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Understanding Argentina’s Surrender

On March 31, with the support of the Peronists, the Argentinean Senate voted in favor of passing the “Public Debt Normalization and Access to Public Credit” bill to authorize the government to pay the holdouts.

Esteban Mercatante

April 12, 2016
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This is a translation of an article originally published in La Izquierda Diario.

What does the new bill do?

This new bill repeals both the Bolt Law (Ley Cerrojo) and the Sovereign Payment Law (Ley de Pago Soberano). Past laws prevented vulture funds from receiving a more beneficial deal than the funds that agreed to debt swaps in 2005 and 2010. These debt swaps covered 93 percent of the debt on bonds after Argentina went into default in 2001. The vulture funds (so-called “holdout” funds) are those that lay claim to the remaining seven percent and had rejected these two debt swaps, pushing for 100 percent payment of the debt, plus interest.

The holdouts used the Bolt Law in New York courts to substantiate their claim that the Argentinean government must pay the full value of the bonds that are in default. This demand was accepted by New York Judge Thomas Griesa in the New York District Court in February 2012 and later reaffirmed by the U.S. Supreme Court in June 2014.

The government of Argentina refused to comply with the rulings, arguing that it could easily lead to new disputes with other creditors it had already settled with. The following September, this led to the “Griefault” –partial default on the debt bond swaps of 2005 and 2010 that were issued under U.S. legislation. Under Judge Griesa’s orders, Argentina cannot continue to pay off the already-restructured bonds until it starts to pay off the vultures.

Also repealed by the recent Senate vote, the Law of Sovereign Payment was passed in September 2014 by the Cristina Fernández de Kirchner administration in an attempt to escape Griesa’s shackles. It allowed creditors with bonds affected by Griesa’s decision to exchange them for others under the jurisdiction of Argentina or France and changed the payment agency from the Bank of New York Mellon to the Nación Fideicomisos (subsidiary of the Argentinean National Bank).

This legislation did not achieve its original aim of incentivizing creditors to exchange their bonds in order to allow for the continued payment of the affected debt. Instead, the Sovereign Payment law was used by the vultures to bolster their case against the Argentinean government, accusing it of acting in “bad faith.” All the while, Cristina Fernández continued debt payment, running down the country’s Central Bank reserves, while disguising her “sovereign” policy with the rhetoric of “patria o buitres” (homeland or vultures).

What’s next?

The law approved by the Macri government authorizes it to hand over up to $20 billion to the vultures. According to agreements with the various bondholders, the amount needed will reach $12.5 billion dollars. This figure includes both the original beneficiaries of Griesa’s 2012 judgment, re-affirmed in 2014, along with other creditors who, with the ruling, are being given the same rights as the original plaintiffs.

The debt that the government is now preparing to cancel was originally worth $4.682 billion. However, with interest and punitive debt, the government will be paying 2.7 times the original amount. According to figures from the economic team, with the accumulation of interest and punitive debt, the total amount reaches $22.388 billion. The government has reached an agreement to pay off ths debt with a 46.2 percent “rebate” that will be applied to the astronomical levels of interest.

Furthermore, the Macri government has committed to filling the already-fattened pockets of the New York litigants with an additional $235 million to reimburse the legal fees of the vulture funds.

What will happen after April 13?

After the agreement with the vultures was signed on February 29, Judge Griesa ordered the lifting of the sanctions on Argentina. But the New York Court of Appeals left the judges’ decision in abeyance and set a new hearing date for April 13 – just one day before the expected date of payment to the vultures. In fact, the decision of the Court of Appeals requires delaying the April 14 expiration date. But the agreement also stipulates that if the payment is not settled by April 14, the agreement falls.

A number of vulture funds have submitted two briefs before the Justice of the United States in which they demand the suspension of Judge Thomas Griesa’s decision to lift the sanctions placed on Argentina, as they believe that the country will not meet its obligations by April 14.

The major holdout funds of NML Capital, Aurelius Capital Management, Blue Angel Capital and Olifant Fund argue that they want the agreed amount of $4.653 billion to be paid by the deadline.

The government has bet on an agreement for the postponement of the date, while preparing to enter the market at the beginning of April. It is likely that negotiations will reopen and the vultures will pile on the pressure for more concessions in exchange for a later payment date.

Does this close the chapter on the vultures, or is there more litigation to come?

The agreement gives the vultures more than what 93 percent of creditors accepted in the earlier debt swaps. In 2005, the nominal rebate was around 54 percent, but adjustment for inflation and coupons attached to the GDP growth generated an accelerated growth of value gained by the creditors. This operation was repeated in 2010, with the added problem of recognizing that those who entered into this exchange would have gotten the full retroactive growth from these coupons, that is, pure profit without the annoying threat of “risk” for the usurers.

Adding these growth coupons to the debt paid makes no less than $12 billion, the equivalent of under a third of the value of the bonds delivered in 2005. As if this was not enough, the majority of those who did make the exchange had bought the titles at rock-bottom prices as the bonds were in default, and with the exchange they have made profits of 300 percent or more over what they had paid.

The vultures will now get much more. Under the agreement that has been reached, they will pocket yields ranging from 846 percent in the case of Aurelius Capital, to 3,183 percent for Bracebridge Capital. Somewhere in the middle is Paul Singer’s NML Capital, with 1,308 percent.

This is all based on the market estimate that these funds never paid more than 30 percent of the face value of each bond. To give an idea of the magnitude of these profits: if it is assumed that these titles were bought in 2001, i.e. that they have had to wait fifteen years to collect (which has not generally been the case) and that they paid 30 percent of the nominal value, the annual return received for these “investments” are 19.28 percent for NML; 16.16 percent for Aurelius and 26.21 percent for Bracebridge.

Several creditors who entered in debt swaps in 2005 and 2010 now allege that they have been “handicapped” by the agreement. It just so happens that these earlier bonds include the famous “Rights Upon Future Offer” (RUFO) clause, which means that those who entered into the swaps are entitled to a better offer if the government improves the conditions offered to bondholders who did not enter into the previous debt swaps. According to the conditions of the issue of Argentine debt, the RUFO clause has a December 31, 2014 expiration date. But it is a matter of debate among jurists as to whether or not this will hold up in future court cases.

The Macri government has attempted to minimize this possibility. As this law was being discussed in the Chamber of Deputies, the Luciano Laspina of the Republican Proposal (Propuesta Republicana – PRO) said, “There is no one that seriously considers, whether in private or in public, that there is a chance of reviving the RUFO clause.”

But there are, in fact, many who that believe this may occur. It cannot be ruled out that vultures like Paul Singer, the most visible face among the litigants, have some of these earlier debt swap bonds in their possession and are prepared to file a claim in order to invoke the RUFO clause as soon as the agreement materializes. The “vulture” judges are ready to give them this right in the New York courts.

How to get out of the debt trap

For Argentina, paying the holdouts means sinking billions of dollars further into debt and handing money immediately over to the filthy rich, whose profits come from demanding millions of dollars for titles bought for two pesos.

But this indebtedness from the payment of “old” debt is only the beginning; Macri is preparing to issue debt for amounts that exceed the payments to the vultures several times over. Minister of Economy Alfonso Prat-Gay has stated on several occasions that the debt is “good” because it will allow for the mitigation of the austerity policies already under way, which is of course untenable as now there will be little choice but to enforce further austerity after paying the debt that they have now taken on.

Far from “normalization”, the payment of this vulture debt will push Argentina into a new spiral of indebtedness. Thus, it is urgent for working people to fight for the continuation of the non-payment of this debt, the costs of which will fall on our shoulders. It is necessary to say NO to the payment of the debt, to call for the nationalization of the banks into a single entity under the management of workers, and for a state monopoly of foreign trade.

This is the only way out of the defrauding and discretionary manipulation of dollars by the imperialist octopus and its local partners that control the entry and exit of foreign currency.

Translation: Sean Robertson

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Esteban Mercatante

Esteban is an economist from Buenos Aires and a member of the PTS.

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