domingo, 3 de agosto de 2014

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July 31, 2014 6:39 pm

Argentina’s endless debt dilemma

Default highlights the need for a settlement with holdouts



Argentina’s 12-year dispute with a group of hedge funds holding out for full payment on defaulted Argentine bonds is proving to be one of the most wasteful debt restructurings in history.

During the past few years an unedifying legal battle waged in New York courtrooms has steadily unpicked the restructurings that allowed Argentina to pick up the pieces after its $95bn default in 2001

Basing their rulings on a tight definition of the so-called pari passu clause that guarantees equal treatment for bondholders, US judges have declared it illegal for Argentina to make payments to the holders of restructured bonds unless it includes full payments to holdouts too.

This week, the unresolved dispute reached its doleful climax. Unwilling to bow to the demands of the holdouts, and consequently unable to keep the restructured bonds current either, Buenos Aires threw up its hands and gave up on its attempts to pay its creditors under US law.

Neither side can claim the moral high ground. Central to the holdouts’ case has been that in two restructurings, Argentina strong-armed creditors into accepting a savage haircut worth just 25 cents on the dollar. Yet if warrants linked to economic growth are added, the payouts have in some cases been worth much more.

Of greater systemic concern, the points of law in the hedge funds’ favour have led to a situation where it will be easier for other holdouts to block future sovereign restructurings. This is an unwelcome possibility, however difficult Argentina’s behaviour has been.

President Cristina Fernández has revelled in her “won’t pay, can’t payattitude. While this is central to her political image as someone who takes on financiers and wins, it is also a fiction. Argentina’s restructurings have not reopened international markets. The bigger worry is that her intransigence poses a real threat to the economic wellbeing of her compatriots. Although the initial reaction has been muted, Argentina’s default is likely to lead to a squeeze in trade finance and higher borrowing costs

Argentina has no easy options. Restructuring all of its debt into bonds issued under local law would be one way of thumbing its nose at the pesky holdouts and the US courts. But the costs would be huge. A general default could lock the country out of capital markets for years at a time when it needs international capital to develop its deposits of shale gas.

That leaves settling, which has difficulties too. For instance, it exposes Argentina to claims from other holdouts, which Buenos Aires costs at $15bn. Another problem is the so-called RUFO clause in the restructured bonds. This prohibits Argentina from offering investors more than the 30 cents on the dollar it paid holders that accepted the restructuring.

Allowing the stand-off to continue profits no one. Meanwhile, the holdouts are racking up legal fees and must want to settle. The outlines of a deal exist

Argentina could meet the holdouts’ claim, or some compromised figure, with fresh bonds, issued on a deferred basis to sidestep the RUFO clause which expires at the end of 2014. All the holdouts could be invited in, settling the problem for good.

Whether this can be agreed swiftly, if at all, is another matter. Indeed the case once again illustrates the need for a better way of managing sovereign defaults. The collective action clauses since introduced into many bond contracts, which oblige minorities to accept majority writedowns, are no fail safe. The pari passu clause should be scrapped, even at the price of higher borrowing costs.

In the absence of clarity, well-paid lawyers to hedge funds will continue to exploit the confusion in other debt workouts, and perhaps other jurisdictions. Debt bondage of this kind is the last thing the world needs.


Copyright The Financial Times Limited 2014

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