Case study on Sovereign Debt (Argentina)

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#1
This is my first thread. Pls amend if title is inappropriate or in wrong sub-forum

I find this Argentina debt problem extremely interesting:
1) It involves sovereignty. Classically no country can demand repay of debt just as no country can demand recourse for nationalisation. Think Russia debt crisis. However the practical issue is Argentina has been relying on foreign koolaid for as long as I can remember, especially US. Which is why there is a pressure to bow.
http://www.csmonitor.com/World/Americas/...e-a-nation

2) National asset can actually be seized. They seized an Argentina navy ship.
http://www.ft.com/intl/cms/s/0/edb12a4e-...z2PGgDr800

3) The concept of pari passu even when EU nor ECB respected that

4) Minority bondholders can hold majority bondholders hostage

Argentina ‘Greek Tragedy’ Nears End as Debt Battle Ruling Looms
2013-03-31 23:00:00.3 GMT


By Bob Van Voris
April 1 (Bloomberg) -- Argentina may learn at any time
whether a U.S. appeals court will rule that it must pay
$1.4 billion to holders of its defaulted debt, something the
South American country has resisted for more than a decade.
The court in New York is set to rule after Argentina
submitted a payment proposal last week that would force holders
of defaulted bonds to take a steep discount on debt the nation
repudiated in its record 2001 default on $95 billion. With
further appeals unlikely to succeed, the ruling may be the
last word on the matter.
Argentina’s proposal largely ignored previous U.S. court
rulings and instead offered the type of restructuring deal that
has been rejected by holdout bondholders led by billionaire
hedge fund manager Paul Singer and his Elliott Management Corp.
unit NML Capital Ltd. The proposal sets up a possible collision
between Argentine politicians and U.S. judges that has been a
decade in the making.
“This has some Greek tragedy elements to it,” said Anna
Gelpern, a law professor at American University in Washington
who is an expert on government debt. “The parties are bound to
play along and succumb to their fates.” Joshua Rosner, an
analyst at Graham Fisher & Co., said in an e-mailed note March
30 that Argentina’s last-minute proposal is the equivalent of
the nation “thumbing its nose at” the court.
A decision forcing Argentina to pay the defaulted
bondholders immediately would expose it to $43 billion in
additional claims it can’t pay and trigger a new default, the
government has warned. The nation’s officials have also said
they may ignore the U.S. court altogether.

Repudiated Bonds

In its proposal, Argentina said it would give holders of
the repudiated bonds about one-sixth of what a U.S. judge has
said they’re entitled to receive. The country’s proposed plan,
filed March 29--one hour before a deadline set by the court
weeks ago--offers two possibilities for holdout bondholders to
exchange their defaulted debt for new bonds.
“After taking the full month available to work on its
response, Argentina came back last night with a proposal for
exactly the same package that it had offered back in 2010,” Joe
Kogan, head of emerging-market debt strategy at Scotia Capital
Markets, said in a note March 30. Kogan said he expects the
country’s bonds to fall “upon news of Argentina’s continued
intransigence.”

‘Argentine Consumption’

“The proposal itself appears intended for local Argentine
consumption,” Kogan said. Argentine officials said they will
submit a bill to their nation’s Congress to provide for the plan
to be implemented.
Though Argentina could file an appeal of any adverse ruling
by the three-judge appellate panel to a larger number of judges,
or the U.S. Supreme Court, it’s unlikely to be granted either
because contract issues in the case were based on New York state
law. As a result, it’s improbable they would be reviewed by the
Supreme Court, said Henry Weisburg, an international litigator
at New York-based Shearman & Sterling LLP.
Argentina’s best bet for high court review may lie with the
Foreign Sovereign Immunities Act, a federal law that limits
suits against foreign governments. However, Weisburg said it’s
unlikely the court will choose to consider the case on that
ground either.
Argentina’s top leaders have vowed never to pay the hedge
funds, which it calls “vulture” investors, that hold the debt.

Not Obey

Jonathan Blackman, the attorney for the South American
nation, has said Argentina would default on its restructured
debt if it’s forced by the panel to pay so-called vultures.
“So the answer is you will not obey any order but the one
you propose?” U.S. Circuit Judge Reena Raggi asked Blackman
during oral arguments in February.
“We would not voluntarily obey such an order,” Blackman
said, with Hernan Lorenzino, Argentina’s minister of economy,
and Vice President Amado Boudou sitting nearby.
Blackman argued that a lower-court order obliging Argentina
to pay the defaulted bonds whenever it makes payments on
restructured debt violated its sovereignty, threatens to trigger
a new financial crisis and would quadruple the number of
Argentine bond cases in New York federal court.
“If that’s the confrontation the court seeks with the
injunctions, that is the court’s decision,” Blackman said.
“We’re representing a government and governments will not be
“We’re representing a government and governments will not be
told to do things that fundamentally violate their principles.”
The holdout creditors are seeking to uphold rulings by U.S.
District Judge Thomas Griesa in Manhattan, who has presided over
the case for a decade. Griesa has ruled that Argentina must pay
holdouts the full amount they’re owed whenever it makes a
required payment to the holders of the exchange bonds.
The Exchange Bondholder Group, who took the deal offered by
Argentina for their bonds, claimed the ruling threatens their
investment.

‘Innocent Parties’

“We’re innocent parties,” attorney David Boies argued for
the Exchange Bondholder Group at the oral arguments. Griesa’s
order shouldn’t apply to restructured debt holders, he said.
“If you allow Judge Griesa’s injunction to exist unchanged,
everybody in this courtroom knows what’s going to happen,”
Boies argued. “Argentina is going to default.”
In a related case, the U.S. Court of Appeals said March 26
that it won’t grant a full-court reconsideration of an earlier
ruling barring Argentina from treating restructured-debt holders
more favorably than holders of the repudiated debt.
In November, Griesa quizzed a lawyer for Argentina about
press statements by President Cristina Fernandez De Kirchner and
Lorenzino that the republic wouldn’t pay “vulture funds.”

Unknown Intentions

“I don’t know literally what the intentions of the
republic are,” Griesa said in the Nov. 9 hearing. “But I have
had some modest amount of experience, and that is that the
republic will not comply with the judgments which have been
entered against it.”
The three judges on the appeals panel are Rosemary Pooler,
appointed by President Bill Clinton; and Barrington Parker and
Raggi, both named to the court by George W. Bush.
In a press conference March 30 in Buenos Aires, Boudou said
the country won’t issue more debt to repay old debt as part its
proposal. The Argentina vice president said the Griesa ruling
it’s fighting would mean a 1,300% gain in five years for
holdouts.
According to Argentina, the payment formula it’s
challenging, set by Griesa, would give NML Capital $720 million.
That compares with an estimated value of $120.6 million for NML
under one of the payment alternatives the nation is proposing,
the so-called discount option.

‘Fair Return’

“Argentina’s proposal accounts for past-due amounts to
bring the debt current, provides for a fair return going forward,
and also gives an upside in the form of annual payments if
Argentina’s economy grows,” the country’s lawyers said in its
proposal. It “fulfills the court’s dual objectives to satisfy
the pari passu clause: non-discrimination in payment priority
and equal treatment among bondholders.”
In 2005 and 2010, Argentina offered its creditors new bonds,
at a deep discount. About 91 percent of bondholders agreed to
the debt restructuring, or exchange.
NML and other holdouts have tried to use U.S. courts to
enforce their rights under the original bond agreements.
In its proposal to the court, Argentina estimated that NML
paid $48.7 million for the bonds in 2008.
“The formula adopted by the district court would cause
great harm to the exchange bondholders while giving plaintiffs a
return that is exorbitant on its face,” Argentina said.
Argentina’s legislature in 2005 passed a so-called lock law
barring payment on the defaulted bonds.

Par Option

Under Argentina’s proposal, a so-called par option, which
is intended for small accountholders, would give bondholders new
bonds due in 2038 in a nominal face amount equal to the amount
of their defaulted debt, plus unpaid interest up to the end of
2001. The par bonds would pay interest that rises from 2.5
percent to 5.25 percent a year over the life of the bonds. They
would also receive a one-time cash payment to compensate for
interest they would have earned if the bonds had been issued on
Dec. 31, 2003, according to the letter.
The holders would receive additional payments when the
Argentine gross domestic product growth exceeds about 3 percent
a year, the government said in the letter.
The discount option would give bondholders discount bonds
due in 2033, less than the defaulted amount, with an 8.28
percent annual rate and an increase in principal over time. They
would be compensated for past due interest on those bonds with
new bonds due in 2017 that pay 8.75 percent annually, according
to the letter.
The holders would also receive GDP-tied payments, according
to the proposal.

No Better Terms

“It is our hope that the plaintiffs will finally join the
92% of creditors, accept this fair and equitable offer and put
this difficult period to rest,” said Sean O’Shea, a lawyer for
the exchange bondholders, in an e-mailed statement March 30.
Argentina said its proposal wouldn’t allow the plaintiffs
in the lawsuit to force it to offer payment on better terms than
those received by bondholders who agreed to the restructuring.
Eugenio Bruno, an attorney at the Buenos Aires law firm
Estudio Garrido, said in an e-mail that Argentina’s proposal is
similar to past debt-restructuring offers by the country that
have been rejected by NML and the other holdouts.
If the government were to offer a better deal, it would
trigger provisions allowing holders of the exchange bonds to
take advantage of more favorable terms offered to the holdouts,
he said.

Supports Country

Bruno represents Alfonso Prat-Gay, a former governor of
Argentina’s central bank, who submitted a brief in the case
supporting his country’s effort to overturn the lower U.S. court
ruling. Bruno said he also advises exchange bondholders and
holdouts who aren’t involved in litigation.
Following the oral arguments, the three judge panel ordered
Argentina March 1 to provide a suggested formula for paying the
creditors. Argentina’s lawyer, at the Feb. 27 arguments in
Manhattan, “appeared to propose” an alternative to the payment
formula devised by Griesa, according to the appeals court.
The judges may ask for a response from the creditors to the
new proposal, or come to a decision without one.
The lower court case is NML Capital Ltd. v. Republic of
Argentina, 08-06978, U.S. District Court, Southern District of
New York (Manhattan). The appeal is NML Capital Ltd. v. Republic
of Argentina, 12-00105, U.S. Court of Appeals for the Second
Circuit (New York).
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#2
Further update on the topic...

New default for Argentina won't be as bad as last default

BUENOS AIRES - Argentina's battle with investors who rejected its proposals to restructure debt risks pushing the nation into a new default that would wreck its attempts to return to credit markets but not have the same economic effect as its catastrophic 2001-02 default.

The U.S. Supreme Court declined on Monday to hear Argentina's appeal against lower court rulings that ordered it to pay in full the hedge funds which refused 2005 and 2010 debt swaps on $100 billion in debt.

As the risk of default rises, Argentina must now either negotiate a deal with the funds it dismisses as "vultures" or quickly find a way around the court rulings that would prevent it from paying holders of its restructured debt if it doesn't also agree to pay the holdouts.

Argentina's battle with investors who rejected its proposals to restructure debt risks pushing the nation into a new default that would wreck its attempts to return to credit markets but not have the same economic effect as its catastrophic 2001-02 default.

The U.S. Supreme Court declined on Monday to hear Argentina's appeal against lower court rulings that ordered it to pay in full the hedge funds which refused 2005 and 2010 debt swaps on $100 billion in debt it issued in 2001.

As the risk of default rises, Argentina must now either negotiate a deal with the funds it dismisses as "vultures" or quickly find a way around the court rulings that would prevent it from paying holders of its restructured debt if it doesn't also agree to pay the holdouts.
...
http://www.todayonline.com/business/new-...st-default
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#3
I read about these vultures that prowl countries that have default, basically when the country defaulted the debt became worthless maybe pennies to the dollar and these vultures swooped in to buy them up. So in order for a country become solvent either you buy back the debt that has now become cheap or write off the debt which case investors take a hair cut so of course won't agree usually the case the country will just unilaterally do it without consent. So after the country becoming solvent again the holders of debt start lawsuit to asking for their money back the full value not the pennies they paid.

Its a long term game.
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#4
A good case study on default of a country...

Argentina says next bond payment 'impossible', default looms

BUENOS AIRES/NEW YORK - Argentina threatened to default on its debt on Wednesday when the government called it "impossible" to pay bond service due on June 30, citing a U.S. court decision earlier in the day that increased pressure on the economically ailing country.

Buenos Aires is locked in a 12-year legal fight with creditors who refused to participate in two restructurings that followed Argentina's 2002 default on $100 billion in bonds.

The long impasse in the U.S. courts has kept the country from accessing international capital markets as its economy stagnates, inflation soars and central bank reserves fall.

On Monday, the U.S. Supreme Court declined to hear an appeal by Argentina in its battle against the hedge funds which refused to take part in restructurings offered in 2005 and 2010. This left intact a ruling by U.S. Judge Thomas Griesa in New York ordering the country to pay the hedge fund "holdouts".

The 2nd U.S. Circuit Court of Appeals on Wednesday lifted the stay it had placed on an injunction by Griesa barring payment to holders of restructured bonds via U.S. banks unless the "holdouts" were paid $1.33 billion at the same time.

"The lifting of the stay by the Second Circuit makes it impossible to make the next payment on restructured debt in New York, and shows a complete lack of willingness to negotiate under conditions different from those dictated by Judge Griesa," a statement from the Argentine economy ministry said late on Wednesday.

Talks are nevertheless expected between the two sides in New York next week.
...
http://www.todayonline.com/business/arge...g-proposal
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#5
The creditors are at the mercy of defaulter... What an interesting story...Big Grin

Argentina says no preparations for 'possible' trip to US in bond spat

BUENOS AIRES - Argentina Cabinet Chief Jorge Capitanich said on Thursday the government has no delegation prepared for a "possible" trip to the United States to seek negotiations in the ongoing bond dispute, casting doubt over whether the prospective talks will materialize.

Buenos Aires is locked in a 12-year legal fight with creditors who refused to participate in two restructurings that followed Argentina's 2002 default on $100 billion in bonds.
...
http://www.todayonline.com/business/arge...-bond-spat
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#6
for the default country or argentina it is a matter of quickly settle this issue then credit ratings can restore or improve they can start borrow again it's also a huge political gain for current gov if they can settle the issue. But the holdouts or vultures are experts at this game and they know this is what the argentine gov wants.

I think maybe the terms offered to creditors wasn't that good or both sides refused. See who more desperate to settle it first both side seems to be playing it cool could still be long time to go.
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#7
(19-06-2014, 09:26 PM)CityFarmer Wrote: The creditors are at the mercy of defaulter... What an interesting story...Big Grin

When you owe the bank 10k, it is your problem. When you owe the bank 100million, it is the bank's problem!
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#8
(19-06-2014, 11:48 PM)weijian Wrote:
(19-06-2014, 09:26 PM)CityFarmer Wrote: The creditors are at the mercy of defaulter... What an interesting story...Big Grin

When you owe the bank 10k, it is your problem. When you owe the bank 100million, it is the bank's problem!

When you owe the investors 100 billion, it s the investors' nightmare. Tongue
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#9
Thanks CF for reviving this thread Smile Since nobody seemed to be interested so I had not updated. Key here is Argentina need foreign capital whereas Russia exports energy which people need. Just like companies that need capital need to make capital markets happy. Companies that don't need capital TENDS not to care as much, unless the major shareholders have other ideas.

I thought it would be a good exercise for us to monitor a train wreck in progress and the dynamics involved, instead of doing a post-ante academic study Smile Economists are great at explaining how but not so good at why Smile
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#10
Latest update on the default...

Argentina's YPF says its assets can't be embargoed by country's creditors

BUENOS AIRES - Argentina's state oil producer, YPF, said on Saturday that since it is an "independent" company its assets cannot be embargoed by so-called holdout investors who are demanding full payment following the country's massive 2002 bond default.

The 2nd U.S. Circuit Court of Appeals ruled on Wednesday that Argentina could not continue to pay creditors who agreed to restructure their bonds after its 2001-02 default on $100 billion in debt unless it also paid $1.33 billion to the holdouts demanding full payment.

"YPF is an independent company and is governed as such in accordance to law. Its assets don't belong to the Republic of Argentina, and as such cannot be embargoed by the Republic of Argentina's creditors," the oil firm told Reuters.
...
http://www.todayonline.com/business/arge...-creditors
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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