Here is the extended version of my Argentine piece after the intervention of my chief editor. Of course, they will edit the English further. Dear Nestor, what do you think? PS: All citations in the footnotes disappeared after this copy and paste. The Argentine Saga Continues: Cry for me Argentina T Sabri Öncü In my previous Parekh column of 4 May 2014, I gave a brief account of the history of Argentine debt default of 2001 and its aftermath up to 21 April 2014. To recapitulate, Argentina attempted to restructure its debt defaulted in 2001 in 2005 and, then, in 2010. In these restructurings, about 93% of the old debt was swapped for new debt, leaving 7% as holdouts. And some of these holdouts and vulture funds such as NML Capital operating from Cayman Islands ─ who purchased the defaulted debt from other holdouts at a deep discount ─ sued Argentina at the United States District Court for the Southern District of New York way before 21 April 2014, demanding full payment. On 21 April 2014, the US Supreme Court justices heard the arguments of Argentina and some holdout owners of the defaulted bonds led by NML Capital in one of many appeals before the Supreme Court in which Argentina was one of the parties. It was expected at the time that the justices would rule by late June or early July. The first of the expected rulings came on 16 June 2014. In this ruling, the Supreme Court justices declined to hear Argentinas appeal against the United States District Court for the Southern District of New York February 2012 decision. This and other rulings that followed not only sent shock waves to global financial system by threatening the integrity of sovereign debt markets, but also made Judge Thomas P. Griesa – an 85 year old US Federal Judge to the Southern District Court whose visibly deteriorating mental abilities have been called into question by many – suddenly world famous by making his 2012 ruling valid. Griesa’s February 2012 ruling was based on an unprecedented interpretation of the “pari pasu” clause in the Argentine bond contracts. A standard component of sovereign bond contracts, the clause is there to ensure that the issuing country treated identical bondholders identically, with the understanding that some senior creditors such as the International Monetary Fund are to be treated differently. Indeed, this is the recommended International Capital Market Association (ICMA) interpretation of the clause in its recently proposed new framework for sovereign bonds. Despite this standard interpretation, however, Griesa ruled in February 2012 that if Argentina paid the interest that it owed to the 93% creditors who accepted the restructuring, it had to pay the suing vulture funds among the remaining 7% holdout bond holders ─ most of whom were not even among the original creditors ─ about $1.5 billion in principal plus accrued interest in full. Indeed, after Griesa’s verdict and before all these appeals, an Argentinian navy ship was detained for 10 weeks in Ghana at the request of NML Capital because of this dispute and was finally set sail from Ghana in December 2012. One of the demands of NML Capital has been to take ownership of the global Argentine assets, threatening national sovereignty not only of Argentina, but also of any debtor nation, including the US. Another difficult to understand situation is why Ghanaian authorities chose to abide by the decision of a district court judge somewhere in New York, since Ghana is not bound by the New York law. What was more confusing was that not all of the defaulted Argentine debt had been issued under the New York law originally. Some were issued under the domestic law, others under the UK law and yet some others under the Japan law. To whose law should the Ghanaian authorities have had to obey? Yet, that Argentine ship had been detained in Ghana for 10 weeks, indicating much confusion about what law to obey, international or otherwise. Once the US Supreme Court declined to hear Argentinas appeal, however, Judge Griesa started to reign supreme. Griesa ruled after the Supreme Court denial of appeal that the Bank of New York Mellon ─ through which Argentina makes its interest payments to most of its non-holdout bond holders ─ cannot pay the non-holdouts even if Argentina deposited the interest payments to this bank. And, despite that Argentina deposited $539 million for its interest payment obligations to the non-holdouts at the Bank of New York Mellon way before the due date, the bank could not transfer the funds to the bond holders after Griesa’s ruling, pushing Argentina into a technical default on 30 July 2014. Although this was called a default by the mainstream media, it was more appropriately called #griesafault on Twitter to mean that Argentina actually griesafaulted on 30 July 2014. It is very difficult to summarize everything that has followed after the end of July in such a short article, because almost every day since then has been phenomenal for both Argentina and the international “community”. One important phenomenon was the 9 September 2014 United Nations General Assembly resolution that approved the launching of negotiations on a multilateral framework for sovereign debt restructuring. This was a resolution initiated by Argentina and penned by Bolivia representing G77. It was a deeply divided vote some called , although I find it difficult to call that vote deeply divided. The vote was such that 11 opposed, 41 abstained and 124 favoured. And those opposed included the usual culprits: the US, Japan, Germany and the UK. In his very recent article, Ocampo welcomed the non-binding 9 September 2014 UN resolution and claimed that “a good model is the dispute settlement mechanism of the World Trade Organization. That model creates three consecutive stages with clear deadlines: one of voluntary negotiations, a second of mediation and a final of arbitration if the former two fail. The sequence is essential for an efficient and speedy process. The decisions of the appeals court is binding for all parties involved.” Similarly, Stiglitz and Guzman also welcomed the same UN resolution ─ as well as the recently proposed ICMA framework for sovereign bonds ─, and claimed that the international community faced two challenges: “One is to deal with the hundreds of billions of dollars of debt written under the old terms, which cannot be restructured under Griesa’s ruling. The second is to decide on the terms that should be imposed in the future.” I wholeheartedly agree with the above claims of Stiglitz and Guzman. However, given my much longer than 13 years of observing the continuing Argentine and other similar sagas, I respectfully differ from Ocampo. Although a World Trade Organization-like dispute settlement mechanism might offer a more efficient and speedy mechanism than the ongoing Griesa mechanism, I propose to restructure the defaulted debt of the debtor country, whether its debt was originally issued under some foreign law(s) or not, under its own domestic law. In 2012, Gulati and Zettelmeyer proposed the reverse of what I proposed to heavily indebted Eurozone countries – mainly to Greece after the Greek bankruptcy in May 2010. They proposed to the sovereign a voluntarily exchange of domestic-law debt for foreign-law debt so that, in effect, the creditors got “more” contractual protection in exchange for “more” reduction in the debt burden to the sovereign. In passing, I should mention that only 3% of the Greek debt was foreign-law debt at the time, which makes their proposal quite “interesting”. What I propose is the opposite. I propose to the creditors a voluntary exchange of foreign-law(s) debt for domestic-law debt so that, in effect, the sovereign gets “less” reduction in its debt burden in exchange for “less” contractual protection to the creditors. After all, as the neoclassical finance theory goes, our expectation is that the market correctly prices all financial assets including debts even when the debt restructuring contracts are “incomplete” in the sense that the claims of the debtors are neither directly observable nor verifiable by the creditors. As Miranda Xafa argued, and as the ongoing Republic of Argentina vs NML Capital case demonstrates, holdout creditors can have considerable leverage to frustrate debt restructuring agreements after they have been concluded if the restructuring is done under the law of one particular foreign country – especially considering that a significant portion of the restructured Argentine debt was issued under various other country laws originally. Assuming that we all agree with the neoclassical finance theory, the question then boils down to deciding whose proposal is “better” for both the majority of creditors and the debtor: Gulati and Zettelmeyer’s or mine. Until an answer is found to the above question, that is, default or griesafault, cry for me Argentina.
Posted on: Sat, 11 Oct 2014 19:41:02 +0000
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