Argentine debt restructuring

Argentine economic crisis (1999–2002)
Economy of Argentina Peso (currency) Currency Board Corralito Cacerolazo 2001 riots Apagón Debt restructuring

Argentina went through the worst economic crisis in the South American country history beginning in the mid-1990s, with full recession between 1999 and 2002; though it is debatable whether this crisis has ended, the situation has been more stable, and improving, since 2003.

Argentina defaulted on part of its external debt at the beginning of 2002. Foreign investment fled the country, and capital flow towards Argentina ceased almost completely. 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, producing higher-than-average inflation.

Large-scale debt restructuring was needed urgently, since the debt had become unpayable. However, the Argentine government met severe challenges trying to refinance its debt. Creditors (many of them private citizens in Spain, Italy, Germany, Japan and the U.S. and other countries, who had invested their savings and retirement pensions in debt bonds) denounced the default; the Italian government lobbied against Argentina in international forums. Vulture funds who had acquired sovereign bonds during the critical moments, at very low prices, asked to be repaid immediately.

The state had no spare money at the time, and the Central Bank's foreign currency reserves were almost depleted. (Moreover, whatever amount left was needed to control the availability of dollars in the local market, in order to prevent further devaluation of the peso.) For four years, Argentina was a pariah, effectively shut out of the international financial markets.^{[citation needed]}

Even as the economic situation improved, the amount of the debt was still the largest defaulted debt in history (about 93 billion USD), and Argentina was in no position to pay without sacrificing essential parts of its budget.

The Argentine government kept a firm stance, and finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25–35% of the original) and at longer terms. Among these bonds, some are indexed based on the future economic growth of Argentina.

The terms of the debt exchange were not accepted by some of the private debt holders (amounting to a quarter of the debt). The IMF used to lobby for these holdouts, but its position has been greatly weakened by the anticipated payment made in January 2006.

In 2010, the debt exchange was re-opened to holders of the debt. By 2012 holders of 6% of the debt continued to hold out; the hold-outs continue to put pressure on the government, most recently having an Argentine Navy ship seized in Ghana. Argentina has still not been able to raise finance on the international debt markets for fear that any money raised would be impounded; their borrowing costs over 10%, much higher than comparable countries. Instead they have been paying debt from central bank reserves, and have banned most purchases of dollars, limited imports and ordered companies to repatriate money held abroad.

2005 -2006

In the June 2005 report by the Ministry of Economy, the total acknowledged debt of the Argentine state amounted to 126.466 billion USD, down by 63.464 billion USD from the first semester 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's debt and several other adjustments, as of January 2006 the total figure decreased to USD 124.300 billion USD.

Debt bonds not exchanged in 2005 accounted for 23.381 billion USD, of which 12.688 billion were already overdue. Because of the lack of payment to these creditors, Argentina is the only member of the G-20 that is unable to raise capital in the international financial markets.^{[citation needed]}

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.

The American 'Task Force Argentina', sponsored by a New York sovereign debt fund, states their ultimate aim is to bolster the stability of global credit markets; work towards an equitable outcome for remaining creditors; ensure the integrity of U.S. law; and strengthen crucial bilateral relations between the United States and Argentina.

Disindebtment policy

During the restructuring process, the International Monetary Fund was considered a "privileged creditor", that is, all debt was recognized and paid in full. In 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, with the acknowledged intention of gaining financial independence from the IMF.

The Nobel Prize economist 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.

The main criticisms of disindebtment were, in the first place, that the large amounts of money used to pay off IMF debt were made 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.

Anticipated payment

On 15 December 2005 President Kirchner announced his intention of liquidating all the remaining debt to the IMF, in a single payment of $9.810 billion USD, 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 made some minor payments beforehand, but the main one, for about $9.5348 billion, was delayed for accounting reasons and paperwork, and was finally made on 3 January 2006. The debt was in fact denominated in special drawing rights (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 3.7817 billion SDR (equivalent to about $5.417 billion USD) from 16 central banks and ordered their transfer to the IMF. The rest (2.874 billion SDR or $4.117 billion USD) 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 ($5.082 billion), 2007 ($4.635 billion), and 2008 ($432 million). This disbursement represented 8.8% of the total Argentine public debt and decreased the Central Bank's reserves by one third (from $28.045 to $18.575 billion). According to the official announcement, it also saved about $1 billion in interest, though the actual savings amounted to $842 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 that quickly became crowded. 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 Snow said that this move "shows good faith" on the part of the Argentine government.

The day after the announcement, the price of the U.S. dollar in pesos jumped and then stabilized on 3.07 pesos (a 1.3% devaluation); the Central Bank was forced to sell $270 million in the market. The peso-denominated Argentine debt bonds declined by 3% and the Buenos Aires Stock Exchange lost 1.9%. After the initial surprise, reactions to the move were mixed, and the markets became quiet in a few days. Both President Kirchner and the Ex-Minister of Economy Felisa Miceli assured the public that the measure would have a "neutral effect" in the economy, since the Central Bank's dollar reserves were still enough to buy the whole monetary base.

Some analysts pointed out that the payment was more a political move than a thought-out economic strategy, but disagreed on their assessment of its long-term consequences. Minister Miceli said that the policy of accumulation of foreign currency reserves would continue and that the Central Bank would attempt to buy all the dollars that entered the market through international trade in 2006.

The Central Bank's reserves surpassed their pre-payment levels on 27 September 2006. As a result of its aggressive buying strategy, the exchange rate increased 8% in one year, reaching 3.12 pesos per dollar.

Venezuelan government buys Argentine bonds

In August 2007, the President of Venezuela Hugo Chávez bought $500 million Argentine bonds (Boden 2015) which were due to the IMF. This was decided by Chavez 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 by the Chávez administration.

From 2005 to 2006, Venezuela had already bought more than $3 billion bonds from Argentina, issued by the Argentine government following the debt restructuring. In total, Venezuela bought more than $5 billion bonds from Argentina since 2005.

Argentina re-opens debt exchange in 2010

In June, Argentina completed the reopening of its 2005 debt exchange and on July 1, announced the results. A total of approximately $12.86 billion of eligible debt was tendered into the exchange that launched on April 30, 2010. The total amount tendered represented 69.5% of the debt eligible to be tendered.

The 2010 re-opening brings 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.

Elliott Management Corporation

As of 2012 holders of 6% of the debt continued to hold out, including US$1.6bn-worth held by Paul Singer's Elliott Management Corporation. In October 2012 the sail training ship ARA Libertad of the Argentine Navy was seized under court order in Ghana at Singer's request. 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, and the state-owned oil company YPF has already placed debt in the financial markets to finance its investment programme in years to come. As of February, 2013, after adverse decisions below which would require full payment by Argentina, Elliott Management Corporation's claim remained before the U.S. 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; Argentina was given until March 29, 2013 to present a payment plan. The decision below was based on the unfairness of Argentina servicing some of the creditors while not paying anything to the remaining bondholders which had refused to accept 35 cents on the dollar.

During the 2000s, Elliott's lawyers initially obtained several huge judgments against Argentina (all of which were affirmed on appeal), but soon discovered that due to a number of quirks of sovereign immunity law, 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 attack 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 messy 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. Therefore, Argentina issued the bonds in the United States in New York 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 Elliott 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.

In March 2013, Argentina offered a new plan that was judged unlikely to be acceptable to the New York court.

References

• Denis Robert and Ernest Backes, "Revelation$" (2001) about the Clearstream scandal
• Argentina Didn't Fall on Its Own (GlobalExchange.org)
• Argentina's debt restructuring: A victory by default? (Economist.com)
• Argentina: IMF slammed by own independent panel - A report by the Independent Evaluation Office of the IMF.
• Full anticipated payment to the IMF: news reports in Reuters, Forbes, Miami Herald, Buenos Aires Herald, La Nación (in Spanish), La Capital (in Spanish), Página/12 (in Spanish)
• Argentina: Life After Default Article looking at how Argentina has largely overcome its economic turmoil
• Vulture funds

External links

• [2] - CNBC Interview with Robert Koenigsberger
• [3] - Financial Times, June 2010
• 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).