Argentina’s desperate exchange proposal

By Felix Salmon
March 30, 2013
ordered, and has now formally put forward its proposal for paying off Elliott Associates and the other bondholders suing it in New York court.

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Argentina has done as the Second Circuit Court of Appeals ordered, and has now formally put forward its proposal for paying off Elliott Associates and the other bondholders suing it in New York court.

You could be excused for not entirely understanding what Argentina is proposing, in this 22-page filing: it’s not particularly easy to understand. But the upshot is simple, and pretty much as everybody expected: Argentina is offering to give Elliott pretty much exactly the same deal as it gave all the other holders of its defaulted bonds. In practice, that means that Elliott would swap into new Discount bonds with a present market value of roughly $120 million; if settling the case in that way helped Argentina’s bonds to rally back to where they were trading in October, then the market value would rise to about $176 million.

Argentina is at pains to point out that “this proposal is a voluntary option”: they’re not proposing that the court force Elliott to accept the deal. But at the same time, Argentina knows full well that the chances of Elliott voluntarily accepting this deal are exactly zero. Elliott is suing for a total of $720 million, and while it might be willing to settle at a modest discount to that sum, there’s no way it’s going to accept the same kind of 70% haircut that it has consistently rejected all along.

Indeed, it’s entirely improbable that any of the current plaintiffs, having rejected two previous exchange offers and having spent many millions of dollars in legal fees, would be remotely inclined to accept this offer were it put to them. Which makes it really hard for the court to accept this proposal as a good-faith attempt to pay the plaintiffs what they’re owed.

The court specifically asked Argentina how it was going to make current the obligations of the original bonds; and/or how it might repay those original obligations going forwards. Argentina, in response, has proposed doing neither. Instead, it is proposing to give the plaintiffs the 70% haircut, on those original bonds, which they have consistently rejected.

The AP’s Michael Warren says that Argentina’s proposal is “creative”, but I don’t see much evidence of creativity here: instead, I see a lot of the failed rhetoric which helped bring Argentina to this fraught position in the first place. “Plaintiffs cannot use the pari passu clause,” writes Argentina’s lawyer, Jonathan Blackman, “to compel payment on terms better than those received by the vast majority of creditors who experienced precisely the same default as plaintiffs”. But of course they can do that, or at least they’re trying to, and so far, New York’s courts have ruled quite consistently that they have every right to do so.

There are signs of real desperation in Argentina’s filing: it spends a lot of time, for instance, talking about the price at which Elliott bought its debt, and the profit that Elliott would make if it got the full $720 million it’s asking for. It’s an incredibly weak argument: for one thing, there’s no law against making money in the markets, and for another, it ignores all the judgment debt that Elliott holds, and isn’t getting paid on, and isn’t litigating in this case.

Indeed, it’s far from obvious whether Argentina is extending this offer to judgment creditors, who make up the vast majority of the country’s holdouts. But one thing is clear: everything in this filing is entirely consistent with the behavior which has already been found to be “contumacious”. Argentina is a sovereign nation, and it’s staring down the court, here, daring it to go through with its dangerous plan. And frankly it’s very hard to imagine that at this point, because of this filing, the court is finally going to blink.

I’ve been largely sympathetic to Argentina’s position in this case all along, but in the wake of the various rulings which have already been handed down, Argentina doesn’t really have a legal leg to stand on any more. That’s why it’s resorting to desperate measures like saying that Elliott is going to make an unconscionable amount of money if it wins: where legal reasoning has failed, all that’s left is an attempt to bypass the law and attempt to scramble onto the moral high ground. The problem, of course, is that it’s really hard for the contumacious Argentines to occupy any kind of moral high ground at all, even when their opponent is a notorious vulture fund.

As far as I know, Argentina has not hired any kind of bankers to run this proposed exchange offer. Which is further evidence, if any were needed, that it will never see the light of day. You’ve heard of giving someone an offer they can’t refuse: this is an offer the plaintiffs can’t accept, and Argentina knows it. I find it extremely hard to believe that the New York courts, having come as far as they have, will consider it a remotely adequate remedy.


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So Argentina stiffs its creditors. Who will suffer more? Argentina or the creditors? Maybe these lenders should have had the rudimentary good sense earlier not to lend to a nation like Argentina. Philip II of Spain stiffed his creditors too, on a regular basis, and they kept on lending him money. So. what’s new?

Posted by Chris08 | Report as abusive

I don’t get it, you say there is no law against making money in the markets – so since when was it illegal to lose money ?

Posted by TheEnglais | Report as abusive

Argentina has a military… No? Perhaps it is time to use them against the enemy. I, for one, would think it a noble blow stuck against the predator financiers on behalf of debtors around the world.

Posted by silliness | Report as abusive

@Chris08: it looks to me as though the plaintiffs didn’t lend money to Argentina at all. They appear to have bought $720 million in debt from those who had done so for $48 million, and then invested in lawyers try to get that money reimbusred at face value. The ones who lent the money to Argentina realized their losses long ago and moved on.

Posted by f.fursty | Report as abusive

Felix, your disdain for international sovereignty in this article is extremely dangerous.

US court has zero jurisdiction over any other country. Argentina is fully within its rights to modify its laws – and to abrogate debt. Unless the US military chooses to invade Argentina, Elliot should get $0. The only option is to refuse to lend to that government in the future.

Or accurately price default risk when making loans, one of the two.

Posted by Unsympathetic | Report as abusive

Unsympathetic – It’s not Felix’s “disdain for international sovereignty,” it’s the court’s disdain and overreach to this point that have created the environment in which the Argie proposal (choose from: “F.U., we’ll do what we’ve always offered; here it is. Oh, by the way, the make 150% profit on the deal. You want them to make more? F.U., as we said” or “Nice bond market you had in the U.S. Too bad you had to screw it up.”) will again have the judge moaning.

Posted by klhoughton | Report as abusive

Unsympathetic, your reasoning seems a bit circular. First, the bonds were issued on their face under New York law, so it isn’t any fluke or any instance of gunboat diplomacy that has the matter in New York. Second, (and here is the circular bit) to say that the bond markets should more “accurately price default risk” is to presume that default risk is somehow independent of the consequences of decisions like this. If the pricing has been inaccurate it is only because the results of this litigation has come as something of a surprise to the markets.

Posted by Christofurio | Report as abusive

I have no sympathy for any of the parties involved, but always remember that the basic matter here is one of a bunch of debtors trying to stiff a bunch of creditors. So in some sense the debtors are the real problem here.

Posted by QCIC | Report as abusive

Any lender who would lend to a nation with the reputation of Argentina is taking big risks up front. If you want to avoid getting stiffed you have to be very hard headed about whom you lend to. You can of course take risks but when they go against you, that’s just your bad luck that you brought onto yourself. Don’t blame the debtor or the bank or the court. Of course you can try to get back as much as possible, but again, lotsa luck.

Posted by Chris08 | Report as abusive

It doesn’t matter whether Elliott Associates paid $760 million or one penny. It’s still $760 million worth of debt and their claim is equally strong either way. I encourage private businesses to stand up to government bandits such as Argentina whenever possible. Of course, it is true that Argentina is a sovereign country and does not have to follow what the US courts say. But if Argentina ever wants to do business with the United States they will have to eventually deposit some money into US accounts and a creditor with a judgment against Argentina could presumably seize it. If the Kirchners had not made war against Argentina’s economically productive citizens in their misguided attempts to benefit those who produce too little and want too much these defaults would not be happening. The only solutions the socialists can ever think are 1) steal 2)steal and 3) steal some more. If they can’t have the Falklands (and they can’t and shouldn’t) then they try to steal from US businesses. Let them suffer the consequences.

Posted by freud101 | Report as abusive

Investing is a risk,
They lost, tough luck.
I am tired of banks and investing entities that want full protection, why did they buy insurance? if nobody wants insure the investment means that it is not good.
If they loose money is good so next time they do not land it to risky entities.

Posted by giua | Report as abusive

@Chris08 – that’s really the point of this case. To reiterate Christofurio’s point and expand on it, these bonds were issued under New York law. These bonds also were not issued with a collective action clause, meaning that a creditor could not be crammed down in an involuntary restructuring. The question then is if/how can an international sovereign be compelled to pay this debt. The answer sought by Elliott is that funds being routed through New York to pay other bondholders are assets of Argentina that are subject to the pari passu clause of Elliott’s bonds.

There are some ambiguous points in this case, specifically because Argentina is a sovereign and because it’s debatable whether the funds paid to other bondholders still belong to Argentina once they reach New York. The basic idea though – going to a court to enforce payment under a legally binding document – is a fundamental premise of the notion that we have the rule of law in this country. If someone breaches a contract with you, you rely on the court to obtain a judgement and then collect the amount due.

Posted by realist50 | Report as abusive

I would not give them one penny.
remember that there is no friendly nation from Mexico down to Uruguay to the USA.
Our foreign policies of imposing is failing. Afghanistan, Iraq, Libya, Egypt, Lebanon should teach us something.
You buy junk you get junk. Do not look at me for help.
These are the entities that are ruining the country.

Posted by giua | Report as abusive

there is an international court for these problems why not use it?

Posted by giua | Report as abusive


Well I am heartily in agreement that there should be a rule of law in nations and so on and so forth. But the FACTS are that nations break laws if the incentive is great enough to do so, and default, and thumb their noses at foreign courts. The supposed punishment for this is to be cast into outer darkness and never be able to borrow again. But to my knowledge this punishment tends to be weak and quite soon the defaulter will find another lender reckless enough to take a chance. That was true of Philip II and also of many “bad credits” in the 20th century. Tell me how a New York court can COMPEL Argentina to pay up if it refuses to do so. Send in the Marines? Tell me how long Argentina, if it refuses, will be unable to borrow a dollar or whatever again.

Posted by Chris08 | Report as abusive