Argentina’s debt restructuring options limited

Kicillof Kirchner Argentina

On June 16th, 2014, the U.S. Supreme Court ruled in favor of NML Capital Ltd (NML) over the Republic of Argentina in a major debt settlement case. The ruling has implications not only for Argentina but also other debt-ridden countries throughout the world. Regardless of how Argentina responds, Prime Minister Christina Fernandez de Kirchner’s options are unattractive.

Argentina reached agreement with a majority of its creditors with only a limited number of holdouts. However, there was a small subset of U.S. creditors led by Elliot Associates, a New York-based hedge fund described as NML Capital Ltd, that were holding out for better repayment terms. They sought and received relief from the Southern District of New York, which can result in a high payoff from their purchase of cheap bonds that occurred from the 2001 default of Argentina.

With the U.S. Supreme Court siding with the creditors, Argentina’s agreement with the other bondholders is now null and void. They face a June 30th deadline when interest payments must be made on these exchanged bonds, though they will likely seek a delay.

Weighing the options

Argentina has three options. First, abide by U.S. Supreme Court ruling and pay back NML $1.2 to $1.6 billion; second, ignore the ruling and risk technical default; third, allow U.S. creditors to swap original U.S.-issued bonds for Argentinian bonds.

The first option is the easiest route for Argentina in rebuilding their credit status, but it carries significant political risks potentially exposes them to further liability. Given de Kirchner’s populist base, succumbing to perceived greedy investors would not play well at home and could stall her agenda as her second term comes to an end next year.

Paying off NML could also violate the “pari passu” clause written in the original bond documents that forbids providing more favorable terms to holdouts. Even though they could amend that law, it could potentially put them on the hook for $15 billion as previous creditors seek similar terms, according to Argentina’s Finance Minister Axel Kicillof.

With current foreign reserves at approximately $29 billion, this exposure is a frightening prospect for Argentina.

The second option is politically expedient, but would halt Argentina’s re-entry into the global financial market. Argentina desperately wants access to global markets to slow its inflation rate and reverse its sluggish economic growth prospects. Currently, the IMF projects negative economic growth for 2014 — even before the adverse ruling. A technical default would be disastrous and why Mr. Kicillof dismissed as “unthinkable.”

The third option will likely be Argentina’s first course of action, but it is highly unlikely that will materialize. For one, it requires convincing bondholders to swap U.S. issued bonds for Argentinian bonds, which would subject them to Argentinian law. Given their low ranking in institutions and susceptibility to corruption, many bondholders would balk at this choice. Additionally, potential third-party financial institutions have expressed reluctance to even facilitate this swap due to potential litigation risk arising from the U.S. judicial ruling.

But none of the three options are likely. Argentina’s best hope is to negotiate a settlement with all the creditors so to regain entry into the global financial arena and stabilize their monetary issues.

Even though some analysts see this as a positive development for credit markets, it sends an ominous sign to developing countries that have taken on significant debt. The ability to restructure debt will become increasingly difficult, ultimately raising the downside risk for developing countries and widen the divide between rich and poor countries.

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Categories: Finance, Latin America

Author:Aaron Johnson

Currently, I am the Assistant Professor of Economics at Darton College where I also serve as Economics Spokesperson. In this capacity, I serve as a local resource for the media and community on economic issues. I also serve as a board member on the Albany Dougherty Planning Commission, Albany Chamber of Commerce Small Business Resource Committee, and Girls Inc.

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2 Comments on “Argentina’s debt restructuring options limited”

  1. June 30, 2014 at 3:03 am #

    Reblogged this on econprofaj and commented:
    In my latest installment to Global Risk Insights, I comment on Argentina’s dispute with U.S. creditors. This is an under-the-radar issue to most Americans, but it should matter to investors. While on one hand, the U.S. Supreme Court ruling for a New York-based hedge fund over Argentina bodes well for U.S. creditors. This is problematic for Argentina’s prime minister Christina Fernandez de Kirchner for two reasons.

    First, she can abide by the ruling and pay Eliot Associates, also known as NML Capital Ltd, the principal of their U.S. bonds, which they defaulted on in 2001. However, these repayment terms might conflict with contractual terms that limited their ability to offer better terms to late holdouts. There is disagreement on the interpretation. It is Argentina’s position agreeing to this would renege their previous agreements with 93 percent of other U.S. creditors that agreed to more favorable terms. If they have to offer similar terms to these other creditors, then that could raise their repayment obligations to up to $15 billion, which is more than half of their reserves.

    If they refuse to abide by the ruling and withhold payment, then they risk a technical default. That would potentially be devastating to a country that is already suffering from a weak currency, rising inflation, and sluggish growth prospects.

    As of right now, the impact on emerging countries is limited. However, countries with significant debt exposure might have less flexibility in attaining more favorable repayment terms as a result.

  2. Kevin Amirehsani
    July 2, 2014 at 7:37 pm #

    Good article. I’ve been following this case for some time. Given that the holdouts are mostly hedge funds, and also given the populist and often virulently anti-market tone of the Kirchner governments, I’m not quite sure who to “side” with. Regardless, do you think the introduction of collective action clauses in the majority of sovereign bonds issued currently will render a future debt restructuring problem like this moot?

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