Argentine debt restructuring
|1998–2002 Argentine great depression|
Argentina began a process of debt restructuring on January 14, 2005, that allowed it to resume payment on the majority of the USD82 billion in sovereign bonds that defaulted in 2002 at the depth of the worst economic crisis in the country's history. A second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, though ongoing disputes with holdouts remained. Bondholders who participated in the restructuring have seen the value of their bonds rise and have been paid punctually.
The recession that resulted in the crisis lasted between 1999 and 2002; of the USD82 billion in defaulted bonds, 51% were issued during that interim. Argentina defaulted on a total of USD93 billion of its external debt on December 26, 2001. Foreign investment fled the country, and capital flow toward Argentina ceased almost completely during 2002 and 2003. The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly to nearly 4-to-1, producing a sudden rise in inflation to over 40% and a fall in real GDP of 11% in 2002.
Large-scale debt restructuring was needed urgently, since the debt had become unpayable. The Argentine government met severe challenges trying to refinance its debt, however. Creditors (many of them private citizens in Spain, Italy, Germany, Japan, the U.S., and other countries, who had invested their savings and retirement pensions in debt bonds) denounced the default; this included bondholders from Argentina itself, estimated to comprise about a fourth of affected bondholders. Refinancing efforts were further undermined by the George W. Bush administration policy of vetoing proposals to create a mechanism for sovereign debt restructuring.
Economic recovery eventually allowed Argentina to offer large-scale debt swaps in 2005 and 2010; the first brought 76% of bonds out of default and the second, 93%. The terms of the debt exchanges were not accepted by all private bondholders, and these became "holdouts." The IMF initially lobbied for the holdouts until Argentina's lump-sum repayment to the IMF in January 2006. Individual creditors worldwide, who represent about one third of this group, have mobilized to seek repayment from the Argentine state. Among the most prominent are Task Force Argentina, an Italian retail bondholder association, and Mark Botsford, a private U.S. citizen retail bondholder. Italian nationals had become the largest group of foreign retail investors in Argentine bonds when during the 1990s, banks in their country purchased USD14 billion in bonds and then resold them to nearly half a million investors; the vast majority rejected the first swap but accepted the second.
Holdouts retained a total of USD4 billion in bonds as of 2013. Vulture funds, which owned USD1.3 billion of this total, sued to be repaid at 100% of face value for purchased for cents on the dollar, filing injunctions to attach future payments to other bondholders by way of forcing Argentina to settle. A similar strategy had been successfully pursued by vulture funds against Peru and a number of African nations as well. The American Task Force Argentina, sponsored by the Cayman Islands-based vulture fund NML Capital Limited, is the most prominent and best financed lobbying group against Argentine bond restructuring efforts, spending over $7 million lobbying U.S. Congressmen and becoming the top campaign contributor to a number of these; the most prominent, former Western Hemisphere Subcommittee Chair Connie Mack IV (R-FL), became the main sponsor of a bill in 2012 designed to force Argentina to pay NML nearly $2 billion before losing his Senate bid that year.
Argentina has still not been able to raise finance on the international debt markets for fear that any money raised would be impounded by holdout lawsuits; their country risk borrowing cost premiums remain over 10%, much higher than comparable countries. Consequently, Argentina has been paying debt from central bank reserves, has banned most retail purchases of dollars, limited imports, and ordered companies to repatriate money held abroad. Nevertheless, between 2003 and 2012 Argentina met debt service payments totaling USD173.7 billion, of which 81.5 billion was collected by bondholders, 51.2 billion by multilateral lenders such as the IMF and World Bank, and 41 billion by Argentine government agencies. Public external debt denominated in foreign currencies (mainly in dollars and euros) accordingly fell from 150% of GDP in 2002 to 8.3% in 2013.
A Belgian court in June 2013 declined to issue judgment in favor of the creditors to distrain Argentinian diplomatic bank accounts. A German court ruled in favor of Argentina in July on the basis of the Pari passu clause. The French government planned to file an amicus brief in favor of the Argentine position at the US Supreme Court, said Finance Minister Pierre Moscovici, while the IMF declined to intervene. In August 2013, the Government of Argentina lost an U.S. appeals court case and was told it had to repay the full face value amount to these holdouts. A third debt restructuring offer to remaining holdouts on similar terms to the 2010 swap was announced on August 27, 2013.
First restructuring (2005)
The Argentine government kept a firm stance, and in January 2005 offered the first debt restructuring to affected bondholders; nearly 76% of the defaulted bonds (USD62.5 billion) were thus exchanged and brought out of default. The exchange offered longer term par, cuasi-par, and discount bonds - the latter with a much lower nominal value (25–35% of the original). The majority of the Argentine bond market thereafter became based on GDP-linked bonds, and investors, both foreign and domestic, netted record yields amid renewed growth.
Argentina re-opens debt exchange in 2010
On April 15, 2010, the debt exchange was re-opened to bondholders who rejected the 2005 swap; 67% of these latter accepted the swap, leaving 7% as holdouts. Holdouts continued to put pressure on the government by attempting to seize Argentine assets abroad, and by suing to attach future Argentine payments on restructured debt to receive better treatment than cooperating creditors.
A total of approximately USD12.86 billion of eligible debt was tendered into the exchange launched in April 2010; this represented 69.5% of outstanding bonds still held by holdouts. The 2010 re-opening thus brought the total amount of debt restructured to 92.6% (the original 2005 debt exchange restructured 76.2% of Argentine government debt in default since 2001). The final settlement of the 2010 debt exchange took place on August 11, for bondholders that didn't participate in the early tranche that closed on May 14 and settled on May 17.
Repayment in full to the IMF
During the restructuring process, the International Monetary Fund was considered a "privileged creditor", that is, all debt was recognized and paid in full. During 2005 Argentina shifted from a policy of constant negotiation and refinancing with the IMF to payment in full, taking advantage of a large and growing fiscal surplus due to rising commodity prices and economic output, with the acknowledged intention of gaining financial independence from the IMF.
President Néstor Kirchner on December 15, 2005, announced his intention of liquidating all the remaining debt to the IMF, in a single payment of USD9.81 billion, initially planned to take place before the end of the year (a similar move had been announced by Brazil two days before, and it is understood that the two measures were to be coordinated).
Argentina under the Kirchner administration had already reduced its debt to the IMF from USD15.5 billion in 2003 to USD 10.5 billion at the time of this announcement. The last and largest remaining share of the IMF debt, about USD9.5 billion, was paid on January 3, 2006. The debt was in fact denominated in special drawing rights (SDR; a unit employed by the IMF and calculated over a basket of currencies). The Argentine Central Bank called on the Bank for International Settlements in Basel, Switzerland, where a part of its currency reserves were deposited, to act as its agent. The BIS bought 3.78 billion SDR (equivalent to about USD5.4 billion) from 16 central banks and ordered their transfer to the IMF. The rest (2.874 billion SDR or USD4.1 billion) was transferred from Argentina's account in the IMF, deposited in the U.S. Federal Reserve.
The payment served to cancel the debt installments that were to be paid in 2006 (USD5.1 billion), 2007 (USD4.6 billion), and 2008 (USD432 million). This disbursement represented 8.8% of the total Argentine public debt and decreased the Central Bank's reserves by one third (from USD28 billion to USD18.6 billion). According to the official announcement, it also saved about a billion dollars in interest, though the actual savings amounted to USD842 million (since the reserves that were in the BIS were until then receiving interest payments).
The initial announcement was made in a surprise press conference. President Kirchner said that, with this payment, "we bury an ignominious past of eternal, infinite indebtment." Many of those present later called the decision "historic". The head of the IMF, Rodrigo Rato, saluted it, though remarking that Argentina "faces important challenges ahead". United States Secretary of the Treasury John W. Snow said that this move "shows good faith" on the part of the Argentine government. Nobel Economics Prize laureate Joseph Stiglitz repeatedly criticized the IMF and supported the Argentine strategies on the debt restructuring, but opposed the disindebtment policy, suggesting instead that the IMF should receive the same treatment as the other creditors. Local criticism of the IMF debt paydown centered around the cost, which made funds unavailable for productive purposes within Argentina or to come to terms with outstanding creditors; and second, that the government traded cheap IMF credits for new emissions of public debt at much higher interest rates. Following the initial surprise and mixed reactions local markets rallied, with the MERVAL index growing more in January 2006 than in all of 2005.
The Ministry of Economy reported in June 2005 that the total official Argentine public debt was down by USD63.5 billion from the first semester to USD126.5 billion as a result of the restructuring process; of this, 46% was denominated in dollars, 36% in pesos, and 11% in euros and other currencies. Due to the full payment of the IMF debt and several other adjustments, as of January 2006 the total figure decreased further to USD124.3 billion; bonds not exchanged in 2005 accounted for USD23.4 billion, of which 12.7 billion were already overdue. The Central Bank's reserves surpassed their pre-payment levels on September 27, 2006.
Venezuelan government buys Argentine bonds
In August 2007, the President of Venezuela Hugo Chávez bought USD500 million Argentine bonds (Boden 2015) which were due to the IMF. This purchase was decided by Chávez two years earlier during Tabaré Vázquez's inauguration as President of Uruguay. This trade of bonds would be the Argentine apport to the third emission of Bono del Sur ("Southern Bonds") by the Chávez administration.
Venezuela bought a total of more than USD5 billion in restructured Argentine bonds from 2005 to 2007.
A dispute between Argentina and holdouts has been ongoing since at least the 2005 debt restructuring. Holdout portfolios represented of 6% of the debt (USD 4 billion) in 2013; of the USD4 billion in bonds owned by holdouts in 2013, USD1.3bn were held by Cayman Islands-based NML Capital Limited and U.S.-based hedge funds Aurelius Capital Management and Blue Angel. Bondholders who instead accepted the 2005 swap (three out of four did so) saw the value of their bonds rise 90% by 2012, and these continued to rise strongly during 2013.
Vulture funds that rejected the 2005 and 2010 offers to exchange their defaulted bonds resorted instead to lawsuits to block payments to other bondholders and attempts to seize Argentine government assets abroad – notably Central Bank deposits in the Federal Reserve Bank of New York, the presidential airplane, and the ARA Libertad. The Libertad, an Argentine Navy training frigate, was seized at the behest of NML Capital for ten weeks in late 2012 in the port of Tema, Ghana, until the International Tribunal for the Law of the Sea ruled unanimously that it be released. The dispute limited Argentina's access to foreign credit markets as well; in October 2012 Argentina's theoretical borrowing costs were 10.7%, double the average for developing countries. Although Argentina has not raised money on the money markets since the default, the state-owned oil company YPF has already placed debt in the financial markets to finance its investment programme in years to come.
NML Capital Limited, a Cayman Islands-based offshore unit of Paul Singer's Elliott Management Corporation, purchased the majority of their holdings in 2008, paying an estimated USD49 million for one series of bonds whose face value was over USD220 million. They in turn established the American Task Force Argentina lobbying group against Argentine bond restructuring efforts, and sued to attach Argentina's ongoing payments to the bondholders who had participated in the earlier restructurings.
During the 2000s, Singer's lawyers initially obtained several large judgments against Argentina (all of which were affirmed on appeal), but soon discovered that due to a number of sovereign immunity laws, it was impossible to actually enforce those judgments against the handful of Argentine assets still within the reach of U.S. jurisdiction. They then reexamined their strategy and decided to attach Argentina's ongoing payments to the bondholders who had participated in the 2005 and 2010 restructurings.
The basis of this new strategy arose from a strategic error on Argentina's part which was rooted in its history. Because Argentina was historically so unstable, it would have been difficult for it to solicit investors to buy bonds in Buenos Aires under Argentine jurisdiction, as few external investors trusted Argentina courts to enforce bonds against their own government. This consideration led Argentina to transfer the issue of bonds to New York, under United States law, on April 20, 1976, as were most subsequent bond issues. Bonds were thus under a special kind of bond contract, a "Fiscal Agency Agreement" which was drafted by its American attorneys under New York law. The FAA stipulated that the repayments on the bonds were to be made by Argentina through a trustee based in New York (meaning that the U.S. courts did have jurisdiction over that party to order injunctive relief).
In the Fiscal Agency Agreement, Argentina's attorneys included a boilerplate pari passu clause, but neglected to include a collective action clause. As a result, Argentina could not force NML Capital or the other holdouts to participate in the 2005 or 2010 restructurings. Even worse, the pari passu clause was interpreted by U.S. courts as meaning that Argentina could either pay all its bondholders or none, but could not pay only those who cooperated with the 2005 restructuring and ignore the rest. This was considered to be fair by the U.S. courts because Argentina was bound by its attorneys' actions; having enjoyed the benefit of New York law and access to New York capital markets, it now had to bear the burden.
As of February, 2013, after adverse decisions which would require full payment by Argentina, NML Capital's claim remained before the United States Court of Appeals for the Second Circuit (New York). The decision of the appeals court was adverse and a motion for rehearing by a full panel was denied on March 26.
Large banks, investors, and the U.S. Treasury Department objected to the judge’s order, expressing concern over losses that would be incurred by bondholders and others, as well over disruption in the bond markets. Vladimir Werning, executive director for Latin American research at JPMorgan Chase, observed that vulture funds "are trying to block the payments system" in the U.S. itself, something "unprecedented in the New York jurisdiction." Kevin Heine, a spokesman for Bank of New York Mellon, which handles bond payments, said the ruling "will create unrest in the credit markets and result in cascades of litigation, which is precisely the opposite effect that an injunction should have." The American Bankers Association agreed, noting that "permitting injunctions that preclude pre-existing obligations whenever expedient to enforce a judgment against the debtor will have significantly adverse consequences for the financial system." Argentina was given until March 29, 2013, to present a payment plan; but despite offering the holdouts significant returns (284% in the case of NML), the new repayment plan offered by Argentina was judged unlikely to be acceptable to the New York court. The payment formula proposed by the district court would imply a 1380% return for NML.
On August 23, 2013, the United States Court of Appeals for the Second Circuit affirmed the lower court's verdict and dismissed said plan. The ruling determined that holdouts should be repaid the full face value, and on highly unequal terms to the 93% who had accepted the 2005 and 2010 swaps at a 70%-75% discount. A court in Germany has backed Argentina on the basis of the equal terms clause; and the ruling may be unenforceable, because the U.S. Justice Department does not want to create the precedent of overturning the Foreign Sovereign Immunities Act or forcing a default of 93% of the holders of a debt issue for the sake of ensuring the payment to holdouts. The lack of legal certainty in U.S. courts meanwhile prompted Argentine officials to propose placing the restructured bonds in question under Argentine law, while concurrently announcing a renewed bond swap offer. The expiration of Rights Upon Future Offers in December 2014 will preclude bondholders from suing for better terms should the Argentine Government and the vulture funds settle, making such a settlement all the more likely after that date.
The United States Supreme Court on October 7 declined to hear a preliminary appeal filed by Argentina following the Second Circuit ruling, though this in effect maintained the stay against the adverse Griesa ruling due to related litigation in the lower courts; Argentine bonds rose on the news.
The possibility that holdout creditors can attach future payments on restructured debt and receive better treatment than cooperating creditors distorts incentives, can derail efforts for a cooperative restructuring, and may ultimately lead to the U.S. no longer being viewed as a safe place to issue sovereign debt. It is likely to be of particular importance in cases in which the creditors are being asked to accept substantial debt and debt service reduction; however, it is unclear given the special circumstances of the Elliot/NML case whether it will be broadly applicable to holdouts in other restructurings.
- J.F.Hornbeck (February 6, 2013). "Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts”". Congressional Research Service.
- "Banks Fear Court Ruling in Argentina Bond Debt". New York Times. February 25, 2013.
- Drew Benson. "Billionaire Hedge Funds Snub 90% Returns". Bloomberg News.
- "Argentina Bonds Rally Despite Risk". Wall Street Journal. September 29, 2013.
- "Argentina Seeks to Restructure Debt Held by Vulture Funds". IPS News. August 29, 2013.
- "El detalle del proyecto para el nuevo canje de deuda". InfoNews. August 28, 2013.
- "Los bonistas argentinos, entre entablar juicios o esperar un fracaso del canje". Clarín. January 10, 2005.
- Joseph Stiglitz (September 4, 2013). "The Vultures' Victory".
- "Tired Italians May `Accept Anything' to Unload Argentina's Defaulted Bonds". Bloomberg. April 26, 2010.
- "Argentine Funds Can’t Be Seized by Bond Holders, Judge Says". Bloomberg. March 28, 2012.
- "Bankers’ Group Supports Bond Trustee in Argentina Appeal". Bloomberg. January 5, 2013.
- "Vulture Turns to Pirate: Blocks Argentine Ship from Leaving Ghana". CEPR. October 11, 2012.
- Arthur Phillips and Jake Johnston (April 2, 2013). "Argentina vs. the Vultures: What You Need to Know". CEPR.
- "A victory by default?". The Economist. March 3, 2005.
- "Vulture Fund Case Studies: Peru and Elliott Associates". Jubilee USA Network.
- "A Belgian court ruled in favor of Argentina and against a vulture fund". Telam. 11 July 2013.
- "German court rules in Argentina favor against Vulture Funds". Buenos Aires Herald. 11 July 2013.
- "France to back legal argument in Argentina case against creditors". Reuters. 26 July 2013.
- "Argentina loses $1.3bn debt court appeal". BBC. 25 August 2013.
- "El PBI subió 8,5% en 2010 y asegura pago récord de u$s 2.200 millones a inversores". El Cronista Comercial.
- "The real story behind the Argentine vessel in Ghana and how hedge funds tried to seize the presidential plane". Forbes.
- "What Argentina's fight with holdout creditors is all about". Reuters. February 22, 2013.
- Richard Wray (April 16, 2010). "Argentina to repay 2001 debt as Greece struggles to avoid default". The Guardian.
- "El Gobierno defiende el desendeudamiento con el Fondo". Clarín. July 28, 2005.
- "Todo en un pago y chau al Fondo". Página/12. December 16, 2005.
- "Pegs, boards and the IMF". Asia Times. July 29, 2010.
- "En enero, la Bolsa ganó más que en todo 2005". La Nación. January 31, 2006.
- "El Central recuperó las reservas del pago al Fondo Monetario". La Nación. September 28, 2006.
- "Chavez touts $500 million bond deal with Argentina". CNN. 8 August 2007.
- "Se colocará con Chávez la deuda más cara desde el default: 10,6% de tasa". Clarín. 7 August 2007.
- "Venezuela compra deuda argentina". BBC. 3 March 2005.
- "Chavez keeps up South American energy diplomacy". Reuters. Aug 8, 2007.
- "US Supreme Court rules in favour of Argentina and unfreezes funds". MercoPress.
- Daniel Schweimler (10 January 2013). "Argentine naval frigate returns home". Financial Times.
- "YPF colocó deuda por 750 millones de pesos". La Mañana Neuquén. November 9, 2012.
- "El fallo Griesa y la operación buitre". Infobae. September 10, 2013.
- Bob Van Voris (February 26, 2013). "Argentina Seeks Relief From U.S. Court in Debt Fight". Bloomberg.
- Bob Van Voris; Katia Porzecanski (March 26, 2013). "Argentina Loses Bid for Full-Court Rehearing in Bond Appeal". Bloomberg.
- Emily Schmall (March 1, 2013). "Argentina: U.S. Court Orders Debt Repayment Plan". The New York Times.
- "Argentina offers to pay debts with cash & bonds". Yahoo News. March 30, 2013.
- UNITED STATES COURT OF APPEALS, FOR THE SECOND CIRCUIT (23 August 2013). "12-105(L) NML Capital, Ltd. v. Republic of Argentina". Clarín.
- "German court rules in Argentina favour against Vulture Funds". Buenos Aires Herald. July 11, 2013.
- "Argentina Markets Ride Wall Street Rally Higher". Wall Street Journal.
- "U.S. Supreme Court won't hear Argentina bond dispute appeal". Reuters. October 7, 2013.
- "Argentina Bonds Rise Following U.S. Supreme Court Decision". Wall Street Journal. October 7, 2013.
- Felix Salmon (August 23, 2013). "Elliott vs Argentina: It’s not over yet". Reuters.
-  - CNBC Interview with Robert Koenigsberger
-  - Mark Weisbrot (2009). Vulture Funds Lobby Against Argentina, Trying To Use the U.S. Congress In Public Relations Campaign.
- Argentina: Life After Default Article looking at how Argentina has largely overcome its economic turmoil
- Banco Central de la República Argentina - Argentina's Central Bank website, with various economic statistics available on the fly.
- Interessengemeinschaft Argentinien e. V. (non-profit-association of creditors involved in the restructuring, based in Germany).
- Argentina and the IMF on the IMF website.
- Associazione per la Tutela degli Investitori in Titoli Argentini/Task Force Argentina (pressure group based in Rome, representing the interests of default bondholders in Italy).
- American Task Force Argentina (pressure group based in Washington, D.C., representing the interests of institutional default bondholders in the U.S., and co-chaired by Robert J. Shapiro, former U.S. Undersecretary of Commerce in the Clinton Administration, and Nancy Soderberg, member of the National Security Council under Clinton).
- Global Committee of Argentina Bondholders (global association of Argentina bondholder groups and committees from around the world, representing holders of over US$39 billion in debt. It includes more than 500,000 retail investors and more than 100 institutions, banks, partnerships and committees).