Argentina is in hot water after a pair of U.S. Supreme Court rulings against it, so it was forced to get creative yesterday afternoon: asking creditors to accept bonds that will be paid in Argentina, not the United States. The Wall Street Journal reports on the debt swap:
Under the plan, Argentina would swap its existing bonds that are governed by U.S. law for debt that falls under its own jurisdiction, Economy Minister Axel Kicillof said. Such a switch is unprecedented in sovereign-bond markets. While the decision was largely anticipated as a possibility, many lawyers and investors said they have yet to figure out how Argentina could go about making such a change and what such a move would mean for bondholders.For a start, investors would likely have to give up their rights under U.S. law, such as suing in the nation’s courts, and the security of having payments processed by a U.S. bank. On the flip side, they would continue to receive income from Argentina’s bonds, which are among the world’s highest-yielding debt.
Argentina currently has $28.8 billion in foreign currency reserves, but owes $24 billion to bondholders (after restructuring the debt) and now at least $1.33 billion to NML Capital due to the SCOTUS ruling. It can afford to make both payments, but fears that if it pays NML, the country will be on the hook for $15 billion to other “holdout” creditors from 2001.If this were all in Argentinian courts, where the judges have a more “deferential“ view of government power, this predicament might be less daunting. Of course, NML Capital sued Argentina precisely because it wanted the case decided under New York law so that it would be paid in full. Having won, they are unlikely to capitulate now. Other creditors who had accepted a haircut might be tempted to accept the debt swap to keep some money coming in. Given that Argentina already defaulted on these bonds once, however, they’d do well to brace themselves for further losses.In the unlikely event any investor thought moving debt arbitration from New York to Argentinian law was a great opportunity, it may be impossible to pull off. The court’s ruling entitles NML to be paid whenever any other creditor is paid, so any U.S.-based bank or investor involved in performing a swap might open itself to charges of helping Argentina to evade a court order. Argentina therefore has a strong incentive to settle with NML. As the Economist points out, though, President Cristina Fernández de Kirchner has turned the NML case, and a refusal to pay, into a matter of national pride. Backing down could be politically difficult, even for someone for whom a cult of personality ensures unconditional support. Ironies abound. Argentina is in this bind because, in 1994 its creditworthiness was already so poor that it had to go to New York to find anyone to buy its bonds. Then it defaulted a second time in 2001. It is now caught between paying a group it has already defaulted on, or defaulting on debt twice over. Yet it’s going to great pains either to find a way to pay, or to “legally” shirk its interests (rather than default), because it wants greater access to international bond markets—in other words, it wants to borrow more money. Conversely, because of this lack of access to the markets, default would actually not be as damaging now as it was in 2001, though it would represent a huge opportunity cost.The ultimate irony is that Argentina is one of the few nations on earth with all the natural resources a people would need to be prosperous. But for a century, Argentinian politicians have enacted policies that have blocked its path to success. That does not look likely to change soon.