The whole vulture funds vs. Argentina saga is more stale than a three day old media luna. It made headlines again due to a fairly meaningless development that should push this Government to settle if they cared about putting the economy back on track. Spoiler alert – they don’t.
Argentina has suspended Citibank Argentina’s ability to operate in the local stock and bonds market because Citi dropped its appeal of New York Judge Griesa’s ruling that classified dollar denominated bonds issued under local law as international debt. This decision means that Argentina cannot make payments on these local law bonds until they settle with the holdouts.
It’s confusing. And at the end of the day it’s meaningless to the market. Cristina Fernández de Kirchner’s administration is in a race against the clock to make it to the end of her term without the economy imploding, and not paying these holdouts is a populist ploy to retain her status as defender of Argentina. The somewhat sexist phrase “she’ll break every dish in the kitchen” before the end of her term is true – she pledged not to pay the holdouts and she won’t. The market honestly doesn’t care anymore because most participants believe reaching a settlement with these “vultures” will be one of the first accomplishments of her replacement come December 2015. Anything that happens until then save a full-fledged block on Argentina’s ability to transfer funds is just noise.
But in the spirit of journalism’s brand of keeping up with the Joneses, let’s take the mandatory look at what this new development means in terms of the vultures vs. Argentina saga and in the broader context of Argentina’s mess of an economy.
Argentina defaulted on its roughly US $82 billion worth of dollar-denominated foreign debt back in 2002. In 2005 and then in 2010, the government offered holders of the defaulted bonds the opportunity to exchange their bonds for restructured bonds worth only about 30 percent of the original face value. Approximately 93 percent of all bondholders participated in these exchanges, but within the remaining 7 percent are the “vulture funds”, or holders of original debt that predominantly bought these defaulted instruments for cents on the dollar and then sued for face value – and won.
New York Federal district judge Thomas Griesa ruled that in order to continue making payments on the restructured bonds, Argentina must pay the holdouts in full. Which they did not want to do.
Griesa’s ruling only has teeth because it goes on to state that any bank or financial institution that helps or facilitates Argentina making payments on exchange bonds is in violation of his ruling. Which is a huge deal and carries heavy financial and legal penalties that could include jail time for executives.
When stocks and bonds are transferred between two parties, or payments made on these instruments, we no longer live in a world where you take a paper coupon to a bank and receive a bag of cash. Put simply, the country making the payments first transfers this money to a custodian or trustee who then passes the funds along to a clearing agent, who is also responsible when these bonds change hands. These are at least two additional financial institutions that the funds must pass through to reach the bondholders.
Argentina’s mature response to Griesa’s ruling has been something between a game of hot potato and an emotional tantrum. In July Argentina deposited US $539 million with Bank of New York Mellon, the trustee. When BNY Mellon was forbidden to transfer these payments, Argentina took out a full page ad in the Washington Post (with all their spare cash) asking BNY Mellon to resign as trustee. They then revoked BNY Mellon’s license to operate and attempted to replace them with Nacion Fideicomisos, a subsidiary of Banco de la Nacion, who would have made these payments locally.
Argentina deposited US $161 million with Nación Fideicomisos in connection with a September 30 interest payment, but again these payments could not be distributed.
Besides the fact that Banco Nación lacks a corporate trust office in Manhattan, a trustee requirement under the bond contracts, Griesa found Argentina in contempt of court for trying to circumvent his ruling. So Argentina has been unable to make payments on its restructured debt since the initial ruling, despite attempts to make the payments locally or in other jurisdictions. At some point in the payment chain, a financial institution who doesn’t want to violate New York law and face sanctions has to touch the money.
Until early March, Griesa’s ruling only affected those exchange bonds issued under New York law. For bonds issued under Argentine law Citibank was the custodian responsible for receiving the funds from the Argentine government and passing it along to bondholders. Citi was permitted to continue processing payments while Griesa reviewed arguments as to whether dollar-denominated instruments issued under local law were classified as foreign debt. Argentina and Citibank were on the same side, arguing that the local law bonds were not under New York jurisdiction and that Citibank would violate Argentine law by not making the payments. Griesa decided to go with an extremely wide definition of what constitutes foreign debt, stating that because the bonds were in US dollars and the bondholders predominantly foreign they did indeed fall under his ruling, and those financial entities involved in processing payments (in this case Citibank) would be in violation. In response to the concern that Citibank would face the decision to either violate US or Argentine law he basically said tough shit – make a choice.
And Citibank did make a choice. In an agreement that Economy Minister Axel Kicillof likened to making a deal with the devil, Citi was granted permission to process two more rounds of payments through June 2015 under two conditions:
- It use the time to absolve itself of the role and responsibilities associated with acting as custodian for Argentine debt
- It drop the appeal and stop supporting Argentina in the legal batter with the “vultures”.
The second was betrayal. And it stung.
But when it comes to actually getting the money from Argentina to its bondholders, the custodian is only half of the equation. The custodian takes the money from Argentina and passes it along to a clearing agent, which in this case is Euroclear. Euroclear and Clearstream are basically the only international clearing agents in the game, and obviously neither can run afoul of the US justice system. So even if Citibank HAD made the payment, they simply would have passed the hot potato that is Argentine bonds along to to Euroclear. And nothing would have happened. Seriously.
Kicillof lambasted Citibank for abandoning its responsibilities to the bondholders, villainizing them for trying to pass the burden of nonpayment along to Euroclear and making plans to weasel out of acting as custodian. Never mind that Argentina has done exactly the same thing by passing the burden of nonpayment of New York law bonds to BNY Mellon. Hypocrites.
Citibank faced a choice to either have its ability to operate in Argentina revoked or to violate US law. It created a third path whereby its ability to operate in money markets has been suspended, but for now can still offer retail banking. Argentina immediately designated national depository company Caja de Valores to replace Citibank as custodian. Furthermore, as a consequence of Citi’s suspension, the Comision Nacional de Valores (CNV, equivalent to the SEC in the United States) automatically transferred custody of all other investment funds that were previously with Citibank over to Caja de Valores. Caja de Valores sent a notification stating that those holders “who wish to receive the proceeds…should contact Caja de Valores to instruct the corresponding cash transfer”.
Caja de Valores will continue making the payments, but any payment destined for an overseas bondholder will stop with Euroclear, so unless you’re located in Argentina, the result will be the same. Until Argentina settles with the holdouts, foreign holders of Argentine debt will not see a single cent.
Everyone freaked out on Monday when Clearstream and Euroclear temporarily closed a “trading bridge” for Argentine bonds between the two entities that allowed the two to buy and sell between each other. Clearstream then went above and beyond Griesa’s restriction and blocked trading on all Argentine instruments. This didn’t affect Argentine brokerages, which all use Euroclear, and Clearstream restored settlement on Wednesday following confirmation from Caja de Valores that settlement on non-change bonds would be resumed. So basically nothing happened.
Argentina’s ongoing dance to wriggle out of paying holdout creditors while continuing to pay other creditors and raise additional foreign capital has been likened to a game of chess in which Argentina is nearing checkmate. I for one think this gives Argentina too much credit.
Argentina has lost the legal battle, and unless it is willing to attempt to pay foreign creditors by physically mailing cash or gold bullion, they can’t get around the fact that in order to make payments an international financial institution would have to violate US law. Not going to happen.
This is more like a game of Monopoly where one kid has clearly won, but that one asshole kid who picked up a few utilities and the maybe Boardwalk and Park Place has enough cash left to hold on for five more hours and waste everyone else’s time, patience, and sanity in the process.