Yesterday Argentina may have defaulted on its sovereign debt after a New York Judge, Judge Thomas Griesa of the New York District Court had a few days earlier taken steps to block Argentina’s payment agent, Bank of New York, from making a regular quarterly payment of US$539 million which was due June 30th on Argentina’s outstanding international bonds, in multiple currencies.
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Two weeks ago Paul Singer, who runs private equity firm Elliot Management won a big argument at the US Supreme Court. The Supreme Court declined to intervene in a case where Argentina had been taken to court by Paul Singer and others over certain covenants in its international loan agreements. If applicable these required the country to pay him, and others, ratably whenever it made payments on its international bond issues, under their “pari passu” clause.
An investment fund Singer controls, NMI Capital had acquired distressed Argentine debt obligations both shortly before, and after, it defaulted on US$95 billion of its international sovereign debt in 2001.
In two subsequent restructurings, in 2005 and 2010 about 93% of Argentina’s debt-holders agreed to a major haircut, but Singer and a few other major distressed debt investors refused to exchange their defaulted bonds for about 30 cents on the dollar, and have been claiming full payment of both principal and accrued interest since.
Both the New York District Court and the New York court of Appeals subsequently agreed with him in precedent setting decisions when he later claimed, in a novel form of legal argument, that the equal treatment “pari passu” clauses of the original loan agreements meant he and his fellow holdouts were still entitled to be paid whenever payments were made on the remaining US$24 billion of debt that had been restructured.
Since the bond issues were negotiated under New York Law and omitted to include a Collective Action Clause, which would have protected Argentina after such restructurings, the South American country has now been skewered by the extension of private contract law to sovereign debt that the New York Courts have now imposed – in past such cases countries have argued they were protected by the concept of sovereign immunity.
Since the Supreme Court decision two weeks ago Argentina has blown hot and cold over the question of whether it would now consider making payments to Singer and the other hold-outs, first vowing to ignore the Supreme Court, then also saying it would negotiate with its lenders, including Singer.
By placing funds with its payment agent last week for just its regular bond payments, however, thereby clearly intending thereby to ignore Singer and his claims, this then forced Judge Griesa to issue an emergency order to the bank not to make any such payments, so indeed yesterday no payments were made to anyone.
After failing to make payments when these are due, there is a 30 day grace period before an actual default is declared which, if no corrective payments are made by such time, will then trigger the default on all its currently outstanding bonds and obviously place Argentina in a very difficult position.
Paul Singer stated the other day that Argentina has indeed refused to enter into discussions with him of any kind, even though he has repeatedly said he would be amenable to such talks.
Argentina is now between a rock and a hard place. If it makes no payments on its current regular bonds it enters into default. On the other hand if it does placate Singer and his friends by making some arrangement with them too, Argentina then has a potentially much bigger problem as well under a so-called RUFOs clause in its restructured bond agreements.
RUFOs stands for “Rights Upon Future Offers, ” and when Argentina first restructured at the beginning of 2005 all those investors who did accept the huge 70% haircut imposed at that time insisted that, for the following ten years, if Argentina ever came to terms with those who had held-out from the restructuring and paid them some money then this would trigger equivalent payment as well to all those who had accepted the restructuring – something which today could potentially cost Argentina billions.
That is obviously something Argentina wants to avoid, and the silver lining for them is that the RUFOs clause expires at the end of 2014. So by playing hardball at the moment Argentina at least gets to see if the courts will blink. If they do not, Singer has said several times he is ready to talk – presumably to determine some kind of deferrable agreement to January 1st next year when the Gordian knot can be cut.
As of yesterday mixed messages continue to come from Argentina. The Chief of the Argentine Cabinet has spoken up saying, “Argentina’s position is the same, ” he said. “Argentina maintains it is open to dialogue in order to establish conditions for dialogue that satisfy three demands: that they are equal, fair and legal for 100% of bondholders.”
On the other hand Argentina’s minister of economy Axel Kicillof has said of the ruling, “… is merely a sophisticated way of of trying to bring us down to our knees before global usurers, ” adding, “But he will not achieve his goal for quite a simple reason: The Argentine Republic will meet its obligations, pay off its debts and honor its commitments.”
Also by having placed the funds with its payment agent Argentina can claim it is at least trying to do the right thing, only to be blocked by some kind of “force majeure.” Either way though, by the time this is all over it is likely going to cost Argentina some more money.