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Argentina and the future of sovereign debt
July 30, 2014 7:11 AM   Subscribe

In 2000, Argentina defaulted on international debt, and then renegotiated with most of its bondholders. Some of the rest of the bonds were snapped up by hedge funds at deep discounts. Recently a U.S. district court judge, Thomas Griesa, ruled that Argentina couldn't pay the renegotiating bondholders -- and no bank or other agent could help it pay them -- without paying the hedge funds, too, in full. The 2nd circuit affirmed, the Supreme Court denied appeal, and the ruling could have a major impact on the future of sovereign debt and on the role of the U.S. as a world financial center. If a solution is not found, Argentina will default again today.
posted by shivohum (84 comments total) 21 users marked this as a favorite

 
the foreign affairs link is paywalled.

I'm more curious about why the US has jurisdiction on this.. yeah, yeah, "us courts have found ... appeals court affirmed ... surpremes denied review" .. but, why should US court have say in this ? Was it a poorly done contract ?
posted by k5.user at 7:37 AM on July 30


Argentina has defaulted 7 times since it gained independence in 1816
posted by Bwithh at 7:37 AM on July 30 [3 favorites]


Thanks for this post. The foreign affairs article in particular was exceptional.

These decisions by Griesa and Scalia seem particularly shortsighted. I have to wonder if they could also come back to bite the US in the ass someday soon. China and Japan both own over a trillion US dollars worth of Treasury bonds, and Congressional Republicans appear to have no understanding of what could happen if we default.
posted by zarq at 7:39 AM on July 30 [8 favorites]


I guess there's good reason there can't be a bankruptcy tribunal for nations, but I wonder if this couldn't be made better for the creditors as well as Argentina if the obligations could have been modified nonconsensually according to a long term plan. I guess there are international institutions that perform some bankruptcy-like functions but it sounds like something bad is going to happen.
posted by grobstein at 7:40 AM on July 30


the foreign affairs link is paywalled.

I don't know about other browsers, but opening the link in a new incognito window worked for me.
posted by zombieflanders at 7:41 AM on July 30


The US courts have jurisdiction because this debt was sold through US markets, paid by US based bank accounts and issued in US dollars.
posted by humanfont at 7:42 AM on July 30 [10 favorites]


I'm more curious about why the US has jurisdiction on this.. yeah, yeah, "us courts have found ... appeals court affirmed ... surpremes denied review" .. but, why should US court have say in this ? Was it a poorly done contract ?

Argentina sold the bonds to US investors using US banks in the State of New York, and as part of the deal it agreed to be subject to US judicial review.
posted by BobbyVan at 7:42 AM on July 30 [9 favorites]


I'm more curious about why the US has jurisdiction on this.. yeah, yeah, "us courts have found ... appeals court affirmed ... surpremes denied review" .. but, why should US court have say in this ? Was it a poorly done contract ?

The company bringing the lawsuit is based in NY.
The case involved Argentina and a group of so-called vulture funds, led by the deep-pocketed and highly litigious hedge fund Elliott Associates, which was demanding repayment in full on old Argentine debt. Elliott had first come to broad public attention in 2000, when it brought -- and won -- a similar case against Peru. That unprecedented victory against a sovereign government, although worth a mere $90 million, so deeply shocked the international financial community that it prompted the International Monetary Fund to undertake a messy and protracted attempt to create a brand-new sovereign bankruptcy court. The Argentina case is much, much bigger -- Argentina owes Elliott over a billion dollars. The total amount that it owes “holdout creditors,” as the vulture funds are more formally known, is some $15 billion. Given that other holdout firms will immediately demand any terms awarded to Elliott, Argentina is not lying when it says that it simply can’t afford to do what the U.S. courts are demanding of it -- which is to pay all the holdouts in full.

posted by zarq at 7:42 AM on July 30 [1 favorite]


I wondered where a US judge found leverage against a sovereign nation to force compliance.

He didn't, of course, so he went after someone else:
Normally, when a borrower violates a contractual obligation, a judge will hand down a judgment against that borrower. In this case, however, Griesa went after the bondholders who had accepted 30 cents on the dollar for restructured Argentine debt. He told every other agent in the payments chain, up to and including the trustee for the exchange bondholders, that Argentina was not allowed to pay them until Elliott had been paid in full. If the trustee or anybody else helped Argentina pay its exchange bondholders, then Griesa would find them in contempt of court, assuming that Elliott had not been paid at that time.

That order was stayed pending appeal, but it is now in full effect. Make no mistake: the innocent are being punished. The exchange bondholders have done nothing wrong, and there is no way that they’re going to get their payment in full and on time, as Argentina would like. But the ruling goes well beyond punishing the innocent. It also turns the natural order of debt on its head. It used to be that having a bond was good but that having a judgment was much better. Now, however, it’s the other way around: judgments will get you nowhere, while bonds, if they have a pari passu clause, can make you all-powerful.
[From the Foreign Affairs link]
posted by notyou at 7:45 AM on July 30 [6 favorites]


Elliott being in NYC has nothing to do with it, Its really that the bonds were issued under US law.

I think there are Belgian law bonds as well.

Really the solution to this going forward surrounds legalese in the future bond issuances. This really doesn't cause some potential existential thread to NY-Law bond issues.

Basically Elliot's lawyers were smarter than Argentina's lawyers who did the restructuring in '01.

And yeah, its the fact that the administrator for the bonds is the US sub of Bank of New York
posted by JPD at 7:49 AM on July 30 [4 favorites]


Ah. Thanks for clarifying!
posted by zarq at 7:50 AM on July 30


So the banks holding Argentina's timely interest payments have to decode whether to process them thereby being in contempt of court in the U.S., or return them, thereby opening themselves to lawsuits by Argentina for not fulfilling their duties, is that right?

The NY Times article from June is a pretty damning indictment of Griesa's capabilities as a judge, meanwhile. What are the ramifications to him in all this? It's mindboggling that the admitted uninformed ruling of an 84-year-old man is about the upend the rules around international debt.
posted by griphus at 7:51 AM on July 30 [2 favorites]


I'm more curious about why the US has jurisdiction on this.. yeah, yeah, "us courts have found ... appeals court affirmed ... surpremes denied review" .. but, why should US court have say in this ? Was it a poorly done contract ?

When you make deals of this size, you try to specify in advance what law will govern disputes, to reduce uncertainty -- and for other reasons. Imagine you are Argentina, trying to market Argentine sovereign debt, and everyone thinks you're financially shaky. If your instruments all say, "Argentine law will govern," it might be tough to find buyers at the price you want.

In addition, in this case all of the payments that are the subject of the order would take place in (the computers of) New York (-based institutions).
posted by grobstein at 7:52 AM on July 30 [1 favorite]


(Unless I'm misunderstanding something.)
posted by griphus at 7:52 AM on July 30


I guess? I'm just processing this now.
posted by grobstein at 7:53 AM on July 30


I wondered where a US judge found leverage against a sovereign nation to force compliance.

He didn't, of course, so he went after someone else:
Normally, when a borrower violates a contractual obligation, a judge will hand down a judgment against that borrower. In this case, however, Griesa went after the bondholders who had accepted 30 cents on the dollar for restructured Argentine debt. He told every other agent in the payments chain, up to and including the trustee for the exchange bondholders, that Argentina was not allowed to pay them until Elliott had been paid in full. If the trustee or anybody else helped Argentina pay its exchange bondholders, then Griesa would find them in contempt of court, assuming that Elliott had not been paid at that time.

That order was stayed pending appeal, but it is now in full effect. Make no mistake: the innocent are being punished. The exchange bondholders have done nothing wrong, and there is no way that they’re going to get their payment in full and on time, as Argentina would like. But the ruling goes well beyond punishing the innocent. It also turns the natural order of debt on its head. It used to be that having a bond was good but that having a judgment was much better. Now, however, it’s the other way around: judgments will get you nowhere, while bonds, if they have a pari passu clause, can make you all-powerful.


It was a legalistic argument, not a moral one. Elliott was happy to get paid to make the pari passu issue go away, Kirchner didn't want to play ball. She lost. Its really quite simple.

Yes its not great to be someone who agreed to the original restructuring, but in the end they will still get their money.

At the end of the day the judge can't compel Argentina to do anything, what they can do is compel Bank of New York from doing something. IIRC the money for the payment is actually sitting in a bank account in NY right now.
posted by JPD at 7:53 AM on July 30 [1 favorite]


I wonder if Argentine security and intelligence services will be used to apply extrajudicial pressure available to sovereign nations.
posted by humanfont at 7:53 AM on July 30


So the banks holding Argentina's timely interest payments have to decode whether to process them thereby being in contempt of court in the U.S., or return them, thereby opening themselves to lawsuits by Argentina for not fulfilling their duties, is that right?

Yes exactly. Tho they may not be able to return it either. I'm not actually sure.
posted by JPD at 7:54 AM on July 30


The NY Times article from June is a pretty damning indictment of Griesa's capabilities as a judge, meanwhile. What are the ramifications to him in all this? It's mindboggling that the admitted uninformed ruling of an 84-year-old man is about the upend the rules around international debt.

Griesa's ruling was upheld by a US Court of Appeals and the US Supreme Court, so don't think his reasoning can be so easily dismissed as an old man's addling.
posted by BobbyVan at 7:54 AM on July 30 [10 favorites]


This is contract law more than foreign affairs. That's sort of why this all seems so crazy to people. Argentina tried to claim sovereign immunity to make this go away but that was rejected. And thank god for that, because then you really would have an existential crisis for the sovereign debt markets.
posted by JPD at 7:55 AM on July 30 [3 favorites]


I thought the Supreme Court refused the appeal. Does that count as officially upholding it? I'm not entirely sure how inaction works here.
posted by griphus at 7:56 AM on July 30 [1 favorite]


He didn't, of course, so he went after someone else

Someone else who's received payments that at least partially belong to Elliott.
posted by one more dead town's last parade at 7:57 AM on July 30


The last default was in December 2001 not 2000.
posted by Lanark at 7:59 AM on July 30


I thought the Supreme Court refused the appeal. Does that count as officially upholding it? I'm not entirely sure how inaction works here.

Yeah I should have been more clear. The SupCt didn't officially rule, but I've gotta think they'd have taken the case if it was so obvious that a confused old man wrote an opinion that was going to turn international debt markets upside down.
posted by BobbyVan at 7:59 AM on July 30 [2 favorites]


Was this a similar boat Iceland was in prior to it, IIRC, calling bullshit on the whole system and just not paying anyone?
posted by Slackermagee at 7:59 AM on July 30


IANA bankruptcy expert. Am I right in thinking that a sub-national entity in bankruptcy could have in effect compelled everyone to take the exchange, eliminating this problem? Or would we be in approximately the same place, with some creditors able to hold out?

The old bondholders are sort of free riders here. The exchange is presumably what has allowed Argentina to have the degree of financial solvency it has had since -- all the bondholders who took the exchange offer are paying to keep Argentina solvent. The old bondholders who declined the exchange get the benefit of this forbearance at no cost to themselves.

This (it seems to me) is one kind of free-rider problem that bankruptcy is meant to alleviate.
posted by grobstein at 8:01 AM on July 30 [3 favorites]


BTW - I think technically there is a pile of yen denominated debt that has already put ARG into default or will when it hits midnight in Tokyo.
posted by JPD at 8:01 AM on July 30 [1 favorite]


It's currently 12:05 in the morning in Tokyo.
posted by one more dead town's last parade at 8:05 AM on July 30


Was this a similar boat Iceland was in prior to it, IIRC, calling bullshit on the whole system and just not paying anyone?

Not really. They refused to pay foreign account holders at their banks.

Am I right in thinking that a sub-national entity in bankruptcy could have in effect compelled everyone to take the exchange, eliminating this problem? Or would we be in approximately the same place, with some creditors able to hold out?

If this were a non-sovereign under US law we have a bankruptcy process that is either a knife to dangle or the way in which you push through a restructuring with a judge adjudicating.

I believe most sovereign debt these days carries collective action clauses that essentially can force holdouts to participate.
posted by JPD at 8:06 AM on July 30 [2 favorites]


...but I've gotta think they'd have taken the case if it was so obvious that a confused old man wrote an opinion that was going to turn international debt markets upside down.

Re-reading the articles, it sounds like that happened before Griesa admitted he fucked up. There's two different issues at play (the ruling itself and how it applies) and I am not remotely a lawyer but would that have affected the treatment of the appeals if it was revealed beforehand? Again, assuming it was not.
posted by griphus at 8:07 AM on July 30


I believe most sovereign debt these days carries collective action clauses that essentially can force holdouts to participate.

. . . but the old debt didn't include any language like this, or it somehow wasn't triggered?
posted by grobstein at 8:09 AM on July 30


oh yeah -

Ftalphaville has been obsessed with this for years. Something like 70 posts
posted by JPD at 8:11 AM on July 30 [1 favorite]


old debt didn't include the language
posted by JPD at 8:11 AM on July 30 [2 favorites]


I thought the Supreme Court refused the appeal. Does that count as officially upholding it? I'm not entirely sure how inaction works here.

It in effect upholds the decision, because there's nowhere else to go to challenge it. The times that the Supreme Court takes a case roughly lump into three classes. First, if two circuits have come to opposite conclusions, they'll take a related case to decide which position will be law across the land. Second, if they see clear error in the Circuit decision, they'll take it to correct it. Third, if they see the need for clear precedent, they'll take a related case to make that precedent.

But if a circuit has ruled correctly and there's no precedent issues, they'll just deny cert. This makes the circuit court the highest possible appellate court for that issue, and that means they get the final word.

IANA bankruptcy expert.

That's okay. Sovereign Nations can't go bankrupt! There's no court above a sovereign nation, so there's no way for them to be declared bankrupt. What they can do is refuse to pay a debt, this is a default, but it is not bankruptcy.

In bankruptcy, the court distributes the assets as best as it can to the creditors, then declares the rest of the debts are discharged, and thus, null and void. When you emerge from bankruptcy, you don't own anybody anything*

Sovereign nations don't get that route. Argentina made a deal with *many* of its creditors, but this doesn't discharge the debt it owed to the creditors that refused to deal.



* With the exception of the few kinds of debt that cannot be discharged.
posted by eriko at 8:15 AM on July 30 [1 favorite]


In bankruptcy, the court distributes the assets as best as it can to the creditors, then declares the rest of the debts are discharged

This is not in fact how a court led bankruptcy works in practice. Its creditor driven. And rarely involves the distribution of assets. Actually I've never heard of one that did other than to secured creditors.
posted by JPD at 8:16 AM on July 30 [1 favorite]


Re-reading the articles, it sounds like that happened before Griesa admitted he fucked up.

OK, I see what you're referring to now (the Argentine-law bonds). Yes, he seems to have handled that aspect pretty poorly, but that doesn't seem to have much to do with the Elliott Management situation.
posted by BobbyVan at 8:19 AM on July 30


Well, whoever put bets on this ('credit default' insurance) is sure going to clean up.
Or else get driven into bankruptcy, of course.
Which would kick off another round of payments for _their_ credit defaults.
Unless that bankrupts their counterparties, of course.

I think the financial system has discovered nuclear fission.
Remember that Disney film -- the room full of mousetraps each loaded with two ping-pong balls?

Then toss in one ping-pong ball, and SNAP three ping-pong balls are in the air; they hit, oh, say only two mousetraps and SNAP, five ....

Lather, rinse, meltdown.
posted by hank at 8:23 AM on July 30 [1 favorite]


But once a bond has defaulted, it is possible to get a bit more imaginative. And if Argentina wanted to continue to funnel money toward the exchange bondholders, one way of effectively doing so would be to simply buy up those bonds on the secondary market. Argentina could simply take the money that it would otherwise have spent on coupons and spend it instead of buying newly defaulted exchange bonds.

When does Argentina default on these bonds? Why is it possible to get more imaginative once they default? If they buy these newly default exchange bonds won't they still have obligations related to old bonds that Elliott will attempt to milk?

Does the bond trustee need to do something in a sale on the secondary market? Won't the bond trustee be in contempt if they do?
posted by bdc34 at 8:25 AM on July 30


There are only about a billion dollars of outstanding CDS. I'd guess Elliot owns a lot of that. It hasn't been a very attractively priced thing for a long time because of this issue.
posted by JPD at 8:35 AM on July 30


Why is it possible to get more imaginative once they default?

For a non-defaulted bond, you have to follow whatever terms it was issued under. Once you aren't following those terms, by definition you're in default. If you've stated you can't and won't pay the bonds at face value, your creditors may be willing to negotiate - better for them to get thirty cents on the dollar than nothing at all. They're not required to negotiate, but they may decide it's in their own best interest.
posted by echo target at 8:44 AM on July 30


Argentina should pay its debts, which it can afford to do, instead of being so indignant and damaging its economy through default once again.
posted by knoyers at 8:45 AM on July 30


so the practical effect of this is that US financial institutions and bond-owners could be found in contempt of court. What happens then? Do they "go to jail"? Do they get fined? shut down?
posted by rebent at 8:46 AM on July 30


When does Argentina default on these bonds?

The vulture bonds are already in default and have been for years. The exchange bonds will default at the end of the day today (30-Jul) if Argentina cannot pay.
posted by eriko at 8:48 AM on July 30


Ok, the first ping-pong ball is 1 million:

"The actual determination of default is made by the International Swaps and Derivatives Association, which says whether a default, or credit event, has occurred for those who bought credit-default swaps, known as CDS and which is insurance that protects investors against such an occurrence. If that happens, the amount that would be paid out to investors who insured their Argentine debt is a bit more than $1 billion. By way of comparison, the net notional value of Brazil CDS is more than $16.8 billion ...."
-- Chicago Tribune

As long as the first one doesn't set off the next couple, we're fine.
posted by hank at 8:54 AM on July 30


Welp, looks like it's time for Argentina to invade the Falklands again....
posted by happyroach at 8:56 AM on July 30 [2 favorites]


Its not actually going to be a billion in cash, because the bonds have value even in default.

A CDS pays out as a bond+cash =par.

So say I held CDS on something that went into technical default but the bonds still traded at 95, I wouldn't get 100, I'd get 5.
posted by JPD at 8:58 AM on July 30 [4 favorites]


> I have to wonder if they could also come back to bite the US in the ass someday soon. China and Japan both own over a trillion US dollars worth of Treasury bonds, and Congressional Republicans appear to have no understanding of what could happen if we default.

You mean the guys who want to get government down to the size where they can drown it in a bathtub? I think they're thinking they have their golden parachutes well packed.

Snarkiness aside, there are a lot of differences between the US's debt and Argentina's debt. For starters, that debt is held by sovereign nations whose own economic health is contingent to a great deal on the US's (which might not be true decades hence, but it's still true now). And the US's cash reserves aren't being stored in commercial banks in the creditor nations, so it's not going to be accessible through contract law the same way Argentina's is.
posted by at by at 9:45 AM on July 30 [1 favorite]


This is contract law more than foreign affairs. That's sort of why this all seems so crazy to people. Argentina tried to claim sovereign immunity to make this go away but that was rejected. And thank god for that, because then you really would have an existential crisis for the sovereign debt markets.

I imagine you are a lot closer to this sort of thing than I am... but... it's Elliot Associates which is crashing the party here not Argentina, which is I'm sure the point Argentina's lawyers were trying to make. Elliot Associates has been allowed to create a mess: to whose benefit?
posted by ennui.bz at 9:47 AM on July 30


“U.S. on Its Own, Once Again, at OAS Meeting on Argentinean Sovereign Debt,” Alexander Main, Center for Economic and Policy Research, 09 July 2014

“Why Argentina may default on its debts,” The Economist Explains, 29 July 2014


I feel somewhat better about this now. I was thinking Argentina would be on the hook for the more than $100B, €30B, and various odds and ends of all outstanding issues and this was potentially a existential crisis. $29B seems like a doable impact for the financial system.
posted by ob1quixote at 9:57 AM on July 30


The worst part about all of these bonds on steroids is that now Argentina'll never get into the Hall of Fame.


...i'll get me coat
posted by delfin at 10:02 AM on July 30 [3 favorites]


From the foreignaffairs article:
The case in New York -- the one that made it all the way to the Supreme Court -- was brought by bondholders that didn’t participate in the exchange. They originally bought their debt at a deep discount, and they knew how to apply past-due compound interest calculations to make the face value of the defaulted debt balloon into the billions. They knew that it wouldn’t be easy to get paid in full, but if they managed it they would have scored one of the biggest home runs in hedge-fund history.
So basically a vulture hedge fund bought discounted debt with the express purpose of getting to where we are today? If I understand it correctly the $1b Elliot are asking for [and $15b held by other vulture funds] is the full value of the bonds defaulted on in 2001 including compounded interest over the past 13 years.

knoyers: Argentina should pay its debts, which it can afford to do, instead of being so indignant and damaging its economy through default once again.

Argentina paid its interest payments on the exchanged bonds, so forcing a default again doesn't make sense. The debt in question here is the one Argentina already defaulted on 13 years ago. Surely the paid the price for that with the huge negative effects that default had on the nation, economically and otherwise?

If this ruling goes through then Argentina would have defaulted on the debts, ate up the negative effect of the default, and still be forced to pay the debt that it already defaulted on. Basically nullifying nations' ability to default.
posted by xqwzts at 10:20 AM on July 30 [7 favorites]


I think the reason American sovereign debt is considered safe is two-fold.

First, the Fourteenth Amendment doesn't permit the US to default.

Second, if the US does default (directly or indirectly*) then the entire world economic system will melt down, and in that case there won't be any refuge anywhere. So it's not so much that US T-Bills are infinitely safe as that there isn't anything else which is safer.

*Indirectly? The "best" way would be to inflate the dollar. Our debt is denominated in our own currency, which could crash. If dollars reached parity with Yen, for instance, then 99% of our debt would magically vanish.

Of course that would have a lot of other consequences...
posted by Chocolate Pickle at 11:21 AM on July 30


Of course that would have a lot of other consequences...

We'd take down China with us. It's like an economic murder-suicide.
posted by Talez at 12:23 PM on July 30


"This is contract law more than foreign affairs. That's sort of why this all seems so crazy to people. Argentina tried to claim sovereign immunity to make this go away but that was rejected. And thank god for that, because then you really would have an existential crisis for the sovereign debt markets."

… but I thought that the general rule had been that sovereign immunity had covered these types of claims, hence the novel move of the judge to enjoin third parties from processing the payments on the exchange bonds. If it's an "existential crisis," wouldn't that mean it was an extraordinarily long-running one?

(As a side note, the last default was weirdly a huge boon for Argentinean indie record labels and pressing plants — drops in currency meant that for bands with foreign followings or labels with foreign distribution, it was incredibly cheap to get stuff made and the factories had been overbooked before, so it was hard to get high quality vinyl press time. No Fun Records, full of great Latin American garage rock, put out a ton of solid albums in the aftermath.)
posted by klangklangston at 12:28 PM on July 30 [2 favorites]


So basically a vulture hedge fund bought discounted debt with the express purpose of getting to where we are today? If I understand it correctly the $1b Elliot are asking for [and $15b held by other vulture funds] is the full value of the bonds defaulted on in 2001 including compounded interest over the past 13 years.

Basically, yeah. I'd add that US financial interests' political clout is an important component of the overall plan.

Since 2007, American Task Force Argentina has spent over $5 million lobbying the US government on behalf of these vulture funds -- not to mention whatever they've been spending on their media campaign. I'd imagine all that has influenced the US government's (and the IMF's) changing position on the matter.

It's also worth noting that the vulture funds convinced the government of Ghana to seize an Argentine naval ship over this issue back in 2012.

It's a hell of a business model: buy up cheap debt during an economic crisis, then use your massive financial and political influence to extract billions from the economy once it recovers. And, of course, it's ultimately the ordinary people of Argentina who will pay the price.
posted by twirlip at 12:39 PM on July 30 [8 favorites]


the bonds explicitly waive sovereign immunity. I think its a standard clause.


it's Elliot Associates which is crashing the party here not Argentina, which is I'm sure the point Argentina's lawyers were trying to make. Elliot Associates has been allowed to create a mess: to whose benefit?

Of course Elliot is crashing the party, but the claim isn't any less valid because of who the party is or when they bought it.

Argentina is dumb two way - They didn't deal with this at the time of the original restructuring - blame their bankers and lawyers and they didn't deal with Elliot with some cash as soon as they showed up. Instead they bet on the legal system and lost. It was a bad bet.
posted by JPD at 12:42 PM on July 30 [4 favorites]


They gave the boat back BTW.
posted by JPD at 12:44 PM on July 30


If I understand it correctly the $1b Elliot are asking for [and $15b held by other vulture funds] is the full value of the bonds defaulted on in 2001 including compounded interest over the past 13 years.

What you ask for, and what you'll be content with are very different things

If this ruling goes through then Argentina would have defaulted on the debts, ate up the negative effect of the default, and still be forced to pay the debt that it already defaulted on. Basically nullifying nations' ability to default.

No, really. It doesn't. Its more complicated then that and is basically a legal fuckup that is easily corrected
posted by JPD at 12:46 PM on July 30 [2 favorites]


These decisions by Griesa and Scalia seem particularly shortsighted.

You don't say.
posted by mhoye at 1:06 PM on July 30


They gave the boat back BTW.

Sure, after the UN intervened. What's interesting is that the vulture funds could and did provoke this sort of international political crisis in their pursuit of profit.

Imagine it from the perspective of an ordinary person in Argentina. 15 years ago there was an economic crisis, austerity measures to satisfy foreign lenders, accounts being frozen to deal with a run on the banks, a sovereign debt default, currency devaluation, inflation, mass unemployment, riots, factory occupations, and popular assemblies in the streets. Eventually the economy recovers, life returns to normal, and your government restructures its debt in order to pay out most bondholders at a discount (despite opposition from the IMF). Then some US financial interests come along and throw a wrench in the works, convincing a foreign court to sabotage existing restructuring deals so that it can get top dollar for the cheap debt that it bought specifically in order to exploit it like this. As a result, your country (probably) defaults on its debt again, which has all kinds of potential negative consequences for you and everyone you know, but sweet fuck-all in the way of consequences for the predatory Wall Street interests that exploited the situation.

If I were in those shoes, I imagine I'd be rather pissed off.
posted by twirlip at 1:12 PM on July 30 [14 favorites]


Interestingly, the dollar exchange blue rate hasn't changed much in the past week.
posted by yellowcandy at 1:22 PM on July 30


saying the UN "intervened' is a bit much. It clearly violated sovereign immunity laws and a sea court attached to the UN told them to give it back.

Its not "sabotaging existing restructuring deals" - Its "Argentina hired shitty bankers"

And you have the timing wrong. This thing has been in the courts since the restructuring. Its not liik NML just popped up two years ago and asked to get paid.

But hey - Argentina should just issue bonds under Argentine law. I'm sure that'll work out. Good track record there.

At the end of the day a populist president refused to do the rational thing and thought she could win in the courts - she lost.
posted by JPD at 1:23 PM on July 30 [3 favorites]


As a complementary read, I highly, highly recommend Paul Blustein's book And the Money Kept Rolling In (And Out) - Wall Street, the IMF, and the Bankrupting of Argentina. I'm not the kind of person to go reading about international monetary policy usually, but I had it on my Kindle on a recent Argentina trip, and found it to be a really fascinating dissection of all of the various events and actors leading up to this particular trainwreck.
posted by deludingmyself at 2:12 PM on July 30 [1 favorite]


Its not "sabotaging existing restructuring deals" - Its "Argentina hired shitty bankers"

Creditors who would otherwise be receiving payment under the existing deals will not be doing so, because NML got a court to rule in their favor. You can make the case that Argentina should have just capitulated to the vulture funds, but it's the vulture funds that sued to block payment on existing deals, without regard for the consequences to Argentina.

And you have the timing wrong. This thing has been in the courts since the restructuring. Its not liik NML just popped up two years ago and asked to get paid.

They popped up in 2008, three years after the first restructuring deal, when they bought their original Argentine debt holdings. And they bought them specifically for this purpose. This is what vulture funds do. I am suggesting that this behavior is predatory and wrong.

Yes, Argentina's government has made mistakes, and yes, theoretically they could avoid default by paying off NML and (eventually) the other holdouts to the tune of $15 billion. But it's hard to blame them for pushing back. This game is rigged against debtor countries -- and one way or another, it's the ordinary people of those countries who suffer for it.
posted by twirlip at 2:44 PM on July 30 [6 favorites]


Creditors who would otherwise be receiving payment under the existing deals will not be doing so, because NML got a court to rule in their favor.

Creditors who would otherwise be receiving money that belongs to NML will not be doing so, because the court ruled that Argentina can't ignore its contractual obligations and favor some creditors over others.

Argentina should get better lawyers next time.
posted by one more dead town's last parade at 2:58 PM on July 30 [3 favorites]


those creditors traded in bonds just like NML's to get their payment. They aren't a discrete class of bondholders - that's sort of the point.

NML started suing in '08 and have been the highest and most high profile plantiff, but Greisa has been on the case since '03 or '04.

Look - in no world is NML actually looking for 15 Bil. They can't go to court with a argument of "Well we're owed 15, but we'll go away for 2" - that's just not how its done.

I'm sure the Argentine government knows where the real negotiations begin.

Don't forget that the biggest owner of the exchange bonds is also a "Vulture" investor. Probably all of the owners are.
posted by JPD at 3:08 PM on July 30 [1 favorite]


So the Argentines made a last offer of the same terms as the original exchange.

Idiots. If you think NML owns a bunch of CDS this is exactly what they wanted. A default and then a cure. You lost, now try to minimize the loss rather than make some gesture.
posted by JPD at 3:14 PM on July 30 [1 favorite]


. This game is rigged against debtor countries -- and one way or another

Argentina submitted to US jurisdiction and used US law to get lower rates. No one should feel sorry for them when that doesn't work in their favor.
posted by jpe at 3:15 PM on July 30


BTW - I think you are wrong about NML buying in '08. Their first lawsuit was in '05, although it seems they tripled the notional value of their stake between then and '08
posted by JPD at 3:40 PM on July 30 [1 favorite]


Former Argentinian leaders made these bad deals and now the whole country has to live with the consequences. The suggestion that we shouldn't feel sorry for the people of Argentina and their current leaders under these circumstances seems contrary to normal standards of empathy. Furthermore the people who renegotiated their agreements and those who have sold debt to Argentina are now needlessly suffering because these few actors want special treatment.
posted by humanfont at 3:51 PM on July 30 [4 favorites]


Furthermore the people who renegotiated their agreements and those who have sold debt to Argentina are now needlessly suffering because these few actors want special treatment.

This seems like one of those situations where "special" is meaningless because, by definition, the treatment you get is determined by the finance system and its method of resolving contract disputes, which is courts of law in an agreed upon venue. The human cost is real but the place to consider that was any one of a hundred-pre-legal-dispute moments of decision, rather than parading weeping widows and hungry urchins after gambling and losing.
posted by fatbird at 4:29 PM on July 30 [2 favorites]


S.&P. Says Argentina Has Defaulted
posted by Nelson at 4:30 PM on July 30


It is the current government or actually the current presidents late husband who did the flawed restructuring.
posted by JPD at 4:34 PM on July 30


Furthermore the people who renegotiated their agreements and those who have sold debt to Argentina are now needlessly suffering because these few actors want special treatment.

Pretty much everyone being damaged here bought the debt on the cheap and then participated in the restructuring. It's Vulture vs Vulture.
posted by JPD at 4:36 PM on July 30


What's the political fallout going to be in Argentina if no deal can be reached, I wonder? Is the domestic credibility of the current government done for? If I was an Argentine contemplating a period of economic decline I'd clamor for early elections right about now.
posted by all the versus at 4:42 PM on July 30


The debt that is at issue is from before the restructuring. Argentina can't force these holdout creditors to accept the terms of the restructuring.
posted by humanfont at 6:19 PM on July 30


Question...

If Argentina is basically in default, then isn't it an obvious decision for investors to basically "short" its stocks/currency/economy?! There's a real shortage of solid investments out there, so the tendency to throw money into destructive -- but relatively certain -- investments is kind of overwhelming.

If that's the case, what is the risk of this perhaps causing a cascade of failures, with various debt / stock owners facing potentially catastrophic losses that Argentina can't make good on, possibly exceeding the debt owed in the first place? Isn't it in the best interest of the global economy for Argentina to be propped up somehow, regardless of the Supreme Court punting on this?
posted by markkraft at 10:38 PM on July 30


No chance. This outcome has been expected for a long time. The sums involved are small in the scale of the global financial system.
posted by humanfont at 12:02 AM on July 31


Yeah, it's already priced in.
posted by jaduncan at 1:11 AM on July 31


Guess so. Looks like the Argentine Peso has gone up overnight, and has been trending upwards over the course of the last month, as the crisis got closer.

It's almost as though the rest of the world thought that stiffing the vulture funds was a good thing to do...
posted by markkraft at 9:34 AM on July 31


I don't follow really follow financial news, maybe someone can help me: is this why the markets are tanking the last couple days?
posted by grobstein at 4:54 PM on August 1


It is likely the US financial markets were down this week because good economic news suggests interest rates will go up and the Federal Reserve will be reducing monetary stimulus. Stocks have also been doing very well the last few years and valuations have outpaced historic norms relative to earnings and other indicators.
posted by humanfont at 9:12 PM on August 1


My preferred answer is "who knows?"
posted by JPD at 9:47 PM on August 1 [1 favorite]


Thx :)
posted by grobstein at 5:04 AM on August 2


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