The stakes couldn’t be higher for Argentine President Cristina Fernández de Kirchner as a legal tug-of-war with a $20 billion US hedge fund plays out in a New York case that has sent nationalist sentiment soaring in Argentina and raised concerns about the impact on future efforts to help debt-ridden countries recover.
NML Capital, part of American billionaire Paul Singer’s Elliott Management, is among a handful of creditors demanding full repayment of bonds that Argentina defaulted on in 2002, rather than the partial repayment to which most creditors agreed. They were buoyed by the Nov. 21 ruling of United States District Judge Thomas Griesa, who, arguing that Argentina must treat all its creditors equally, said the Southern Cone country must pay $1.33 billion to NML – as well as satisfy the demands of other creditors – by Dec. 15, or potentially face a second, “technical” default.
A US court of appeals, however, issued a stay on Griesa’s order, sending it back to let the court figure out the mechanics by which it would force Argentina, a sovereign nation, to submit to local courts.
Legal experts are watching the NML case closely because of implications they say it could have elsewhere in a scantly regulated area of international finance. President Kirchner, whose approval ratings arein a slump as the commodities-heavy economy slows, has seized the moment to shore up national sentiment among a population that remains wary of foreign creditors after Argentina’s $100-billion sovereign debt crash, the largest in history. Kirchner has used the conflict to cast Argentina as the victim of predatory “vulture funds” seeking to impose “judicial colonialism.”
“One judge wants to frustrate Argentina’s greatest achievement,” Kirchner told crowds in Buenos Aires’s Plaza de Mayo Sunday, during an event to commemorate Argentina’s return to democracy in 1983. The crowd responded with hisses and boos.
In recent months, the government’s inability to settle with a handful of holdouts led by NML has resulted in one of its Navy tall ships being impounded in Ghana and an expensive court case in New York.
Young Argentines who grew up in the shadow of former President Carlos Menem’s free-trade indebtedness in the 1990s argue that refusal to pay is a way to avenge previous wrongs – and perhaps even make a statement to the world that Argentina is skeptical of globally managed economic action.***
“They had opportunities, but they are not interested in our national project to pay off the debt. They’ll make more money if we fail,” says Maximiliano Oliva, a taxidriver and psychology student from provincial Quilmes.
American entities are concerned as well. If Griesa’s ruling is upheld, it could throw a wrench into global bond markets, the New York Federal Reserve said earlier this month. For example, Greece reached a restructuring agreement with private bondholders last February to accept a 74-percent "haircut" – in other words, only getting 26 percent of their money back. But, some ask, if the Griesa ruling holds, who’s to say once-cooperative bondholders won’t raise their own suit, citing this ruling as precedent for why they deserve more?
University of Texas bankruptcy expert Jay Westbrook says the case’s major tension– and why it could easily wind up before the US Supreme Court – is that the sovereign-bond market is not equipped to handle this dispute. The introduction of collective-action clauses, which force bondholders to accept the terms of a majority-supported deal, were not introduced until the mid-2000s, long after Argentina and other countries had inked sovereign-debt contracts with investors like NML.
During the administration of former President Nestor Kirchner, who died in October 2010, Argentina reached its first restructuring agreement in 2005 with 76 percent of creditors, who agreed to a swap of the defaulted bonds for new bonds worth about 35 cents on the dollar.
It reopened the debt exchange in 2010 and won over all but 7 percent of remaining creditors, including NML and some Argentina and Italian individual bondholders.
“The thinking then was that Argentina would never go back to the external-debt markets,” says Sergio Berensztein, president of the Buenos Aires-based independent think tank Poliarquía, and thus did not need to worry about the holdouts.
Since Kirchner came to power in 2003, and in the subsequent administrations of his wife, Argentina has taken a radical turn away from the liberal economic policies of previous administrations, moving toward more state control of markets and partnerships with other leftist leaders, including Ecuador’s Rafael Correa and Venezuelan President Hugo Chávez.
Such a move could hinder Argentina in fundraising efforts, for example with YPF, the oil and gas company nationalized through expropriation from the Spanish company Repsol last April.
“Argentina had the luxury to not need to have to ask for outside funding without any major consequence, but with YPF, it’s obligated to look for foreign investments,” Berensztein says.
More leverage to holdouts
If sovereign nations were treated as companies, a bankruptcy court could divvy up assets to satisfy claims, forcing bondholders to come to accept terms by majority rule.
In the case of the US, contracts regulating government sovereign debt establish that the US retains irrevocable rights that shelter it from foreign jurisdictions.
Nevertheless, laying claim to sovereign assets has been done before. Besides the Navy frigate held by order of a court in Ghana, in previous years, Chilean and Zimbabwean aircraft have been seized at foreign airports in lieu of debt repayments.
Argentina has asked its Congress to reopen the 2010 exchange for outstanding creditors.
However, having rejected the deal in 2010, arguing that Argentina has the capacity– if not the will – to pay its debts in full, NML Capital is not likely to accept those terms now.
Strengthened by global commodity prices and a hugely depreciated peso, Argentina’seconomy grew at an average annual rate of 7.7 percent from 2004 to 2010. Tempered by the economic crises in Europe and the US, however, Argentina is employing an import-substitution strategy to save its reserves of US dollars for paying off the country’s debt.
In NML's case against Argentina in Ghana, Argentina appealed to the court on the basis of a 1976 sovereign immunities act, but a judge ruled that the country had explicitly waived its sovereign rights in the language of the contract it signed with NML in 1994. Argentina has since brought a separate case before the United Nations International Sea Tribunal in Hamburg, Germany.
On Dec. 15, Argentina is scheduled to pay $3 billion on warrants issued as part of its regularly scheduled payment to creditors who participated in the restructuring. Griesa’s ruling sent credit-default swaps of Argentine debt on a tear, but the markets normalized after the country won its appeal, quelling investor concerns about a default – at least for now.
The Fitch ratings agency downgraded Argentina’s sovereign debt to junk status last month, calling the risk of default “probable.” Argentina’s foreign minister Hernan Lorenzino questioned the agency’s credibility, citing the global credit crunch of 2008, and said the strength of Argentina’s reserves ($45.4 billion) demonstrate the country’s capacity to pay.
Whether it is willing is a question creditors do ask, says Berensztein.
“There’s a difference between can’t pay and won’t pay,” he says.