Elliot vs Argentina is a domestic Argentine issue

By Felix Salmon
November 24, 2012

If you want to follow all the ins and outs of Elliott vs Argentina in the mainstream press, you’ll soon find something very interesting. It’s a US case, in a US court, which is very likely to have profound consequences for both US markets in general and for one of America’s most diplomatically important laws, the Foreign Sovereign Immunities Act. But to a first approximation, the US press simply hasn’t noticed.

Most US outlets have carried a single dry and dutiful report, buried on an inside page, somewhere; the NYT didn’t even manage that, relying instead on a wire report from the AP in Buenos Aires. The WSJ has not been much better, although its report is notable for getting notoriously reclusive fund manager David Martinez* on the record — a sign that if they put their mind to it, US journalists could really add some value here.

By contrast, the FT has been all over the story, in detail, from the very beginning, out of London and Buenos Aires. Alphaville’s Joseph Cotterill has created the invaluable Pari Passu Saga Series, the newspaper splashed the news all over its front page this morning, and the combination of Jude Webber in Buenos Aires and Robin Wigglesworth in London has proved to be incredibly powerful and astute. Even accounting for the Thanksgiving holiday in the US, the disparity is striking. The best US newspaper coverage — which has come, singlehandedly, from Michelle Celarier at the New York Post — doesn’t even come close to competing. (Michelle and I share more than an interest in sovereign debt: we’re both former correspondents for the UK’s Euromoney.)

But by far the most detailed and voluminous coverage has come from the Argentine press, which has been covering the New York court case in extreme detail. Every time that Judge Griesa releases an opinion, it’s immediately uploaded to a multitude of Argentine news sites, and thousands of Anglophone readers flock to download everything he has said, and argue about what it means. This story is huge in Argentina — and unlike the last time that Argentina defaulted, in 2001, everybody has the internet and is following what’s going on, in extreme detail, online.

Which makes the AP report that the NYT ran with particularly fascinating. Most of the time news stories are interesting when they tell you something you don’t know; in this case, we have a news story which is interesting because it tells us something which isn’t actually true at all.

As with so many other things involving Argentina, this case is rooted in the bloody dictatorship that ruled from 1976 to 1983. The military junta more than tripled the country’s foreign debts. By 2001, the burden had become unsustainable and the economy collapsed. Argentina’s $95 billion default still stands as a world record.

Sovereign debt is supposed to be paid no matter who runs a country, but President Fernández has always considered this defaulted debt to be illegitimate, forced onto the Argentines by dictators acting in concert with international financial speculators. She and her late husband and predecessor, Néstor Kirchner, who took office in 2003, have never made any payments on the defaulted bonds.

In fact, Argentina’s world record was broken by Greece, but never mind that. Much more interesting is the way in which the AP’s Buenos Aires reporter, Michael Warren, is reflecting a very common view of things in Argentina — that Elliott’s debt is odious and illegitimate.

Note that Argentina itself, in Griesa’s courtroom, has never made this argument. Quite the opposite: Argentina has always held, at least in New York court, that Elliott’s debt is entirely legitimate, and indeed is just as legitimate as the debt held by exchange bondholders. It’s up to Argentina, as a sovereign nation, which creditors it pays and which it doesn’t — but Argentina, at least as a matter of law, has never denied that it owes Elliott the full amount it’s being asked to pay.

What’s more, the debt that Elliott holds was not, in any real sense, “forced onto the Argentines by dictators”, and the case is not “rooted in the bloody dictatorship that ruled from 1976 to 1983″. Yes, the junta ran up a lot of debts — and Argentina restructured those debts in its big Brady deal of 1992. By the time the junta-era debts had been restructured, Argentina’s debt was an entirely manageable 30% of GDP; even two years later, in 1994, it was just 31.4% of GDP. It was only in the late 1990s that the democratically-elected Argentine government of Carlos Menem started running up the country’s debts to unsustainable levels.

Menem, of course, was a Peronist, just like Cristina Fernández and her late husband — and so it would be hard for her to blame Argentina’s current predicament on him. Somehow, she has managed to persuade the Argentine public — and even AP reporters — that paying off Elliott would be tantamount to ratifying the actions of the military junta which lost power before most Argentines were even born.

All of which helps explain why absolutely everybody is convinced that given the choice between paying all of its creditors and paying none of them — the choice which Griesa is giving Argentina — Cristina will choose the latter. Even Mitu Gulati tells Christopher Spink that “Argentina is likely to default on the exchange bonds” — and Gulati is the frequent co-author of Lee Buchheit, of Cleary Gottlieb, which represents Argentina.

Essentially, there are two choices here. Argentina can somehow win its appeals; or it will end up defaulting on its exchange bonds. The outcome Griesa is trying to order — where Argentina pays its exchange bondholders and its holdouts, in full — is simply politically impossible in Argentina.

Of course, another Argentine default wouldn’t be the end of the story. It’s hard to pay bond coupons in dollars, even if the bonds are issued under Argentine law, without going through some US-based intermediaries — and Griesa could always try and intercept those payments if Argentina thumbs its nose at him and simply ignores his order. What’s more, Elliott Associates will, everybody believes, make a large amount of money in the CDS market if Argentina does default, and the Argentine government would love to stop that from happening, somehow. (They can’t prevent the fact that Elliott has already made a large sum in the CDS market, on a mark-to-market basis.)

And there’s a decent case to be made that Argentina’s debt is undervalued right now even if it does end up defaulting. So long as exchange bondholders are happy getting paid out of Argentina rather than New York, they will probably end up with every penny they’re owed — in dollars. There might well be an uncomfortable interregnum, but ultimately they’re more likely than not to get their money. So if you have a strong stomach, maybe the exchange bonds are a buy right here — precisely because many institutional investors don’t have strong stomachs, and have no desire to be holding onto defaulted sovereign debt.

In any case, in order to really understand what’s going on with Argentina’s bonds, you need to be at least as well versed in Argentine politics as you are in the intricacies of New York law and pari passu clauses. Judge Griesa might have a surprising amount of power. But Cristina Fernández has more.

*Martinez, one of the world’s most successful distressed debt investors, is siding against Elliott Associates in this case. Similarly, David Boies is siding with the exchange bondholders against Elliott, despite the fact that his son, also called David Boies, founded Straus & Boies with Michael Straus, who represented Elliott in its last major sovereign battle, against Peru. Boies is representing Gramercy Advisors, who also made their name as a vulture fund. This is a case where everybody is pretending to be highly principled — but ultimately, as ever, it’s all about financial self-interest.


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“The WSJ has not been much better … — a sign that if they put their mind to it, US journalists could really add some value here.” (FS)

As long as FT et.al. cover the story well, is it really necessary that every journalist do so? As you say, it’s just a squabble over money among a closed group of people – none of whom ‘wear white hats’. Now the HSBC thing is altogether different – this involves drug-trafficking and homicide by a financial institution that appears to have been a full fledged, legally complicit, willing co-conspirator to all those offenses.

Being a quintessentially US story, kinda sad that no journalist in the great country of ours (if not yours, FS) seems interested in this matter – including you, Scotty. What’s the problem, laddy – cat got your keyboard, son?

Posted by MrRFox | Report as abusive

you are not a journalist….all you right is for one side only…

Posted by gito | Report as abusive

“Judge Griesa might have a surprising amount of power. But Cristina Fernández has more.”

Fortunately. If you want to guarantee that there will never be any more bond issuance using US-based intermediaries, just sustain Griesa’s ruling, guys.

When will the people who (STILL) whine about Kennedy’s 10% excise tax c/r/e/a/t/i/n/g/ t/h/e/ E/u/r/o/b/o/n/d/ m/a/r/k/e/t/ moving foreign bond issuances outside the United States are going to realise that was a minor hiccup compared to this?

Posted by klhoughton | Report as abusive

As a completely disinterested party, I think Argentina should be able to pay whoever it wants whenever it wants. They ought to tell the US court to drop dead. Those who hold sovereign debt are hereby warned… the whole edifice is subject to the whims of politicians who can decide they don’t want to pay at any time for any reason. Caveat emptor.

And yes, I am perfectly willing to live with the consequences of such a thing. The vampire squids will just have to adjust. And so will the people of these countries.

Posted by silliness | Report as abusive

You are welcome Felix.
Glad charting was helpful to your readers.

Posted by yrsecretfriend | Report as abusive

To say that the debt has nothing to do with Argentina’s period of dictatorship is specious. It is similar to say that the EU mess has nothing to do with WWII.

The country was run into the ground by state terrorism against its own population, enthusiastically supported by the US.

Menem introduced neoliberalism, dollarization and facilitated the gutting or sale to rent-seekers of the country’s industrial and resource base.

Banksters are social parasites and should be treated as such.

Posted by upstater | Report as abusive

Argentina’s nightmare default, this since 2002 ongoing HORROR must finally have an end!

Since 2002, Argentina has not paid a cent to the holdouts!

Beyond the U.S. Hedge Funds there are still tens of thousands retail Holdouts worldwide, most of them from Italy and Germany.

Most of the Holdouts are “before default buyer”, who have bought their bonds at an average of 100% or even over.

President Kirchner (by the way a beautiful women) should solve the holdout problem.

President Obama and the IMF should help and talk to President Kirchner to end Argentina’s Horror-Default.

Probably, also the US Court wants negotiations, and that is why, they STILL left the “stay” to give time for negotiations.

A reconciliation with the holdouts would improve Argentina’s ratings, initiate a firework of investments and also cheaper credits for argentine companies.

Argentina clearly has the capacity to repay the debt to the holdouts after more than a decade! The outstanding debt is only approximately 12 Billion (incl. accrued interest) to the holdouts. It is not much for the 3. largest economy in South America.

The argument:-> “If the U.S. courts uphold the complainant’s position, negative consequences will be felt by the U.S. and the rest of the world. Sovereign debt restructurings will be virtually impossible in the future.”

It is not true because, after Argentina’s 2001 Default all bonds imply the Collective Action Clause (CAC) A collective Action clause (CAC) allows a supermajority of bondholders (75%) to agree to a debt restructuring that is legally binding on all holders of the bond, including those who vote against the restructuring.

BUT, This CAC is NOT implied in Argentina’s defaulted old bonds! Accordingly, Argentina MUST fulfill the bond contracts and repay the debt to the holdouts!

If Argentina and the holdouts made NOW A BINDING AGREEMENT with respect to the “time after” (end of the “Rights Upon Future Offers (RUFO) clause in December 2014), seizure risks and a technical Default would be immediately averted. Argentina could immediately return to the capital market and thus Argentina could refinance the payments to the holdouts, without using reserves.

Holdouts want a simple, clear, secure and an ACCEPTABLE solution.

Holdouts DO NOT want such exotic financial constructs, as they were the swap conditions in 2005 and 2010, with an exorbitant Haircut, with many new bonds, with only Discount bonds above $50000, GDP Warrants etc.,and with maturities in the eternity. Such “shares like” financial constructs are inacceptable.

Following simple conditions might be acceptable for the Holdouts .

- at the latest, on 01/01/2015 (end of RUFO clause) Argentina should repay in CASH 100% of the nominal value of the defaulted bonds, which became due before 2015.

- for the accrued interest between 2002-2015´Argentina should emit new bonds with 50% discount, and with a maturity of 5 years.

Posted by GermanHoldout | Report as abusive