My last on Argentina. 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 (IMF) 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% of the 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 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 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 in to 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 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 voting deeply divided. The voting 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 or not, under its own domestic law. I promise to discuss why I propose this in my next Parekh column, although some hints can be found in the above. Until then, cry for me Argentina.
Posted on: Mon, 06 Oct 2014 01:54:53 +0000
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