Case study on Sovereign Debt (Argentina)

[specuvestor]

In the past debt are not bearer form. If the banks lend you the money the banks know the risk they are taking IN THE LONG TERM to get the money back from you.

Then came disintermediation and securitisation. Many participants became short term focused.

In your example A knew the chances of getting back the money. In Argentina's case it is indicative that >90% of the lenders agreed to the refinancing.

Both the debt-collector and the vulture funds are opportunistic. It is a probabilistic game with little regards to the underlying. If they can recover debt from 1/5 of the bad debt they took, they will be ahead. And they will make all possible means to have a chance that this will be the 1/5, even much more motivated than the original lenders.

Food for thought. I don't think Argentina is blameless. But they had offered a restructuring plan that >90% think it is reasonable rather than outright refusal to pay, like say Russia

Valuable input to the topic. Thanks.

Well, We can't blame the fund disagreed to the plan, other than full payment, even as the minorities among the creditors.

In other words, we can't blame minority shareholder to block a SOA, even most of shareholders agree to it, right?

Agree that capitalism inherently functions differently from democracy, but again the point is to strike a balance.

That's why in our rules 10/25% is the threshold (not simple majority) that minorities have to agree with majorities unless can prove oppression. We can't have 1% shareholder taking hostage entire 99% shareholders.

Same principle should apply to Argentina's case. The error is that Argentina when drafting the debt covenant was too eager to please lenders, and created clauses that allowed this loophole. The vulture funds are not wrong LEGALLY, but on a reasonableness basis they are clearly wrong from a simple "common man" test.

[CityFarmer]

The holdouts position on CDS remains a speculation to-date, and waiting for further confirmation from Argentina...

Argentina launches investigation into holdouts' investments

BUENOS AIRES - Argentina's markets watchdog on Monday launched an investigation into what it believes may have been unlawful speculation by holdout creditors whose litigation against the country for repayment of their defaulted bonds pushed it into a new default last week.

The government also reiterated its fierce criticism of the mediator in debt talks with the holdout hedge funds for being "biased" and a "spokesman of the vulture funds".

Local markets were mixed on Monday as players waited for new signs of how soon Argentina might reach a deal with holdouts in order to exit default. Argentine bonds fell slightly while the Merval <.merv> stock index flickered up and down.
The head of Argentina's Securities Commission Alejandro Vanoli said it had asked its U.S. counterpart for information on trade of Argentina's sovereign debt and credit default swaps (CDS), derivatives used to insure against default.

The watchdog wanted to check if holdouts who rejected Argentina's restructuring in the wake of its 2002 default held or traded CDS while they took part in negotiations with Argentina which could trigger a default.

"The use of insider information, which would be the case here, and market manipulation are crimes in Argentina, they are crimes in the United States, and they imply economic sanctions and eventually criminal sanctions," Vanoli told a news conference.

Over nearly the last two years, sources familiar with the position of the holdouts have told Reuters the firms are not holders of CDS positions. A new source said on Monday that this stance has not changed.

"There is absolutely no evidence to demonstrate that the holdouts hold Argentine CDS positions. No proof," said the source, who is familiar with the holdout positions.
...
http://www.todayonline.com/business/arge...misconduct

[CityFarmer]

Smart move by Argentina, to add social pressure on the issue?

Argentina says to formally demand U.S. banks make bond payouts

BUENOS AIRES - Argentina said on Tuesday it will formally demand that intermediary banks charged with delivering the country's debt payments make hundreds of millions of dollars in payouts that were due in June but that have been blocked by a U.S. court.

Argentina defaulted last week after losing a long legal battle with hedge funds that rejected the terms of debt restructurings in 2005 and 2010.

The government deposited payments owed to holders of its restructured bonds with intermediaries Citibank Argentina and Bank of New York Mellon.

U.S. District Judge Thomas Griesa said the deposits were illegal because he had ordered Argentina not to pay restructured bondholders without paying the holdouts at the same time.

The economy ministry late on Tuesday issued a statement saying it will formally demand that Bank of New York Mellon and Citibank Argentina make the payouts despite Griesa's order.

"The money belongs to the holders of restructured Argentine bonds," the statement said.
...
http://www.todayonline.com/business/arge...nd-payouts

[CityFarmer]

A potential happy ending? Previous proposal of buyout by Argentina bank was rejected, will the holdout creditors accept the buyout from US banker? IMO, no reason not to...

Argentina bonds, stocks firm on possible deal to exit default

BUENOS AIRES - Argentine bond prices and stocks firmed on Thursday, with news that international banks may be close to a deal to buy debt from holdout creditors that would resolve its debt crisis.

The creditors are considering an offer from Citigroup , JP Morgan , HSBC and Deutsche Bank of 80 cents on the dollar for their roughly $1.66 billion of Argentine debt, Thomson Reuters IFR reported on Wednesday.
...
http://www.todayonline.com/business/arge...re-default

[Art or Science]

i dont get it.. whats in it for the us banks?

Confident of getting back the 80 cents?

Why would they do this deal?

[Art or Science]

Bloomberg news. can shed some light on my own question

International banks are looking to put together a group of investors to buy disputed Argentine debt and resolve a U.S. lawsuit that is blocking the country from servicing any of its foreign bonds.

The banks are seeking investors willing to purchase bonds left over from the nation’s 2001 default held by firms led by Elliott Management Corp., said Eduardo Eurnekian, an Argentine billionaire who has been approached by bankers. While Elliott has a court order for full repayment, a banker familiar with the talks speculated the New York-based hedge fund would accept a settlement worth about 80 cents to 85 cents on the dollar.

At stake for the banks, which include Citigroup Inc. (C:US), is an opportunity to help Argentina resume payment on its bonds and regain access to overseas markets, bolstering the value of the debt and earning good will that could lead to underwriting business when the country starts issuing notes again. For now, Argentina finds itself back in default, having been forced to miss a $539 million interest payment last month on restructured bonds when a U.S. court ruled it couldn’t service those notes without also making good on its $1.5 billion debt with Elliott and other holdouts.

http://www.businessweek.com/news/2014-08...uyer-group

[specuvestor]

The US banks are always heavily involved in Latin America. It is possible that they are heavy creditors of the other restructured debt of 2001

They are the backdoor of US. It is not inconceivable that it is in US interest to keep Latin America subjugated enough but not in anarchy to pose a threat.

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December 1994, MEXICO: U.S. rate increases helped spark a peso devaluation that fueled capital flight and caused the so-called Tequila Crisis. The country, in danger of missing payments on
$30 billion in mostly foreign-held notes, avoided default by tapping part of a $50 billion bailout package led by the U.S.

August 1999, ECUADOR: Plunging oil prices contributed to a crisis that led about 30 banks to fail, prompting the country to drop its currency, the sucre, in favor of the dollar, and leading to the ouster of President Jamil Mahuad. The country missed payments on about $6.6 billion of debt. Over 90 percent of the bonds were restructured in a distressed exchange, according to Moody’s Investors Service.

September 2000, PERU: Peru missed interest payments on Brady bonds as it sought to renegotiate commercial loans with Elliott Management Corp. After Elliott blocked an $80 million debt payment with a court order, the country paid the firm $58 million to avoid defaulting before the expiry of its grace period.

November 2001, ARGENTINA: The peso’s peg to the dollar and a heavy debt burden contributed to the country missing payments on $95 billion. The government subsequently froze savings accounts, a measure dubbed the “corralito,” sparking violence that killed at least 27 people. Early the next year, it forced banks to convert dollar-denominated deposits into pesos. The 2001 default triggered Argentina’s deepest recession. Almost 100 companies stopped payments on their obligations after being left with dollar-denominated debt and revenue in pesos.

April 2003, URUGUAY: The South American country of 3.3 million people had an investment-grade credit rating before the default in neighboring Argentina rattled Uruguay’s economy. Creditors agreed to swap $4.9 billion of bonds for new debt with longer maturities and the same interest rates. About 93 percent of investors participated in the exchange.

April 2005, DOMINICAN REPUBLIC: The Caribbean nation had been struggling to meet debt payments since 2003, when the government was forced to assume control of Banco Intercontinental SA after the bank lost more than $2 billion through fraud and bad loans. In April 2005, the country’s rescheduling of $1.1 billion of debt was deemed a default by ratings companies.

November 2008, ECUADOR: Less than 10 years after defaulting, Ecuador missed interest payments again, this time on $510 million of 12 percent bonds due 2012 in a bid to force bondholders to restructure despite having the funds to keep making interest payments. By February the country had stopped servicing its $2.7 billion of notes due 2030, with President Rafael Correa deeming the securities “illegal.” A May 2009 restructuring plan saddled investors with a 65 percent cut in the face value of the bonds.

February 2010, JAMAICA: The Caribbean nation, hurt by a drop in tourism and remittances, announced a local debt exchange that gave creditors bonds with longer maturities and lower interest rates. The debt exchange, which didn’t involve foreign securities, concluded with a 99 percent investor participation rate. Three years later Jamaica announced another exchange to extend maturities.

September 2012, BELIZE: Belize missed a $23 million interest payment on its $547 million “superbond” after Prime Minister Dean Barrow won re-election on promises to restructure borrowings. After a March 2013 restructuring, estimated investor losses were about 35 percent, according to Moody’s.

July 2014, ARGENTINA: The South American nation missed a deadline to pay $539 million in interest after two days of negotiations in New York failed to produce a settlement with Elliott and other hedge funds that won a court order for full repayment on the securities they own. The ruling prevents Argentina from servicing its debt until the holdouts settle or are paid the $1.5 billion judgment. The country’s foreign- currency bonds issued overseas totaled $29 billion, according to data compiled by Bloomberg.

[Art or Science]

Thanks Specuvestor.

Tit for tat? Its getting uglier..

Argentina Sues U.S. in International Court of Justice Over Debt Dispute

BUENOS AIRES--Argentina has asked the International Court of Justice to hear a lawsuit it wants to bring against the U.S. in a high-stakes legal battle between the South American nation and some of its creditors over unpaid debts....

http://online.wsj.com/articles/argentina...1407431003

U.S. Judge Threatens to Hold Argentina in Contempt of Court

U.S. District Judge Thomas Griesa directed Argentina to stop making "false and misleading" statements about the country's debt obligations, threatening to hold the country in contempt of court if the statements continued.

Judge Griesa was referring to a two-page ad from Argentina published in the New York Times and The Wall Street Journal on Thursday. The ad said Argentina had not defaulted on its debt obligations because the country deposited the money necessary for an interest payment due June 30....

http://online.wsj.com/articles/u-s-judge...1407534958

[CityFarmer]

The price isn't right for the deal at the moment, and pretty wide gap indeed...

International banks struggling to cut Argentina debt deal: sources
13 Aug 2014 06:42
[NEW YORK] International banks are struggling to reach a deal to buy a chunk of Argentine sovereign debt held by New York hedge funds suing the country, sources close to the negotiations said on Tuesday.

Citi, Deutsche Bank, HSBC and JP Morgan entered into talks with the funds to help Argentina swiftly exit its second default in just over a decade, which occurred as a result of a drawn-out legal battle with the holdout creditors.

Sources told Thomson Reuters IFR that the banks last week offered the holdout hedge funds 40 US cents on the dollar for the roughly US$1.66 billion bonds, including interest, and raised the offer to 50 US cents on Monday.

That price is far below the 80 US cents first proposed last week.
...
Source: Business Times Breaking News

[CityFarmer]

No further progress, all back to square...

Argentina slams U.S. judge, holdouts see no private debt deal

BUENOS AIRES/NEW YORK - Prospects for a private sector solution to Argentina's sovereign debt dispute deteriorated on Wednesday after holdout investors said they entertained no realistic offers from bankers while the government dashed hopes it might soon agree to restart talks.

The country's peso currency hit a record low on fears that the already years-old debt saga would linger on indefinitely.
...
http://www.todayonline.com/business/arge...mpt-threat