New York Justice Thomas Griesa ruled that Argentina must pay an additional US $5.4 billion to 500 so-called “me-too” creditors. This increases the total amount owed on defaulted debt to US $7 billion, and that number will probably increase.
While this has no immediate consequences, as Argentina’s current government has taken extraordinary steps to evade Griesa’s past rulings, it complicates the steps the next government will have to take to repair Argentina’s relationship with international capital markets.
Argentina famously defaulted on its international debt in 2001. In 2005 and again in 2010, Argentina offered bondholders a restructuring that in effect exchanged the original bonds for bonds worth 30 cents for every dollar, or a 70 percent loss in value. Holdout bondholders did not accept the terms of this restructuring, and some sold their unrestructured debt to Paul Singer’s so-called “vulture” funds like NML Capital and Elliot Management. These funds’ team of MBA-wielding skilled attorneys systematically litigated for full repayment under the pari passu clause that requires all bondholders be treated equally. Judge Griesa ruled in favor of these holdouts and has prevented Argentina from continuing to make payments on exchanged debt until a settlement is reached by preventing financial institutions from processing payments.
This first round of “me-too” claims will not likely be the last. Estimates show that roughly US $24 billion, including interest, worth of debt was never restructured or exchanged and these bondholders now have clear precedent and incentive to pursue legal action of their own. And while repayment of the US $1.3 billion owed to the original “vultures” was reasonable and even manageable given international reserves that hover around US $33 billion, paying out US $7 billion or even more would definitely place the country in a precarious situation. Argentina owes an additional US $6.6 billion on the maturing Boden 2015 this October.
Rather than address this growing group of holdout creditors, Argentina has chosen to appeal the decision on the grounds that the “me too” holdouts are in fact the original group of “vultures” – an appeal it will likely lose relatively quickly. Argentina is already in contempt of court for making repeated unapologetic attempts to evade Griesa’s ruling. It raised US $1.4 billion last month by issuing the BONAR 2024 bonds under local law, and Griesa has yet to rule definitively whether or not this constitutes foreign debt and thus would be subject to actions taken to block payment.
Argentina needs access to foreign capital to finance infrastructure and develop projects like the Vaca Muerta oil fields. Until the situation with holdout creditors is resolved, it will pay more for debt and have a limited selection of partners to work with.
Argentina is a deeply (deeply deeply) politically divided country where the practicality required to resolve this issue is unfortunately politically costly. Cristina Fernandez de Kirchner has vowed not to settle with the vultures, and as the dollar amount of debt owed rises, she can claim a moral victory and is correct in saying that if she were to make the entire repayment she would literally bankrupt the country. But there is a massive difference between loud defiance and level-headedly negotiating a settlement – and the latter is the path that will require an Argentine president to show a brand of leadership that transcends shouting empty rhetoric to weeping constituents who praise Cristina as the second coming of Jesus Christ that dances to cumbia.
Solving the problem with the holdouts will require negotiation real negotiation with Argentina’s best interests in mind. It is in Argentina’s best interests to raise future debt without the onus of potentially blocked payments that forces Argentina to offer higher interest rates and decreases the pool of potential creditors. Likewise, Argentina’s default situation influences potential foreign direct investment, with companies and capital steering clear of Argentina in favor of less risky markets.
Whomever assumes the presidency following this year’s election already has a difficult job ahead. Debt claims piling up makes the job even more difficult, as he will be forced not only to make hard decisions and find a way to settlement, but also to dismantle the layers of rhetoric being laid down by Ms. Fernandez to justify her refusal to negotiate to her people.