New Year, Old Problems
Argentina’s economy has taken a backseat in the news since the relatively quiet reunification and float of the Argentine peso in December. Inflation didn’t accelerate out of control, people didn’t take to the streets to protest while pushing wheelbarrows of worthless currency, supermarket shelves did not empty. President Mauricio Macri’s administration has taken steps to addressing the currency and import/export issues, but these issues are secondary to resolving the country’s current default situation.
Yesterday, Macri’s economic team met for the first time with the many-times impugned Judge Thomas Griesa and the holdouts’ legal team, and it wasn’t encouraging. At first, things appeared promising albeit non-concrete: both sides agreed to present settlement proposals to court-appointed mediator Daniel Pollack on January 25th, and Finance Secretary Luis Caputo told reporters the government was “satisfied.” The handholding and hugging lasted less then a few hours.
Within hours of the meeting, it was reported by Bloomberg that the holdouts aka “vultures” will not submit a proposal until Argentina signs a non-disclosure agreement that would bar it from publicizing any details of the plans before an agreed upon time. Caputo was clear to Pollack that the government would make any offer public to the Argentine people in an effort to promote transparency. Enter a new stalemate.
How Did We Get Here?
Let’s review the facts. Argentina defaulted on about US$95 billion in 2001. Most of the bondholders agreed to a restructuring and accepted about 30 US cents for each dollar. Another group decided to hold out for a better deal, and the majority of this group sold the debt to hedge funds owned by a billionaire named Paul Singer. These funds are known as “vulture funds” because their raison d’être is to buy defaulted debt and use their deep pockets, infinite patience and unparalleled legal expertise to litigate for full repayment. Let me reiterate: These funds’ sole purpose in existence is to buy defaulted debt and litigate for full repayment. They are not the IMF or the World Bank, who at the very least pretend to give a damn about development or Argentine poverty. They unapologetically exist to solely make money.
In July 2014, Argentina unequivocally lost an over decade-long legal battle with these holdouts when the US Supreme Court declined to hear its appeal. Remember, this case was heard in New York because Argentina chose to issue these US dollar bonds under New York law. Judge Griesa’s upheld ruling legally prevents Argentina from making payments on the restructured debt until the holdouts are paid in full, or an agreement is reached.
President Macri’s predecesor Cristina Fernández de Kirchner notoriously thumbed her nose at Judge Griesa and wove a web of financially complicated routes to circumvent the ruling by paying the restructured debt and raise more US dollar debt locally in Argentina without the funds passing through US financial institutions. Paying the restructured debt locally was not so successful, whereas the latter worked quite well. The previous administration issued several billions worth of US dollar bonds via local auctions thus far out of the reach of Griesa’s ruling.
Macri vs. Vulture Funds: What’s The Difference?
While the Macri administration has undeniably brought a refreshing air of professionalism to the standoff, besides the fact that his economic team does not behave like an embarrassing hybrid of a spoiled toddler and a middle school mean girl, we have yet to see any tangible departure from the policies of his predecessor.
Finance Secretary Luis Caputo, who traveled to New York to meet with Pollack four times in the past month, joked lightly that he had seen the special negotiator more than he had seen his family. Argentina is seeking an additional law firm besides Cleary Gottlieb Stein to change the negotiation strategy, as Finance Minister Alfonso Prat-Gay has named the firm as a reason past negotiations failed. But while Macri has called Cristina’s stance towards the holdouts “not rational,” he has also promised the Argentine people “tough negotiations to protect national interest.” Which might not be the most rational promise to make.
By next week, Prat-Gay assures that the government will have successfully closed a US$6 billion private loan from international banks. This loan will go through Argentina’s Central Bank (BCRA) to circumvent Griesa’s ruling. Granted the new administration is using the funds to support the newly floated currency rather than to allegedly launder via conveniently fire-prone empty luxury hotels at the end of the world, but Macri’s government is still dodging Griesa’s ruling.
Argentina’s cash reserves received a US$2 billion boost from agriculture exports at the end of 2015, but this doesn’t come close to covering the US$9.8 billion owed to these holdouts. The holdout creditors will accept repayment in the form of new bonds, so the current low reserves is not an impassable obstacle. Reaching agreement on the amount, interest and maturity of these new bonds may be.
What Could An Agreement Look Like?
Before Cristina unceremoniously abandoned negotiations in 2014, the terms being offered to the holdouts was a cool 80 cents on the US dollar, much higher than the 30 received by other restructuring. La Nación correctly poses the question, why would the holdouts accept less than 80 percent now that they have definitively won the legal battle? This 80 percent is extremely more favorable than the annual dividend linked to Argentina’s economic performance that restructured bondholders are currently receiving, yet Prat-Gay criticized these growth-linked payments as “extremely generous.”
The “vultures” have time and the law on their side. Argentina needs to resolve this issue quickly, whereas the holdouts have been waiting for years and have zero incentive to accept anything less than they are willing to.
Argentina is seeking — and desperately needs — a bit of goodwill from the other side of the negotiating table that seems unlikely to come. Asking Argentina to negotiate in secret from the public is not in good faith. The country is desperately trying to recover from an era of misinformation and bombastic
bullshit rhetoric blaring out of every orifice of the state-controlled media apparatus. Regardless of what agreement is reached, Macri’s government will be painted as villains selling the country to evil Wall Street capitalists. If forced to negotiate in secrecy, the political capital required to get an agreement over the line will be exponentially higher.
Argentina is reported to be asking Judge Griesa to grant a temporary stay that would allow the nation to recommence payments on the restructured debt, as well as begin issuing new bonds. If true negotiations between the two parties were to recommence in earnest, a stay may be granted. As it stands, not much has changed besides the professionalism of the Argentine team, which alone is unlikely to sway Griesa.
Even if Argentina were to reach an agreement with the holdouts, it will still have to face the Victory Front (FpV)-controlled Congress. Under Cristina, Congress passed a resolution forbidding offering better terms than the 30 cents on the dollar received by the previous debt restructuring. In order to pay the holdouts more, Congress must approve the terms.
Argentina needs more than a photo op to reach an agreement with its recalcitrant holdout creditors. At this table, Macri’s economic team has been dealt a poor hand with few cards worth playing.