Argentinas complex debt default. Or, how Mittens and his ilk carry unjust enrichment to heights never before dreamed of. Thanks to complaint federal courts, a non-functioning Congress, and continuing to allow hedge funds to operate unregulated. Call it what you will, but its extortion. “The recession that resulted in the crisis lasted between 1999 and 2002; of the USD82 billion in defaulted bonds, 51% were issued during that period.[10] Argentina defaulted on a total of USD93 billion of its external debt on December 26, 2001. Foreign investment fled the country, and capital flow toward Argentina ceased almost completely from 2001 to 2003 (though it later recovered).[11] The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly to nearly 4-to-1, producing a sudden rise in inflation to over 40% and a fall in real GDP of 11% in 2002.[1] Holdouts retained a total of USD4 billion in bonds as of 2013.[17] Vulture funds, which owned USD1.3 billion of this total,[5] sued to be repaid at 100% of face value for bonds purchased not from Argentina but on the secondary market for cents on the dollar after the 2002 default,[18] filing injunctions to attach future payments to other bondholders by way of forcing Argentina to settle.[2][19][20][21][22] Vulture funds, moreover, own a large quantity of credit default swaps (CDS) against Argentine bonds, creating a further incentive to not only trigger a default against Argentina; but also to undermine the value of the bonds themselves, as the CDS would pay out at a higher rate if the defaulted bonds decline to extremely low values.[18] Meeting vulture funds full face-value demands is problematic for Argentina, because although bonds held by vulture funds are a small share of the total (1.6%), such a settlement would lead to lawsuits from other bondholders demanding to be paid on similar terms and thereby create a liability of up to USD120 billion.[23] A similar strategy had been successfully pursued by vulture funds against Peru and a number of African nations,[22][24] as well as against corporations in the U.S. itself such as Delphi Automotive, which was forced to pay Paul Singers Elliott Management Corporation a return of over 3,000% on corporate bonds defaulted during the 2008 recession. [25] Singers Cayman Islands-based vulture fund NML Capital Limited is the principal litigant in this dispute, having paid USD49 million in the secondary market for bonds worth USD832 million by 2014.[26] Its lobbying group, American Task Force Argentina, is the most prominent and best financed opponent of Argentine bond restructuring efforts, spending over $7 million lobbying U.S. Congressmen and becoming the top campaign contributor to a number of these; the most prominent, former Western Hemisphere Subcommittee Chair Connie Mack IV (R-FL), became the main sponsor of a bill in 2012 designed to force Argentina to pay NML nearly $2 billion before losing his Senate bid that year.[20] Their lobbying campaign also extends to Argentina, where NML Capital finances an NGO led by Laura Alonso, a Congresswoman affiliated with the right-wing PRO party.[27] Argentina has still not been able to raise finance on the international debt markets for fear that any money raised would be impounded by holdout lawsuits; their country risk borrowing cost premiums remain over 10%, much higher than comparable countries. Consequently, Argentina has been paying debt from central bank reserves, has banned most retail purchases of dollars, limited imports, and ordered companies to repatriate money held abroad. Nevertheless, between 2003 and 2012 Argentina met debt service payments totaling USD173.7 billion, of which 81.5 billion was collected by bondholders, 51.2 billion by multilateral lenders such as the IMF and World Bank, and 41 billion by Argentine government agencies. Public external debt denominated in foreign currencies (mainly in dollars and euros) accordingly fell from 150% of GDP in 2002 to 8.3% in 2013.[10] A Belgian court in June 2013 declined to issue judgment in favor of the creditors to distrain Argentine diplomatic bank accounts.[28] A German court ruled in favor of Argentina in July on the basis of the pari passu (equal treatment) clause.[29] The French government filed an amicus brief in favor of the Argentine position at the U.S. Supreme Court as well,[30] and while the IMF declined to intervene, both it and the World Bank have came out against NMLs case, arguing that it could endanger the debt restructuring they oversee around the world.[26] The Government of Argentina lost an U.S. appeals court case in August 2013, and the U.S. Supreme Court declined to hear its appeal the following June.[31] A possible third debt restructuring offer to remaining holdouts on similar terms to the 2010 swap was announced on August 27, 2013.[5] In January 2005, the Argentine Government offered the first debt restructuring to affected bondholders; nearly 76% of the defaulted bonds (USD62.5 billion) were thus exchanged and brought out of default. The exchange offered longer term par, quasi-par, and discount bonds - the latter with a much lower nominal value (25–35% of the original). The majority of the Argentine bond market thereafter became based on GDP-linked bonds, and investors, both foreign and domestic, netted record yields amid renewed growth.[32] One of the largest single investors in Argentine bonds following these developments was Venezuela, which bought a total of more than USD5 billion in restructured Argentine bonds from 2005 to 2007.[33] On April 15, 2010, the debt exchange was re-opened to bondholders who rejected the 2005 swap; 67% of these latter accepted the swap, leaving 7% as holdouts.[1] Holdouts continued to put pressure on the government by attempting to seize Argentine assets abroad,[34] and by suing to attach future Argentine payments on restructured debt to receive better treatment than cooperating creditors.[2][21][35] A total of approximately USD12.86 billion of eligible debt was tendered into the exchange launched in April 2010; this represented 69.5% of outstanding bonds still held by holdouts.[36] A total of 152 types of bonds in seven different currencies under eight distinct jurisdictions were issued during the two debt exchanges.[37] The 2010 re-opening thus brought the total amount of debt restructured to 92.6% (the original 2005 debt exchange restructured 76.2% of Argentine government debt in default since 2001). The final settlement of the 2010 debt exchange took place on August 11, for bondholders that didnt participate in the early tranche that closed on May 14 and settled on May 17.[1]” Excerpted from above. A similar strategy had been successfully pursued by vulture funds against Peru and a number of African nations,[22][24] as well as against corporations in the U.S. itself such as Delphi Automotive, which was forced to pay Paul Singers Elliott Management Corporation a return of over 3,000% on corporate bonds defaulted during the 2008 recession.[25]” Notice especially the matter of the credit default swaps, which are purely ancillary as concerns the bonds, and the perverse incentives which are in place today to engage in piracy on a scale never before dreamt of as feasible. Notice too that GWB “Nevertheless, between 2003 and 2012 Argentina met debt service payments totaling USD173.7 billion, of which 81.5 billion was collected by bondholders, 51.2 billion by multilateral lenders such as the IMF and World Bank, and 41 billion by Argentine government agencies. Public external debt denominated in foreign currencies (mainly in dollars and euros) accordingly fell from 150% of GDP in 2002 to 8.3% in 2013.[10]” ”The possibility that holdout creditors can attach future payments on restructured debt and receive better treatment than cooperating creditors distorts incentives, can derail efforts for a cooperative restructuring,[35] and may ultimately lead to the U.S. no longer being viewed as a safe place to issue sovereign debt.[13] While recent court rulings in the U.S. have repeatedly upheld this practice, purchasing bonds with the intent of later bringing legal action remains illegal under New York Law (which has jurisdiction over these cases);[66] the United Kingdom, however, permanently banned the use of its courts for vulture suits in 2011.[67] Currently 70% of the worlds sovereign bonds are issued in New York, and 22% in London.[68 The pirates may well end New York’s role, [the United States, for that matter], as the world’s sovereign debt mediator. GWB, btw, vetoed legislation which would have moved all future arbitration disputes affecting sovereign debt defaults out of the federal courts to an unbiased international court. “Large banks, investors, and the U.S. Treasury Department objected to the federal courts decisions and expressed concern over losses that could be incurred by bondholders and others, as well over disruption in the bond markets. Vladimir Werning, executive director for Latin American research at JPMorgan Chase, observed that vulture funds are trying to block the payments system in the U.S. itself, something unprecedented in the New York jurisdiction. Kevin Heine, a spokesman for Bank of New York Mellon, which handles Argentinas international bond payments, said the ruling will create unrest in the credit markets and result in cascades of litigation, which is precisely the opposite effect that an injunction should have.[2] The American Bankers Association agreed, noting that permitting injunctions that preclude pre-existing obligations whenever expedient to enforce a judgment against the debtor will have significantly adverse consequences for the financial system.[19] Sourced from Wikipedia. Its long, much of it will seem arcane, but its well worth the effort to study it. Its the future.
Posted on: Sat, 09 Aug 2014 18:32:06 +0000
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