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 An intriguing story of real life money – big money.

Argentinean President Cristina Fernández de KirchnerOnce upon a time, Ireland borrowed €86 Billion. It bailed out banks, propped up the economy, paid for the overspending in the public service and generally kept the country afloat.  It has met all its repayments and is choosing not to default on anyone.

Argentina did the same thing.  However, they defaulted on payment on 26th December 2001 to the tune of $93 billion on external debt.  Quite understandably, this led a stop in capital flow into the country between 2001 and 2003.  The peso devalued by a factor of four, inflation rose to over 40% and GDP fell by 11%.

After 2003, the country slowly began to recover and in 2010, they carried out a second level of restructuring.  Between 2005 and 2010, there were large scale debt swaps that brought 76% of bonds out of default in the first round and then 93% in the second.  They exchanged their defaulted bonds for new ones worth significantly less —as little as a 30% in some cases.  Argentina promised to pay this time.  A nice deal if you can get away with it.

There were some ‘holdouts’.  A holdout is where the debt exchange is not accepted by the boldholder.  There were many holdout bondholders all over the world and so far, they have received nothing.  Argentina’s legislature passed a “lock law” making it illegal for the country to make subsequent offers to other bondholders. In other words, the 8% who didn’t take the offer were frozen out.

One of them was Kenneth Dart.  In 2003 he unsuccessfully sued to be paid $724 million for bonds purchased in 2001 for $120 million. He renounced his U.S. citizenship in 1994 for tax avoidance purposes, and his interests in Argentina became the focus of tax evasion charges in 2013.

This is all extremely complicated and I’m not going to go into it in detail here, but in short $4 billion were still in holdouts in 2013.

Some of these holdouts were ‘vulture’ funds like Elliott Management Corp. Paul Singer is the CEO and founder. His tactics are that he buys debt from countries, such as Peru and Congo-Brazzaville that have defaulted. This is “distressed debt”.  He gets this for pennies on the dollar. Then he tries to force those countries to pay up through international courts. It’s a very nasty business and he takes no prisoners in his approach to debt negotiations. It is time-consuming, costly and it can get very ugly. However, the profits can be huge. 

For example, he paid $11 million for debts in Peru and won $58 million in court judgements, which were paid because he gave Peru no choice.

ARA Libertad in Dublin 2007Another example is Argentina.  Argentina owns a beautiful tall ship called ARA Libertad, the sixth tallest in the world.  It has a crew of 357 sailors and is 104 metres long.  In October 2012, it was temporarily docked in Ghana.  Paul got a court order in Ghana to seize the ship.  He demanded $20 million from Argentina to release the ship.  They paid.  This is why they are called vulture funds.

Now let us look at today. 

Argentina was to make a payment of $539 on 30th June 2014 to the bondholders who agreed the restructuring. It missed that date and got 30 days grace to pay.  It made the payment on 30th July through the Bank of New York Mellon.  Now things get complicated again.

Thomas Griesa was appointed to the Federal Bench in the Southern District of New York by President Nixon in 1972.  In February 2012, he oversaw a case that interpreted a clause in the debt contracts known as Pari Passu.  This means that Argentina could not make further payments to the bondholders who agreed to the debt exchange unless it also paid the holdouts. In full.

Argentina appealed this ruling and lost.  It appealed several more times and lost. Then it appealed to the Supreme Court and lost on 16th June.

The $539 million payment made on 30th July to Bank NYM was seized.  This means that the bondholders have not been paid, even though the money has been paid. The money is sitting in the bank and can’t be touched until ALL bondholders are paid and not just the ones that reached agreement. Vulture funds are winning again.

ArgentinaThe actual wording in the bond document says:

Notwithstanding anything herein to the contrary, the Republic’s obligation to make payments of principal of and interest on the Securities shall not have been satisfied until such payments are received by the Holders of the Securities.

When you read further into the bond documents it may have an escape clause:

The Republic may, subject to applicable laws and regulations, make payments of principal of and interest on the Securities by mailing, or directing the Trustee to mail, from funds made available by the Republic for such purpose, a check to the person entitled thereto, on or before the due date for the payment at the address that appears on the security register maintained by the Registrar on the applicable record date.

As a strategist, how would you read this?

Did Argentina make a mistake by paying the $539 million through the Bank NYM?  Should it have simply put the cheques in the post instead?