It is startlingly implausible that anything fiscally useful, interesting, or even sane could be generated by the hare-brained Argentinian Peronist government of Christina Kirchner Fernandez (she has already ditched the memory of her late husband who put her in the Pink House; it's as if Evita changed her name back to Duarte). It is an even more improbable scenario when the source of progress is the U.S. court system, which largely exists to generate the obscene ten per cent of the U.S. GDP consumed by the legal profession, and on the criminal side, to be a conveyor belt to the country's steroid-bloated prison industry for the delectation of the nation's omnipotent and often lawless prosecutors.
In this case, Argentina has been pursued through the commercial courts in New York for over a decade by the vulture funds which bought its effectively defaulted debt and rejected what they considered insufficient offers of replacement bonds, better secured but at discounted face values, in 2005 and 2010. The Argentinian approach to the country's financial embarrassment was the traditional one, but the vulture funds, being, as their generic name and vocation imply, tough and uncharitable bargainers, didn't entirely buy into the arrangement. About 90 per cent of them accepted the hair-shirted Argentinian offer -- 33 cents on the dollar, but the remaining ten per cent litigated for the full face value of the bonds with accrued interest. It was a bold, not to say greedy, step, and the ensuing ten years of litigation has incurred the usual demonstration of the demiurgic talent of the American legal profession at running up legal invoices into man-made mountains.
The ringleader of the rebel funds was Elliott Management, which had already successfully pursued the governments of Peru and Congo-Brazzaville down the same route. In 2005, to strengthen the hand of its treasury, the Argentinian Congress passed what became known as the Lock Law, which closed the bond exchange and statutorily prohibited the government of Argentina from making any follow-up offer or accommodation to non-accepting bond-holders after the offer at 33 per cent had expired. This was a vintage, take-it-or-leave-it ultimatum: the official offer was the last and only train leaving the station. The train left and the litigation began, albeit in a foreign jurisdiction, whose authority Argentina disputed, but where it contested the case anyway.
Since 2005, Argentina has faithfully met the terms of the replacement bonds issued to the 90 per cent of holders that accepted its offer, but has refused to pay one centavo to the refractory litigants, even though the bond exchange was reopened briefly and the Lock Law lifted slightly in 2010 to restructure more of the defaulted debt in a similar manner. Where the plot has become complicated is that the U.S. Circuit Court of Appeals in New York has recently upheld a federal district court ruling barring Argentina from giving priority to bondholders who participated in the 2005 and 2010 debt exchanges.
This was an unforeseen development and cannot be ignored with the usual (rather refreshing) official Argentinian contempt for U.S. courts, as it lands on American recipients. The judgment is based on the standard pari passu clause in such arrangements, which are often asserted in bond issues at the insistence of buying groups, to ensure that the issuer does not favor some bondholders over others in capricious preferments. It has not been applied in this way before in the United States, and many financial commentators have actually agreed with Argentina that the general imposition of such a finding could make the field of discounted sovereign debt exchanges and redemptions even more chaotic than it already is and cannot fail to be, by its nature.
The judicial findings effectively required that the rejectionist holders of the defaulted bonds receive the same treatment as those who accepted the Argentinian treasury's offer, even though they had rejected the offer. This would not, in itself, inconvenience Argentina, as it was hoping for complete acceptance of its offer and only resorted to the draconian Lock Law to try to bludgeon resisters into line. But it would not end the claims of the resisters, who, if they succeeded, and if Argentina agreed to honor such a U.S. court finding, would then find themselves facing a massive claim from the cooperating bondholders demanding, under the same pari passu rule, a full payout on a huge quantity of debt Argentina thought it had successfully discounted by 67 per cent eight years ago.
Any such turn of events would induce holders never to settle for any significant discount, and in many cases to reopen the immense quantum of discounted bonds now being regularly amortized at agreed discounts. Under the New York court rulings, Argentina will be declared by the American judicial system to be in default again if it does not pay the dissentient ten per cent as it is paying the 90 per cent that accepted the discount offer in 2005. If this ruling is upheld by a further hearing next month, Argentina will have either to comply and lift the Lock Law to pay all the holders equally even though those additional holders it will be paying have not accepted the proposal, or be declared generally in default for American judicial purposes.
The most interesting prospect opened up by this controversy is the possibility that Argentina, as is the practice of its current president, tells the Americans to stuff their rulings and attempts to engage financial markets in Europe and the Far East. The Argentinian position is not particularly unreasonable in this case and vulture funds are not the most natural beneficiaries of judicial compassion. The notorious and tenebrous complexities of the American legal system could here contribute another blow to the status of the U.S. financial markets, adding to the tactical and ethical debacle of 2008 and the fiscal incontinence of the country. The Argentine economy minister has accused the Americans of "legal colonialism," and, for once, that thoroughly disreputable government has a point, and this is far from the only offense the masters of the American economy have committed.
Thanks to Kurt Rive of Byron Capital in Toronto for his research on Argentinian debt.
