Argentina: Default scenarios
(Global Macro | Latin America) Last week we saw Argentina giving its final arguments in the court of New York, against creditors. Bondholders that saw their returns vanish after Argetina stop paying in 2002Q1. An although a $100+ billion exchange wrote off 70% of the original debt, there is a vast amount of "hold outs": angry creditors seeking for asset seizing, freezing and payment. But the South American government has refused to cede grounds to the holdouts it calls "vulture funds": approximataley $1.3 billion in debt, arguing implausible arguments (e.g. "the amended injunctions violate the public interest" because there could be a massive migration of business from both sovereign and clients to other countries with a different law system; or because it reduces the power a sovereign has to deal with its own crsiss using restructuring"). The truth of the matter is that if Federal Judge Thoma Griesa forces Argentina to pay the $1.3 billion to holdouts, it could provoke other claims to materialization, bringing an additional $43 billion to the matter. That would be the fastest way to default.
A noisy London 'Claws off Argentina' protest outside the offices of Elliot Associates by Jubilee Debt Campaign on eve of New York's appeal, which calls on them to stop their attack on Argentina and drop the $1.2 billion claim. See more pictures at http://www.demotix.com/news/1831109/protesters-tell-vulture-funds-claws-...
1) Argentina is being sued by a group of exchange bondholders, with Elliott Management Corp.’s NML Capital Fund and Aurelius Capital Management on the center.
2) These investors bought Argentine debt at a very low price as the country suffered from a massive debt crisis back in 2000. By late 2000 a default was inminent. In late 2001 Argentina finaly defaulted on its debt payments, 45% percent of the country total exports at that time.
3) Argentina offered an exchange later (2005), paying 25-35 cents for every dollar they owned. A later follow-on exchange (in 2010) increased total participation to more than 90%. However, NML et. al. continued refusing participation in the deal, demanding a 100% repayment. In October 2012, the New York court ruled that when Argentina makes payments to the creditors who agreed to the debt deal, it also has to make payment to NML. With repayments to vulture funds illegal under Argentinian law, this may force Argentina to default on its debt payments to all creditors.
4) New York High Court Judge Thomas Griesa ruled on November 21 that Argentina pays a holdout in full.
5) Argentina appealed. President Cristina Fernandez vowes (once more) never to pay anything to the plaintiffs she calls "vulture funds," which she accuses of trying to ruin Argentina's recovery from its 2002 economic collapse.
6) March 1st: In a speech to Congress on Friday, Fernandez endorsed the compromise offer of a new debt swap, which had been floated in December by her Economy Minister Hernan Lorenzino. The same day, the Court ordered Argentina to give explanations on how it would issue new bonds rather than comply with the $1.3 billion remaining debt, asking how, when and at what interest rates Argentina would pay installments on the new bonds. Fernandez has said that Argentina would pay debt holders at no better terms than those that were given to bond holders in the two previous debt swaps, who were paid 25-35 cents for a dollar they owned. "We are also prepared to pay these vulture funds, but not at terms that are better than the 93 percent who believed in and supported Argentina," she said.
What Argentina is trying to do here by all means is to avoid a somewhat fair "moral hazard isssue". In case they were forced to pay 100% of what Fernandez called "vulture funds", the country would face new demands by bondholders. We are talking about the 93% of bondholders who accepted to receive only 25-35 cents per dollar they owned in 2005 and 2007. That would imply paying or being forced to pay an additional 43 billion dollars, something that Argentina is not technically able & prepared to do. Such a scenario would imply Argentina's default. Yes, once more.
The effects of the trial on the bond performance are evident. Already 4 months ago Bloomberg pointed out "Dollar bonds due 2017 have tumbled 5.6 cents since Singer's Elliott Management Corp. on Nov. 6 sought an expedited ruling on whether Argentina must pay creditors of defaulted debt when it makes interest payments on more than $3 billion of restructured bonds next month. The notes, issued under New York law, fell to a record 74.71 cents on Nov. 9 after Judge Thomas Griesa said he will decide by Dec. 1 how much Argentina needs to pay so-called holdouts, the day before $42 million of interest comes due."
Three futuree scenarios
Wee see three posible scenarios for the future development of the appeal:
Scenario A: Argentina is forced to pay the remaining bondholders at a 100%: full payments to holdouts. Under this scenario, we first believe that Argentina would not pay because that would innevitably bring further trials with ex-bondholders, causing a sovereign crisis. Argentina can cleverely reroute the payments to another jurisdiction to protect against adverse ruling, and most likely they would do so. But this scenario implies high changes of seeing a default on Argentine's bonds, which would cause enormous damage to an already very unstable economy.
Scenario B: Argentina is forced to pay the remaining bondholders not necessarily at 100% full payment terms, but at better terms than those who settled for the first two agreements. The result would not change much from Scenario A.
Scenario C: The Court of Appeals rules that houdlouts should be paid under the same conditions that exchange bondholders faced back in 2005 and 2007. Fernandez has already stated that they would not mind paying under those terms. Default risk would decrease, causing prices of Argentine bonds to go slightly up and CDS spreads to decrease.
|Scenario A||30%||Notice that the market currently belives in this scenario strongly, which is reflected in the fact that CDS spread have started to increase.|
|Scenario B||30%||Because Scenario B and A produce the same outcome, we see the situation very delicate.|
|Scenario C||15%||Not even Argentinian lawyers find this likely.|
|Other outcome||25%||A middle ground solution with Argentina paying something betwen what it said it is willing to pay (25-35 cents) and what hodlouts are asking for.|
The court’s track record tell us that we ought to expect the final ruling to be announced in late May. Prepare for a possible Scenario A or Scenario B situation.