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Argentina vs. the vultures: no clear winners, many losers

Added 24 Jul 2014
Guest blog by Alan B. Cibils, Chair of the Political Economy Department, Universidad Nacional de General Sarmiento, Buenos Aires, Argentina

The tug-of-war between Argentina and the vulture funds, with US judge Griesa as the not-so-impartial referee, appears to be heading for an outcome that will leave many losers and no clear winners. Once the US Supreme Court decided not to take the Argentine case against the vulture funds, Argentina’s options were severely restricted: negotiate with the vultures, or ignore the US court’s ruling and enter a “technical” default until an alternate, non-US, route to pay bond-holders could be established.

The clause that ties Argentina’s hands

Despite combative official rhetoric against the vulture funds and Judge Griesa, Argentina opted for trying to reach a negotiated settlement with the vulture funds. However, there is one main obstacle to a prompt agreement: the RUFO clause. When Argentina restructured its defaulted debt (in 2005 and 2010), all of the new bonds had a “Rights Upon Future Offers” (RUFO) clause which stated that if Argentina were to voluntarily make a better offer to any defaulted creditor before December 31st 2014, then the holders of restructured bonds would have the right to the same, improved, offer. Given the roughly 50% capital reduction on the restructured bonds, the RUFO clause was an incentive for defaulted bond-holders to accept Argentina’s offer.

So here is the issue: Argentina was ordered by the US court to pay the vulture funds the full value of the bonds with no capital reduction. Therefore, if Argentina were to reach an agreement with the vulture funds before January 1, 2015, it could be subject to a large number of lawsuits by bond-holders who entered the debt restructuring swap under a clause that said they are entitled to the same deal. Avoiding this scenario is a top priority for the Argentine government, since it could result in an unsustainable increase in Argentina’s public debt.

A stay on enforcement could be a way out

The Argentine government’s strategy, therefore, has been to request a stay on the US court’s ruling. This would enable Argentina to continue to pay its current debt obligations through the US financial system, while at the same time postponing any agreement with vulture funds beyond the expiration date of the RUFO clause.

However, Judge Griesa did not agree and on July 22nd, once again, denied Argentina’s request. Given the July 30th deadline for Argentina’s next scheduled debt payment, this means that time is running out for a reasonable solution to the problem.

Is it time to let the clock run down?

Argentina’s options are increasingly narrow—its main option could be to let the clock run down. If this were to happen, US and European bond-holders who accepted Argentina’s restructuring offer in 2005 and 2010 would not get paid on schedule. Interestingly, Argentina deposited the funds for this payment in the Bank of New York Mellon in late June, so non-payment would be due to the judge’s intransigence and not an unwillingness by the Argentinian government to pay. This would be the first time in history that a country failed to meet its debt service due to a court ruling.

Find alternative payment routes?

If Argentina were to be forced to find alternate payment routes, outside the reach of the US courts, the vulture funds would probably be the biggest losers. Once an alternate payment route is implemented, the vultures will have increasingly less leverage as Argentina will be avoiding the US financial—and legal—systems.

However, this scenario would also hurt Argentina. First, it would temporarily thwart all possibilities of regaining access to capital markets. This has been a government objective for the last year, which explains the agreements with the Paris Club and the World Bank’s International Court for the Settlement of Investment Disputes. Second, it would also imply that Argentina would be in contempt of the US legal system. This could have innumerable and unpredictable ramifications, not only for the government but for private actors as well.

An impartial court for the settlement of defaults

There is an important lesson to be had from Argentina’s experience with the vulture funds: the international system needs an impartial international court for the settlement of sovereign defaults. Until a global and fair framework is implemented, vulture funds and speculators will have the power to hijack successful debt restructuring experiences.