Argentina’s default: Here’s what’s happening

Jul 30, 2014 21:20 UTC

Argentine economy minister Axel Kicillof

Welcome to #GrieFault day. That’s twitter’s hashtag for the Argentine technical default, caused largely by a series of court rulings by U.S. federal court judge Thomas Griesa, which was triggered this afternoon. That is to say that the ratings agency S&P cut the country’s credit rating to selective default. The country’s representatives are still negotiating with bondholders in Manhattan as of this writing. This was the story yesterday:

After missing an interest payment on its bonds on June 30 (previous coverage in the saga here and here), the country had a 30 day grace period to reach a settlement with its holdout creditors — mostly the hedge fund Elliott Management — in order to avoid default. That grace period is up Wednesday.

As Matt Levine points out, Argentina is obligated to pay today in all of the different places it has bondholders (there are peso, dollar, euro, and yen-denominated bonds). Because of time zone complications, Argentina is now technically in default (according to one credit agency), but the details are unclear. The important point is negotiations are ongoing. Here’s what we know about those, according to various Reuters stories:

Last night the country’s economy minister, Axel Kicillof, showed up in Manhattan to finally have those talks they were ordered to have roughly 30 days ago. It seems Argentina has something of a plan, wherein a consortium of Argentine banks scoops up the debt held by the holdouts. A senior banking executive familiar with the offer told Reuters today that “the idea is to sit down with the funds and buy all their debt. We have to negotiate the final amount, the terms and how payment will be made.”

Another Reuters report confirms that “negotiations are now revolving around how much local banks need to deposit as a goodwill gesture to give Adeba time to negotiate a way to pay holdouts themselves.”  The banks would presumably be much more amenable to the plight of the Argentine government, which currently doesn’t have the money to cover its outstanding bonds in the event of a default, largely (the government thinks) because of the Rights Upon Future Offers (RUFO) clause on its bonds.

Joan Magee and Davide Scigliuzzo explain Argentina’s argument: The RUFO clause “prohibits it from voluntarily paying the holdouts, who are demanding full payment on their bonds, better terms than the 25 to 29 cents on the dollar the other investors accepted … Argentina fears that it may face billions of dollars of claims from investors who accepted the restructuring should it pay the holdouts in full.”

This would be Argentina’s second default in 12 years, and one in a series of economic crises over the last century. For the truly nerdy (like us), Reuters has compiled a chronological history of major problems in the Argentine economy.

UPDATE: Kicillof is scheduled to hold a press conference at the Argentine consulate in New York at 5:30 pm. Updates forthcoming. The press conference is live here (in Spanish).

Reuters is reporting that Argentina’s debt mediator, Daniel Pollack, says that Argentina “will imminently be in default.” The full statement from Pollack is here. During his press conference, Kicillof dug his heels in. He didn’t reach an agreement with what Argentina calls the “vulture funds” after offering them the same terms as previous debt swaps. He repeated much of what Argentina has said in the past: Argentina paid its June 30 interest payment (Judge Griesa ordered Bank of New York Mellon to return it), it doesn’t make sense to have a deal with the hedge funds and not other holdouts, the country will make every effort to continue to service the exchanged debt. Kicillof also says he will return to Argentina today

Dancing around a default

Jul 29, 2014 21:51 UTC

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Argentina is down to the wire — the likelihood it will default tomorrow is extremely high. After missing a $539 million interest payment on its bonds on June 30 (previous coverage in the saga here and here), the country had a 30-day grace period to reach a settlement with its holdout creditors — mostly the hedge fund Elliott Management — in order to avoid default. The clock runs out on Wednesday.

While the federal judge presiding over the case between the sovereign nation and the fund has ordered the country’s representatives to sit down with Elliott continuously to try to hammer out a settlement agreement, they have so far not spent more than a few hours in negotiations. So what happens if the country defaults? The question is complicated, and there won’t be clear cut answers until a default actually happens (and, probably, lawsuits ensue). Here are some thoughts:

Felix Salmon says there could be a benefit to defaulting, since everyone knows that Argentina has the money to pay its exchange bondholders (those that did restructure debt from the 2001 default), it is just being help up on a legal technicality. By defaulting, “Argentina could stop making its coupon payments for a while, and use the money instead on desperately-needed projects back home.” And while default is generally a bad political move, all Argentine president Cristina Fernández de Kirchner has to do is point her finger at the U.S. judge who forced her hand.

The Financial Times reports that “economists broadly expect a recession in the country would deepen, inflation to rise and capital flight – possibly triggering a second devaluation of the peso this year.” Indeed, while default may not have as big of an effect on the country in international capital markets (which it has been locked out of for ages anyway), it almost certainly will be an issue for the domestic economy. In the event of a default, writes David Gaffen, “Argentines would likely increase their dollar holdings, and would put severe pressure on foreign reserves, which aren’t all that great to begin with. With inflation at about 30 percent, this isn’t a fun option.”

Then, there’s RUFO. One of the big reasons that Argentina has so far refused to negotiate is because of the Rights Upon Future Offers clause on the bonds that were exchanged during the restructuring. “The clause entitles them to the upside if Argentina ‘voluntarily’ makes a better offer to the creditors who stayed out (that’s NML [Capital] and co) before 31 December 2014,” writes Joseph Cotterill. This likely means that if Argentina settles with the holdouts before the end of the year, the exchange bondholders will also be entitled to more money, which Argentina simply cannot afford. Emerging market strategist Michael Roche told Bloomberg that investors think “the default will be cured after the RUFO clause expires, so the degree of panic isn’t great.”

The question is, what happens between tomorrow and December 31? Some exchange bondholders have submitted they are willing to waive RUFO clause rights. But whether that’s enough to get Argentina to settle is another question entirely. We’ll know soon enough. — Shane Ferro

On to today’s links:

JP Morgan’s trading revenue fell, so it’s cutting hundreds of back office employees – Bloomberg

Morgan Stanley junior bankers get 25 percent bigger salaries, smaller bonuses – Bloomberg

Sad Declines
20 percent poorer than it was in 1984: “Nostalgia is just about the only thing the middle class can still afford” – Matt O’Brien

Subtle Hints
The simplest idea for the TSA’s $15,000 “help us speed up airport lines” competition: get rid of the TSA – Jenna Kegel

Please Update Your Records
Your artisanal whiskey probably is not so much handcrafted as factory-made – The Daily Beast

Goldman Sachs says it’s Too Big To Sue for gender discrimination – Matthew Zeitlin

Giant American fridges waste money, pollute unnecessarily, and make you fat – Gawker

A third of consumers with credit files had debts in collections last year – Jonnelle Marte

Just because large retailers pay better than small ones doesn’t mean they pay well – Nick Bunker

Privatize Everything
“Citizens don’t have an automatic right to more than the water they require for mere ‘survival’” – The Guardian

The problem with universal basic income: the U.S. is bad “at replacing complexity with simplicity, and then leaving well enough alone” – The Conversable Economist

Argentina pays

Jun 30, 2014 21:48 UTC

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When we left off two weeks ago, the Supreme Court denied to hear the Elliott v. Argentina case. Federal district court judge Thomas Griesa’s decision stands, giving the sovereign nation until today to either pay its holdout creditors (who did not restructure their bonds when the country defaulted in the early 2000s), settle with them, or default on its debts again. In the interim, Argentina has attempted to do anything but those three things. “Argentina is not lying when it says that it simply can’t afford to do what the U.S. courts are demanding of it — which is to pay all the holdouts in full,” writes Felix Salmon.

Last week, Argentina attempted to do exactly what Judge Griesa told it not to: it deposited the $539 million in interest payments due to its (non-holdout) bondholders with the Bank of New York. After that, “things went variously pear-shaped in court,” says Matt Levine. More specifically, Judge Griesa ordered the payment nullified. “This payment is illegal and will not be made. Anybody who attempts to make it will be in contempt of court,” he said, ordering the Bank of New York to return Argentina’s money.

This morning, Argentina took out a full page ad in the Financial Times, declaring that Judge Griesa is biased in favor of the “vulture funds” (the holdouts). Argentina, it seems, is about to default, despite having technically sent the money to New York. “Naturally, given the bizarro world of the pari passu saga, this announcement is headlined ARGENTINA PAYS,” says Joseph Cotterill. Further, Matt Levine writes in another post that “if your goal is to maintain access to the international capital markets, a technical argument that you’ve paid your debts isn’t nearly as good as actually getting money to your creditors.” If you are interested, that post also contains a fair amount of speculation about various interesting ways Argentina could try to make technical end-runs around the U.S. legal system to pay its bills without defaulting.

While the interest payment was technically due today, the world could be in for another month of drama. “Argentina has a 30-day grace period to try to reach a deal with the holdouts. If it cannot, it will be in default by the end of July,” writes William Alden.

The larger point here, though, is probably Felix’s: no matter what Argentina does, this ruling has broad implications for international finance. “The ruling will make it more difficult for countries to free themselves from the burden of over-indebtedness. It will be very bad for international capital markets. Oh — and it will also diminish national sovereignty,” he says. Martin Wolf and Joseph Cotterill talk about this, too, in an FT Alphaville video. “The most important thing is to have a process that makes possible renegotiation of the debt on not ludicrously easy terms for the debtor, because that destroys the whole market, and at the same time makes it possible that this doesn’t go on forever,” says Wolf. — Shane Ferro

On to today’s links:

“Globally, cash is a major tool to fight extreme poverty” - Paul Krugman

Email, the cockroach of the internet - David Carr

Banks won’t be getting rid of business travel anytime soon - The Epicurean Dealmaker

Ocean acidification related to climate change is threatening oyster populations - Bloomberg

Primary Sources
The Harris v. Quinn decision throws up a big roadblock for the future of public sector unions - SCOTUS

Your Daily Outrage
Residents in Janet Yellen’s neighborhood dislike her security because of huge cars, ugly uniforms, “doughnut bellies” - WSJ

Long Reads
New York real estate can be a convenient way to park (or hide or launder) money for rich foreigners - NY Mag


Argentina’s bills come due

Jun 17, 2014 19:57 UTC

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Argentina lost not one but two Supreme Court cases on Monday regarding paying back bonds that it issued before its 2001 default. First, in what Noah Feldman calls a “legally surprising, financially worrisome, and internationally questionable” move, the court declined to hear Argentina’s appeal regarding the Second Circuit decision last fall. In that case, the court found in favor of Paul Singer’s hedge fund Elliott Management, a “holdout” bondholder that did not agree to Argentina’s debt restructurings in 2005 and 2010 after its 2001 default. Second, and somewhat tangentially, the court found in a 7-1 decision that NML Capital, a subsidiary of Elliott, can seek information about Argentina’s finances to get its money back from the country.

By declining to hear the big case, the court “made final and binding” lower court decisions that Argentina is required to treat its bondholders equally says SCOTUSblog. (Felix Salmon has a good explanation of that ruling, and a video explainer of the whole case here.) This is big not only for Argentina, but for future sovereign debt cases litigated in the United States. “Pari passu will now be enshrined as a powerful enforcement device in New York-law sovereign debt”, says Joseph Cotterill. Peter Eavis thinks this could be a good thing, writing, “Once countries realize that it is harder to get an advantageous deal when defaulting, they may be less likely to take on too much debt”. (Salmon disagrees.) Practically, this “raises the cost to banks which are still dealing with Argentina or other defaulting nations”, says Tyler Cowen.

“Roughly speaking, this moves out of being a judicial matter and becomes a political and financial matter,” international litigator Henry Weisburg told MoneyBeat. Argentina’s options from here are: settle with NML Capital, default on its debt again, or try to find some way around the American legal system.

Plans to try to set up an alternate system of paying bondholders outside of the United States leaked earlier this month, but it’s unclear whether Argentina can get that together in time, not to mention whether current bondholders would have any interest, writes Tim Fernholz.  Another default, says Matt Yglesias, would be bad for all its bondholders, not to mention terrible for its weak economy. “The only ultimate answer is for Argentina to settle, whenever it thinks it has the best negotiating leverage”, writes Cottrill, even though the sovereign’s past reluctance to take this step is what brought it to the Supreme Court in the first place.

Argentina’s president, Cristina Fernandez de Kirchner, made a speech yesterday (full text in Spanish) mostly holding the longstanding Argentine line on this, which in this case amounts to stalling. “It’s our obligation to take responsibility for paying our creditors, but not to become the victims of extortion by speculators”, she said. Ed Stoker at the FT reports that “Argentina has hinted it might consider negotiating with holdouts but could not do so until after December 31, when a clause in its debt swaps prohibiting it from offering holdouts better terms expires”. That’s a little late, since Argentina’s bondholders are scheduled to be paid next on June 30. –Shane Ferro

On to today’s links:

The Singularity
Personalized ads are creepy when they hit their target, but even creepier when they just barely miss it – Sara Watson

Finally, the case against the buzzword driving everyone batty – Kevin Roose

Your Daily Outrage
As many as 25% of all public company deals could involve insider trading – Patrick Augustin, Menachem Brenner, and Marti G. Subrahmanyam

Charting global real-estate bubbles – Jordan Fraade
Housing starts for early 2014 are up 6.5%, but single-family construction is still lagging – Bill McBride

The drug war has shifted violence in Mexico away from your vacation spots, towards everywhere else – Armin Rosen

Damn Kids
“The facts show that the D.C. market is for people who are single and relatively affluent” – Robert Samuels

America’s own sovereign debt crisis

Oct 30, 2013 22:09 UTC

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A Puerto Rican bond crisis is approaching. The territory (suzerainty, actually) is “one of the municipal bond market’s most prolific debt issuers, with around $70 billion in debt outstanding” according to the WSJ, and its bonds are just barely holding on to investment grade ratings. In September, the territory drastically cut down on its borrowing through the end of 2013 after yields on its outstanding bonds rose higher than Greece’s. Its 5-year CDS mid-spread is over 700 basis points, and S&P gives it a 78% probability of defaulting. Simone Foxman points out that yields on its municipal bonds have doubled in the past year.

Some 75% of muni funds hold some Puerto Rican sovereign debt, according to Matt Zeitlin. Two UBS Puerto Rico bond funds have already lost some 85% of their value, while the Franklin Double Tax-Free Income fund, which has a 60% exposure to Puerto Rico, has fallen “a harrowing 15.7 percent in just the last five months”, according to Bob Adelmann. Last Thursday, the SEC announced it would start looking into mutual funds holding Puerto Rican debt, “to get a sense of their exposure and how they’re managing it”.

If Puerto Rico defaults on its debt, it’s not clear what would happen. Mary Williams Walsh compares it to Detroit, but says that the territory is “is in a legal twilight zone. Territories, like states, have no ability to declare bankruptcy”. Sovereign debt relief for a territory that is not actually sovereign is almost completely without precedent. (Walsh adds the Northern Mariana Islands tried, unsuccessfully, to declare bankruptcy in 2012.)

“Underneath the storm of bond payments is the question of how Puerto Rico will grow again”, writes Cate Long. In 2006, tax incentives for American companies doing business in the territory were repealed, leading the companies doing business there to simply move their profits to the Cayman Islands, and leading to an economic downturn that could take another 13 years to recover from, according economist Heidie Calero. PR’s real growth has rate averaged only 0.4% over the past decade; both public and private sector investment has dropped off; and unemployment has been above 10% for years (peaking above 16% in 2010).

The Economist makes the case that Puerto Rico may become America’s Greece:

Like Greece, Puerto Rico is a chronically uncompetitive place locked in a currency union with a richer, more productive neighbour. The island’s economy is also dominated by a vast, inefficient near-Athenian public sector. And, as with Greece, there are fears that a chaotic default could precipitate a far bigger crisis by driving away investors, and pushing up borrowing costs in America’s near-$4-trillion market for state and local bonds.

Long made the same comparison six months ago, with the important caveat that Puerto Rico has no EU for a bailout. “If the U.S. Congress or Federal Reserve bailed out Puerto Rico, then they would have to bail out Illinois and California. And that is not going to happen.” — Shane Ferro

On to today’s links:

Unintended Consequences
How Europe’s pharmaceutical companies could stop America’s death penalty – Motherboard

A great profile of the Machiavellian, yoga-practicing, activist hedge fund manager Dan Loeb – William Cohan

Why Twitter just turned itself inside out – John Herrman

The Fed
Fed still not tapering QE, “fiscal policy is restraining economic growth” – The Fed
How the Fed statement changed from September to October – WSJ

The logic of stupid poor people – Tressie McMillan Cottom

Data Points
Just tell me the good news: new research shows when investors check their portfolios – SSRN

Primary Sources
Inflation low – BLS

Phil Gramm likens bank fines to extortion – Max Abelson

Old Normal
“The women who some time ago took up the pastime of high finance seemed yesterday on the verge of returning to bridge” – NYT, Oct. 30, 1929

SAC will reportedly plead guilty to securities fraud – WSJ
“Hedgez is doing for investors and hedge funds what sites like and OkCupid do for singles”- Bloomberg Businessweek

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