Argentine Default

Fending off the Vultures with New Debt Restructuring Rules

A woman walks past graffiti that reads "No to the debt payment" in Buenos Aires in July. Source: Reuters
A woman walks past graffiti that reads "No to the debt payment" in Buenos Aires in July.
  • Why it matters

    Why it matters

    Argentina’s default is a textbook example of why collective action clauses are needed to allow changes in debt terms based on a majority decision of all bondholders, sidelining aggressive investors when necessary.

  • Facts

    Facts

    • Argentina previously defaulted on $81 billion debt in 2001.
    • A new debt package could cost Argentina an extra $50 billion.
    • Analysts predict country’s economy will shrink 3.5 percent this year.
  • Audio

    Audio

  • Pdf

It was finally midnight. After a last, six-hour marathon negotiation this week between Argentina and U.S. hedge funds in New York, South America’s second largest country fell again into bankruptcy after 13 years.

The parties could not agree on compromise terms to repay Argentina’s $1.3 billion debt plus interest. The resulting cost comes mostly at the expense of the country’s citizens and investors.

All other explanations are splitting hairs, despite attempts by Argentina to spin the situation. It might be that proud South Americans don’t feel hurt by economic failure, but bankruptcy is bankruptcy. There is no denying that.

Axel Kicillof, Argentina’s finance minister, continues to maintain that his country is not in default. “A default is when one does not pay,” he said. “And Argentina has paid.”

But the hedge funds weren’t ready to take offers from President Cristina Fernández de Kirchner’s government. Argentina was angling for another in a series of debt-cutting agreements, following deals in 2005 and 2010. But the hedge fund firms wanted more money – not tomorrow, but here, now and today. That’s the way the game goes when you do business with the  “vultures” of finance, whether one likes it or not.

Still, defaulting on Argentina’s debt could have been avoided if all parties would have cooperated.

The first scenario would have been to issue a new investment loan for the size of the debt. The bonds could have been transferred to a trustee, who would have passed on the papers next year. In effect, the hedge funds could have been satisfied with that. And the majority of creditors, who had already agreed to cutting the debt, would have gotten their interest paid. Argentina would also get something it needed. The whole debt package would not have to be redone, as now is likely, with significantly higher costs. In the worst case, it could add $50 billion to refinancing Argentina’s debt.

Argentina is left now as a textbook example of how not to reschedule debt payments.

A second solution was offered at the last minute. In the fight among creditors, banks had submitted an offer that had some appeal. A group of financial institutions wanted to take over Argentina’s debt from the hedge funds. They would have presented a new debt package with added interest in 2015. Creditors who already accepted a debt cut could not appeal to a betterment clause because the provision runs out at the end of December. The danger of a flood of lawsuits would have been averted.

These solutions would have been, however, only a tinkering on the symptoms – and not a big success. Argentina is left now as a textbook example of how not to reschedule debt payments. It is high time to implement rules already in place to deal with debt restructuring  – so-called “collective action clauses”

Don't cry for me Argentina? President Christina Kirchner has unsuccessfully fought the hedge funds. Source: Reuters
Don't cry for me Argentina? President Christina Kirchner has unsuccessfully fought the hedge funds. Source: Reuters
Don’t cry for me Argentina? President Christina Kirchner has unsuccessfully fought the hedge funds. Source: Reuters

 

In Europe, we know about this from the past year. Here, Greece was the trigger for collective action agreements among bondholders, for example, with German government-issued bonds. The object of collective action clauses is to allow changes in debt terms based on a majority decision of all bondholders, including those who vote against the changes.

This simplifies changes in debt terms or debt cuts. Hard cuts can be pushed through against the will of a minority of creditors, even when investment terms have to be lowered.

Then there is no room for aggressive “vulture funds” at the table. They are left in the minority or forced to keep their hands off risky investments. A debt cut brings enough worries for all investors. And indebted countries and their citizens have to suffer enough already for past mistakes.

Robert Landgraf is Handelsblatt’s deputy finance editor. He can be reached at: landgraf@handelsblatt.com.

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