Critical Analysis: Holdouts and Hard Sells for Argentina’s Bond Swap

The European Union is not the only one finding themselves in deep financial trouble of late. Recently, attention has been diverted to Argentina, and it is not for their delicious wine. After Argentina’s economic collapse in 2001 and its ensuing record-breaking $100 billion default in foreign debt, Argentina was reluctant to negotiate any sort of re-payment option from the start. After refusing to negotiate for four years, Argentina finally made some attempt by offering creditors roughly thirty cents on the dollar and threatened that those who refused to take the offer would get nothing. And after renewing its meager offer again in 2010, it managed to get 93% of creditors to agree and take the offer. However, some of the remaining 7% were hedge fund bonds and those owners did not want to get only thirty cents on the dollar, so they refused to partake in such negotiations. As a result, the owners of those hedge fund bonds took Argentina to court in hopes of achieving a better financial outcome.

On August 23, 2013, the United States Court of Appeals for the Second Circuit in New York came back with a decision that favored the hedge fund holdouts and worried bodies like the International Monetary Fund (IMF) and the Treasury Department. The decision articulated that due to a “pari passu” (i.e. equal treatment) clause, Argentina cannot pay some of its creditors without paying all of its creditors at the same time. This means that if Argentina pays interest on its restructured bonds, it must also pay on the bonds where people refused to restructure. And since those bonds are in default, the entire principle and interest are due. In real dollars this amounts to Argentina owing these hedge-fund hold-outs over $1.33 billion in addition to the money owed to the 93% of creditors who agreed to restructure and get only thirty cents on the dollar. With this decision, however, and because of the Court’s interpretation of “pari passu,” Argentina could be blocked from paying 93% of creditors because of its refusal to pay the remaining 7%. This would cause Argentina to default again and cause even more harm to its fragile economy, which already has to deal with roughly a 25% inflation rate. The United States government, however, disagrees with the Court’s interpretation of “pari passu” and argues that instead, selective repayments should be allowed.

president of Argentina

President Cristina Fernandez de Kirchner stands in front of an image of Argentina’s currency (Reuters)

Through its decision, the Court of Appeals warned banks in both the United States and around the world, that if they accept any such payments from Argentina when Argentina is only selecting some creditors to pay instead of paying them all, contempt charges could be filed against such banks.

After the decision came down, a senior Treasury Department official commented on the potential repercussions when saying, “[W]e have serious concerns that the Second Circuit’s decision will undermine the orderliness and predictability of sovereign debt restructuring and could roll back years of progress.” The IMF shared similar concerns. Even the United States government voiced serious concerns about the decision by “warning that the decision could damage the status of New York as a chief world financial center and cause ‘a detrimental effect on the systemic role of the U.S. dollar’ by encouraging countries to denominate their debt in other currencies and put them outside the jurisdiction of United States courts.

In its decision, however, the Court of Appeals did not seem bothered over such concerns. In his opinion, Judge Barrington D. Parker stated:

“[W]e do not believe the outcome of this case threatens to steer bond issuers away from the New York marketplace. On the contrary, our decision affirms a proposition essential to the integrity of the capital markets: borrowers and lenders may, under New York law, negotiate mutually agreeable terms for their transactions, but they will be held to those terms. We believe that the interest — one widely shared in the financial community — in maintaining New York’s status as one of the foremost commercial centers is advanced by requiring debtors, including foreign debtors, to pay their debts.”

Argentina is trying to appeal the opinion and take it all the way up to the United States Supreme Court. In the meantime, both Argentinian stocks and bonds have profited, with investors betting on at least a year delay before a Supreme Court ruling would even be made. However, if the Supreme Court rejects the appeal or refuses to even hear it, Argentina will have to either pay the $1.33 billion to the hedge-fund holdouts or face another default on its bonds. Argentina and the holdout creditors, however, will have to wait until September 30th before learning what the Supreme Court decides to do.

According to Reuters, the Argentine Congress passed a bill on September 11th approving a debt swap for the remaining 7% of holdout creditors, but it involves the same terms as the 2005 and 2010 offer, with a meager thirty cents on the dollar. Even with the renewed offer, most of the remaining 7% who have been holding out for the past eight years are unlikely to participate in the swap now, especially since they have consistently rejected such an offer in the past. I guess for now, we will all just have to wait and see what happens. One thing though for certain is that Argentina’s future involves paying a lot of money.

 Mara Essick is a 3L and Staff Editor on the Denver Journal of International Law and Policy

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