Argentina defaults – Eighth time unlucky
Cristina Fernández argues that her country's latest default is
different. She is missing the point.
Aug 2nd 2014
ARGENTINA'S first bond, issued in 1824, was supposed to
have had a lifespan of 46 years. Less than four years later, the
government defaulted. Resolving the ensuing stand-off with
creditors took 29 years. Since then seven more defaults have
followed, the most recent this week, when Argentina failed to
make a payment on bonds issued as partial compensation to
victims of the previous default, in 2001.
Most investors think they can see a pattern in all this, but
Argentina’s president, Cristina Fernández de Kirchner, insists
the latest default is not like the others. Her government, she
points out, had transferred the full $539m it owed to the banks
that administer the bonds. It is America’s courts (the bonds
were issued under American law) that blocked the payment,
at the behest of the tiny minority of owners of bonds from
2001 who did not accept the restructuring Argentina offered
them in 2005 and again in 2010. These “hold-outs”, balking at
the 65% haircut the restructuring entailed, not only persuaded
a judge that they should be paid in full but also got him to
freeze payments on the restructured bonds until Argentina
coughs up.
Argentina claims that paying the hold-outs was impossible.
It is not just that they are “vultures" as Argentine officials often
put it, who bought the bonds for cents on the dollar after the
previous default and are now holding those who accepted
the restructuring (accounting for 93% of the debt) to ransom.
The main problem is that a clause in the restructured bonds
prohibits Argentina from offering the hold-outs better terms
without paying everyone else the same. Since it cannot afford
to do that, it says it had no choice but to default.
Yet it is not certain that the clause requiring equal treatment
of all bondholders would have applied, given that Argentina
would not have been paying the hold-outs voluntarily, but on
the courts' orders. Moreover, some owners of the restructured
bonds had agreed to waive their rights; had Argentina made a
concerted effort to persuade the remainder to do the same, it
might have succeeded. Lawyers and bankers have suggested
various ways around the clause in question, which expires at
the end of the year. But Argentina's government was slow to
consider these options or negotiate with the hold-outs, hiding
instead behind indignant nationalism.
Ms Fernández is right that the consequences of America's
court rulings have been perverse, unleashing a big financial
dispute in an attempt to solve a relatively small one. But hers
is not the first government to be hit with an awkward verdict.
Instead of railing against it, she should have tried to minimise
the harm it did. Defaulting has helped no one: none of the
bondholders will now be paid, Argentina looks like a pariah
again, and its economy will remain starved of loans and
investment.
Happily, much of the damage can still be undone. It is not
too late to strike a deal with the hold-outs or back an ostensibly
private effort to buy out their claims. A quick fix would make
it easier for Argentina to borrow again internationally. That, in
turn, would speed development of big oil and gas deposits,
the income from which could help ease its money troubles.
More important, it would help to change perceptions of
Argentina as a financial rogue state. Over the past year or
so Ms Fernández seems to have been trying to rehabilitate
Argentina's image and resuscitate its faltering economy. She
settled financial disputes with government creditors and with
Repsol, a Spanish oil firm whose Argentine assets she had
expropriated in 2012. This week's events have overshadowed
all that. For its own sake, and everyone else's, Argentina
should hold its nose and do a deal with the hold-outs.
(http://www.economist.com/news/leaders/21610263. Adapted)
According to the sixth paragraph,
