Remember the vulture funds negotiations? Of course you do. Pretty much every other article on any given day is about them. But it looks like we might finally be getting somewhere (meaning we may not have to write about them for all of eternity. Maybe.)
Nicolás Massot, the leader of the Republican Proposal (PRO) party caucus — a group of legislators from the same party who vote along the same lines — in the Lower House of Congress announced yesterday that the PRO will seek to abolish the Lock Law and the Law of Sovereign Payment in order to expedite a deal with holdout bondholders, the creditors who have been hounding Argentina for payment on its defaulted debt.
Remember that after Argentina’s economic meltdown in 2001, the country defaulted on its international debt. A group of creditors purchased some of the defaulted bonds and refused to accept debt restructuring plans in 2005 and 2010 that would have exchanged the original bonds for bonds worth 30 cents on the dollar, insisting instead the debt be repaid in full. Hence former President Cristina Fernández de Kirchner’s nickname for them, “vultures.”
President Mauricio Macri’s team has been making steady advances in terms of negotiating with the vultures: this month, Argentina offered a US$6.5 billion cash payment to holdout creditors, an amount that represents a 25 percent reduction from the US$9 billion total the holdouts were asking for. And a few creditors have even accepted the offer. But before anything can go through, the Argentine Congress needs to get rid of the Lock and Sovereign Repayment Laws that currently prevent the country from paying the holdouts more than the restructured 2005 and 2010 debts.
So before moving on, let’s break down the Lock Law and the Sovereign Payment Law.
The Lock Law, passed in 2005, prohibits the country from offering a better deal to creditors that have not accepted the debt restructuring that took place that same year. The goal of the law was to get as many creditors as possible to agree to the debt exchange process (the one that would have exchanged the original bonds for bonds worth 30 cents on the dollar). But only 76 percent of credit holders agreed to the restructuring plan. In 2009 and 2010, the law was temporarily suspended to begin another round of exchanges in which an additional 17 percent of creditors agreed to the offer. The remaining 7 percent that refused to agree to the restructuring on both counts are our famous vulture funds, who beat Argentina in court in 2014 when Judge Thomas Griesa ruled that Argentina must pay these creditors in full, plus interest.
Sovereign Payment Law
As a way of enforcing his sentence in favor of the holdout creditors in 2014, Judge Griesa ruled that Argentina could not pay creditors who had agreed to the restructured debt until it paid the vultures in full. To get around this ruling, Argentina passed the Sovereign Payment Law that same year, which let it continue to make payments to creditors by avoiding clearing the payments through New York, as it had done until that point, and instead doing so through agencies in Buenos Aires or France.
Back To The Present
Massot said in an interview with FM Rock & Pop Radio that in his estimation, the holdout negotiations are going well and that it is “very probable” Macri will announce the end to the negotiations with bondholders once the legislative session begins in March. He was vague about which bondholders he is talking about since there are still two that have yet to agree to the new offer.
However, the road to eliminating both laws will not be so easy. PRO and the larger Cambiemos coalition it is a part of does not have a majority in Congress to singlehandedly pass a law. It will have to reach a deal with other parties in the Lower House in order to form a quorum (the number of legislators necessary to hold session). Deputies from other parties will probably demand funds for public works for the provinces they represent in exchange for their votes on the two laws. The non-Cambiemos parties are also demanding that the government comply with federal co-participation, which are funds divided among the provinces drawn from the total tax revenue collected by the State.
Some holdout creditors have agreed to Argentina’s restructured debt proposals but those who haven’t still see it as an insufficient offer. Griesa has shown he’d be willing to have an injunction preventing Argentina from paying other creditors lifted, which might tip the scale and take away some leverage from the creditors asking for more money.
Not only that, but with the injunction lifted, Argentina would no longer be pressured to quickly come to a deal, giving the country more time to continue negotiating.
Whether that happens will rest largely on Congress’ decision to eliminate the two laws.