The recession that resulted in the crisis lasted between 1999 and 2002; of the USD82 billion in defaulted bonds, 51% were issued during that interim.
Argentina defaulted on a total of USD93 billion of its external debt on December 26, 2001. Foreign investment fled the country, and capital flow toward Argentina ceased almost completely during 2002 and 2003.
The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly to nearly 4-to-1, producing a sudden rise in inflation to over 40% and a fall in real GDP of 11% in 2002.
Large-scale debt restructuring was needed urgently, since the debt had become unpayable. The Argentine government met severe challenges trying to refinance its debt, however.
Creditors (many of them private citizens in Spain, Italy, Germany, Japan, the U.S., and other countries, who had invested their savings and retirement pensions in debt bonds) denounced the default; this included bondholders from Argentina itself, estimated to comprise about a fourth of affected bondholders.
Refinancing efforts were further undermined by the George W. Bush administration policy of vetoing proposals to create a mechanism for sovereign debt restructuring.
The freeze enraged many Argentines who took to the streets of important cities, especially Buenos Aires. They engaged in protests that became known as cacerolazo (banging pots and pans). These protests occurred especially in 2001 and 2002. At first the cacerolazos were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign-owned privatized companies, and especially big American and European companies.
Amid rioting, President Fernando de la Rua resigned on 21 December 2001.
Confrontations between the police and citizens became a common sight, and fires were set on Buenos Aires avenues. De la Rúa declared a state of emergency, but the situation worsened, precipitating the violent protests of 20 and 21 December 2001 in Plaza de Mayo, where clashes between demonstrators and the police ended up with several people dead, and precipitated the fall of the government De la Rúa eventually fled the Casa Rosada in a helicopter on 21 December.
Following presidential succession procedures established in the Constitution, the Senate chairman was next in the line of succession in the absence of president and vice-president.
Accordingly, Ramón Puerta took office as a caretaker head of state, and the Legislative Assembly (a body formed by merging both chambers of the Congress) was convened.
By law, the candidates were the members of the Senate plus the Governors of the Provinces; Adolfo Rodríguez Saá, then governor of San Luis, was eventually appointed as the new interim president.
During the last week of 2001, the Rodriguez Saá government defaulted on the larger part of the public debt, total US$132 billion. The amount approximately represented one seventh of all the money borrowed by the Third World.
Politically, the most heated debate involved the date of the following elections—proposals ranged from March 2002 to October 2003 (the end of De la Rúa’s term).
Rodríguez Saá’s economic team came up with a scheme designed to preserve the convertibility regime, dubbed the “Third Currency” Plan. It consisted of creating a new, non-convertible currency called Argentino coexisting with convertible pesos and U.S. dollars. It would only circulate as cash (checks, promissory notes or other instruments could be denominated in pesos or dollars but not in Argentinos) and would be partially guaranteed with federally managed land—to counterbalance inflationary tendencies.
Argentinos having legal status would be used to redeem all complementary currency already in circulation—whose acceptance as a means of payment was quite uneven. It was hoped that convertibility would restore public confidence, while the non-convertible nature of this currency would allow for a measure of fiscal flexibility (unthinkable with pesos) that could ameliorate the crippling recession. Critics called this plan merely a “controlled devaluation”; its advocates countered that since controlling a devaluation is perhaps its thorniest issue, this criticism was a praise in disguise. The “Third Currency” plan had enthusiastic supporters among mainstream economists (the most well-known being perhaps Martín Redrado, a former central bank president) citing technical arguments.
First, litigation against Argentina before New York courts derives from the cataclysmic crisis suffered by my country in 2001-2002, the worst in its history.
In 2002, public debt as a percentage of GDP reached 166%. The consequences for our economy and our people were devastating.
With an unemployment rate exceeding 21%, Argentina was at a critical juncture, with a paralyzed economy and a dire political situation, struggling to preserve social cohesion.
Argentina began a process of debt restructuring on January 14, 2005, that allowed it to resume payment on the majority of the USD82 billion in sovereign bonds that defaulted in 2002 at the depth of the worst economic crisis in the country’s history. A second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, though ongoing disputes with holdouts remained.
Bondholders who participated in the restructuring have seen the value of their bonds rise and have been paid punctually.
Economic recovery eventually allowed Argentina to offer large-scale debt swaps in 2005 and 2010; the first brought 76% of bonds out of default and the second, 93%.
The terms of the debt exchanges were not accepted by all private bondholders, and these became “holdouts.” The IMF initially lobbied for the holdouts until Argentina’s lump-sum repayment to the IMF in January 2006.
Individual creditors worldwide, who represent about one third of this group, have mobilized to seek repayment from the Argentina state.
Among them are Task Force Argentina, an Italian retail bondholder association, and Mark Botsford, a private U.S. citizen retail bondholder. Italian nationals had become the largest group of foreign retail investors in Argentine bonds when during the 1990s, banks in their country purchased USD14 billion in bonds and then resold them to nearly half a million investors; the vast majority rejected the first swap but accepted the second.
Holdouts retained a total of USD4 billion in bonds as of 2013.
Vulture funds, which owned USD1.3 billion of this total, sued to be repaid at 100% of face value for purchased for cents on the dollar, filing injunctions to attach future payments to other bondholders by way of forcing Argentina to settle.
A similar strategy had been successfully pursued by vulture funds against Peru and a number of African nations as well.
The American Task Force Argentina, sponsored by the Cayman Islands-based vulture fund NML Capital Limited, is the most prominent and best financed lobbying group against Argentine bond restructuring efforts, spending over $7 million lobbying U.S. Congressmen and becoming the top campaign contributor to a number of these; the most prominent, former Western Hemisphere Subcommittee Chair Connie Mack IV , became the main sponsor of a bill in 2012 designed to force Argentina to pay NML nearly $2 billion before losing his Senate bid that year.
Argentina has still not been able to raise finance on the international debt markets for fear that any money raised would be impounded by holdout lawsuits; their country risk borrowing cost premiums remain over 10%, much higher than comparable countries.
Consequently, Argentina has been paying debt from central bank reserves, has banned most retail purchases of dollars, limited imports, and ordered companies to repatriate money held abroad.
Nevertheless, between 2003 and 2012 Argentina met debt service payments totaling USD173.7 billion, of which $81.5 billion was collected by bondholders, $51.2 billion by multilateral lenders such as the IMF and World Bank, and $41 billion by Argentine government agencies.
Public external debt denominated in foreign currencies (mainly in dollars and euros) accordingly fell from 150% of GDP in 2002 to 8.3% in 2013.
In June 2013 a Belgian court declined to issue judgment in favor of the creditors to distrain Argentinian diplomatic bank accounts.
In July 2013 a German court ruled in favor of Argentina on the basis of the Pari passu clause.
Also in July 2013, the French government planned to file an amicus brief in favor of the Argentinian position at the US Supreme Court, said Finance Minister Pierre Moscovici, while the IMF declined to intervene.
In August 2013, the Government of Argentina lost an U.S. appeals court case and was told it had to repay the full face value amount to these holdouts.
A third debt restructuring offer to remaining holdouts on similar terms to the 2010 swap was announced on August 27, 2013.
A dispute between Argentina and holdouts has been ongoing since at least the 2005 debt restructuring
Holdout portfolios represented of 6% of the debt (USD 4 billion) in 2013; of the USD4 billion in bonds owned by holdouts in 2013, USD 1.3bn were held by Cayman Islands-based NML Capital Limited and U.S.-based hedge funds Aurelius Capital Management and Blue Angel.
Bondholders who instead accepted the 2005 swap (three out of four did so) saw the value of their bonds rise 90% by 2012, and these continued to rise strongly during 2013.
Vulture funds that rejected the 2005 and 2010 offers to exchange their defaulted bonds resorted instead to lawsuits to block payments to other bondholders and attempts to seize Argentine government assets abroad – notably Central Bank deposits in the Federal Reserve Bank of New York, the presidential airplane, and the ARA Libertad.
The Libertad, an Argentine Navy training frigate, was seized at the behest of NML Capital for ten weeks in late 2012 in the port of Tema, Ghana, until the International Tribunal for the Law of the Sea ruled unanimously that it be released.
The dispute limited Argentina’s access to foreign credit markets as well; in October 2012 Argentina’s theoretical borrowing costs were 10.7%, double the average for developing countries.
Although Argentina has not raised money on the money markets since the default, the state-owned oil company YPF has already placed debt in the financial markets to finance its investment programme in years to come.
NML Capital Limited, a Cayman Islands-based offshore unit of Paul Singer’s Elliott Management Corporation, purchased the majority of their holdings in 2008, paying an estimated USD49 million for one series of bonds whose face value was over USD220 million.
They in turn established the American Task Force Argentina lobbying group against Argentine bond restructuring efforts, and sued to attach Argentina’s ongoing payments to the bondholders who had participated in the earlier restructuring.
During the 2000s, Paul Singer’s lawyers initially obtained several large judgments against Argentina (all of which were affirmed on appeal), but soon discovered that due to a number of sovereign immunity laws, it was impossible to actually enforce those judgments against the handful of Argentine assets still within the reach of U.S. jurisdiction. They then reexamined their strategy and decided to attach Argentina’s ongoing payments to the bondholders who had participated in the 2005 and 2010 restructuring.
The basis of this new strategy arose from a strategic error on Argentina’s part which was rooted in its history. Because Argentina was historically so unstable, it would have been difficult for it to solicit investors to buy bonds in Buenos Aires under Argentine jurisdiction, as few external investors trusted Argentina courts to enforce bonds against their own government. This consideration led Argentina to transfer the issue of bonds to New York, under United States law, on April 20, 1976, as were most subsequent bond issues.
Bonds were thus under a special kind of bond contract, a “Fiscal Agency Agreement” which was drafted by its American attorneys under New York law. The FAA stipulated that the repayments on the bonds were to be made by Argentina through a trustee based in New York (meaning that the U.S. courts did have jurisdiction over that party to order injunctive relief).
In the Fiscal Agency Agreement, Argentina’s attorneys included a boilerplate pari passu clause, but neglected to include a collective action clause. As a result, Argentina could not force NML Capital or the other holdouts to participate in the 2005 or 2010 restructuring.
Even worse, the pari passu clause was interpreted by U.S. courts as meaning that Argentina could either pay all its bondholders or none, but could not pay only those who cooperated with the 2005 restructuring and ignore the rest.
This was considered to be fair by the U.S. courts because Argentina was bound by its attorneys’ actions; having enjoyed the benefit of New York law and access to New York capital markets, it now had to bear the burden.
As of February, 2013, after adverse decisions which would require full payment by Argentina, NML Capital’s claim remained before the United States Court of Appeals for the Second Circuit (New York).
The decision of the appeals court favored NML and a motion for rehearing en banc was denied on March 26.
Large banks, investors, and the U.S. Treasury Department objected to the judge’s order, expressing concern over losses that would be incurred by bondholders and others, as well over disruption in the bond markets. Vladimir Werning, executive director for Latin American research at JPMorgan Chase, observed that vulture funds “are trying to block the payments system” in the U.S. itself, something “unprecedented in the New York jurisdiction.” Kevin Heine, a spokesman for Bank of New York Mellon, which handles bond payments, said the ruling “will create unrest in the credit markets and result in cascades of litigation, which is precisely the opposite effect that an injunction should have.”
The American Bankers Association agreed, noting that “permitting injunctions that preclude pre-existing obligations whenever expedient to enforce a judgment against the debtor will have significantly adverse consequences for the financial system.”
Argentina was given until March 29, 2013, to present a payment plan; but despite offering the holdouts significant returns (284% in the case of NML), the new repayment plan offered by Argentina was judged unlikely to be acceptable to the New York court.
The payment formula proposed by the district court would imply a 1380% return for NML.
On August 23, 2013, the United States Court of Appeals for the Second Circuit affirmed the lower court’s verdict and dismissed said plan.
The ruling determined that holdouts should be repaid the full face value, and on highly unequal terms to the 93% who had accepted the 2005 and 2010 swaps at a 70%-75% discount.
A court in Germany has backed Argentina on the basis of the equal terms clause; and the ruling may be unenforceable, because the U.S. Justice Department does not want to create the precedent of overturning the Foreign Sovereign Immunities Act or forcing a default of 93% of the holders of a debt issue for the sake of ensuring the payment to holdouts.
Argentina’s officials proposed placing the restructured bonds in question under Argentine law, while concurrently announcing a renewed bond swap offer.
The expiration of Rights Upon Future Offers in December 2014 will preclude bondholders from suing for better terms should the Argentine Government and the vulture funds settle, however, which makes such a settlement all the more likely after that date.
The United States Supreme Court on 7 October 2013 declined to hear a preliminary appeal filed by Argentina following the Second Circuit ruling, though this in effect maintained the stay against the adverse Griesa ruling due to related litigation in the lower courts until such time as the Griesa court can issue an attachment order; Argentine bonds rose on the news.
The possibility that holdout creditors can attach future payments on restructured debt and receive better treatment than cooperating creditors distorts incentives, can derail efforts for a cooperative restructuring, and may ultimately lead to the U.S. no longer being viewed as a safe place to issue sovereign debt.
Alternate viewpoints abound, for example that Argentina is an “outlier in the history of sovereign restructuring”.
It is likely to be of particular importance in cases in which the creditors are being asked to accept substantial debt and debt service reduction; however, it is unclear given the special circumstances of the Elliot/NML case whether it will be broadly applicable to holdouts in other restructuring.