to free themselves from the burden of over-indebtedness.”
8. What Are the Immediate Consequences?
It only gets worse. After the default, bondholders will be able to “accelerate the default.” A contractual clause states that after a default, the bondholders can demand payment of a minimum of 25 percent of their bond value in advance. This could mean judicial claims of up to US$14 billion, which would add to the already defaulted $15 billion.
On December 31, 2014, the RUFO clause will also expire. On that day, Argentina will no longer have any excuse available for ignoring the decision. At that point, even according to their own rhetoric, the government will have to pay both the holdouts and the rest of the restructured debt. On the other hand, some local bankers have started conversations with the hedge funds to arrive to a private settlement, to solve the conflict before next year.
Down in Argentina, though, six months is an eternity in political life, and no one really knows what could happen prior to December.