Not only did Argentina lose the World Cup final in a heartbreaker this past weekend to Germany, they now must turn their attention to a problem that could potentially once again cripple their economy.
In 2001, Argentina succumbed to what was at the time, the largest sovereign default in history. Public debt in Argentina as a percentage of GDP reached had reached 166% and with an unemployment rate exceeding 21%, Argentina had no other option but to miss payments on their bonds.
Since 2003 a new Argentine government has implemented a debt management strategy under the premise that it was necessary to resume economic growth in order to be able to service debt. There has been progress and over the past ten years the domestic economy has grown steadily. Argentina is the second largest economy in South America behind Brazil.
Argentina’s economic progress over the past 10 years was helped by a deal they made with their creditors. Under the deal, 92% of bondholders agreed in 2005 and 2010 to write off two-thirds of the bonds’ pre-crisis value. This provided Argentina with time to rebuild its economy. Restructuring deals are voluntary between the borrower, in this case Argentina, and its creditors. Bondholders are not obliged to agree to a devaluing of their debt, but risk a full default and loss of all their funds if they don’t.
Some investors may buy debt ahead of a restructure and bet that they can demand a better deal. This is what a group of US hedge funds led by billionaire Paul Singer did. They bought the Argentina bonds for pennies on the dollar while the economy was in turmoil in 2001 and then demanded to be paid the full dollar back. The Argentine government has been in a 12-year legal battle in the US courts, arguing that this is unreasonable and that the hedge funds are engaging in blatant profiteering. The charge of the hedge funds engaging in profiteering is not a shock as that is what the mission of most hedge funds is.
Earlier this month, the US Supreme Court ruled that Argentina must pay the hedge funds that had refused to participate in the debt restructuring deal the full $1.3billion value of the debt. Payments on the restructured bonds come due on June 30th; after that, there is a month long grace period—some maneuvering room—and then Argentina will officially be missing its payments on the bonds it has spent years trying to pay back.
There are two possible outcomes, either Argentina negotiates with the holdout creditors (since paying them back in full is all but impossible), or it would once again default on its debt.
The Supreme Court’s decision will make it more difficult for other countries to restructure its debts in an arbitrary and unjust manner. It should also lead to an improvement of the legal frameworks governing defaults by sovereign countries.
Some economists have suggested that the rulings will disrupt or impede future sovereign debt restructurings by encouraging holdout creditors to litigate for full payment instead of participating in negotiated exchange offers. They argue that incentives for holdout litigation are not limited because of significant constraints on creditor litigation, substantial economic and reputational costs associated with such litigation, and the availability of contractual provisions and negotiating strategies that mitigate the debtor’s collective action problems. They also claim that the fact-specific equitable remedy in the Argentina case was narrowly tailored to Argentina’s unprecedented disregard for court opinions and for international norms of negotiating sovereign debt restructurings and is therefore unlikely to be used in future debt restructurings.
Lionel Messi couldn’t bring a World Cup back to Argentina, maybe they need to bring Diego Maradona out of retirement to negotiate with the hedge funds to save the economy.
Don’t Cry For Me Argentina
