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With a little help from judge Griesa, Argentina could be turning tables

Economic Comment

  • A US court ruling on 19 February means the lifting of the injunction that obliges Argentina to pay the holdouts concurrent with other debt payments is one step closer, if several conditions are met
  • Vacating the injunction is important for Argentina as it translates to a stronger position in negotiations with the holdouts; it would also grant Argentina access to international markets again, important for bolstering FX reserves and reducing the risk of a balance of payments crisis
  • But, we are not there yet. The conditions Argentina needs to meet require congress approval which will not be easy

The ruling

A ruling by New York judge Griesa on 19 February brings Argentina one step closer to solving its 15 year old debt saga. The judge ruled that he would lift the injunction that obliges Argentina to pay the holdouts (litigating bondholders of non-restructured debt from the 2001 default) concurrent with other debt payments if the following conditions are met:

  1. Argentina lifts two pieces of legislation that block a deal with the holdouts, namely the Padlock Law (‘Ley Cerrojo’) and the Sovereign Payment Law.
  2. Argentina pays the holdouts who agree to the offer made on 5 February before 29 February. The Argentinian government offered holdouts with a pari passu (equal treatment) injunction a 30% haircut on their claims (principal and accumulated interest). Bondholders lacking a pari passu injunction were offered 150% of the original principal amount (excluding compensation for foregone coupon payments). Argentina would pay the USD 11.5bn in cash by issuing new debt. So far, the offer has been accepted by Italian holdouts and 2 of the six largest American funds.

The judge’s decision was supported by the radical change of attitude and policy towards settlement with the holdouts under the new Argentinian government that took office on 10 December 2015.

The debt saga

Argentina defaulted on USD 95bn of sovereign debt in 2001, the largest default in history. Argentina restructured 93% of the debt, but remaining creditors, currently known as the holdouts, did not accept the haircut. They filed a case against Argentina in a court in New York, whose legislation covers the bond issue, and successfully claimed full payment under the pari passu treatment. Consequently, Argentina had to pay the holdouts concurrent with restructured debt. On the other hand, a self-enacted clause (RUFO, rights upon future offers) obliged Argentina to offer restructured debt the same payment terms as to the holdouts. Caught up between a 100% payment of outstanding debt from the 2001 default and a selective default, Argentina chose for the latter. The RUFO close expired on 1 January 2015, giving Argentina room to negotiate with the holdouts, but former president Kirchner politicised the issue and was not willing to set such a step.

An important milestone

Figure 1: Argentina’s FX reserves at very low levels
Figure 1: Argentina’s FX reserves at very low levels</em>Source: Macrobond, BCA, INDEC

Vacating the injunction would reduce the leverage that the holdouts have over Argentina at the negotiation table, as it would allow the country to service other debt. This might augur well for reaching a settlement. Also, the country would no longer be legally prohibited from issuing international debt, though the unresolved default has de facto limited access to international markets since 2001 nevertheless. Regaining access to international markets is crucial for Argentina to replenish its low FX reserves and reduce the risk of a balance of payments crisis in the coming year. Following years of capital flight and heavy government controls, the country’s FX reserves are at very low levels. FX reserves increased by USD5bn to USD 27bn in February on the back of recent measure, but are poised to deteriorate as imports are expected to spike after 5 years of repression. 

But we are still a long way to go

To meet the conditions imposed by judge Griesa, the Argentinian congress needs to approve the offer made to the holdouts and the legislative changes. This will be a test for president Macri’s political support now that recent defections from the FPV have bolstered hiss leeway in the lower house.

In fact, he can now form the largest group there if he allies with all non-core FPV parties. Getting approval in both chambers of Congress will be more difficult as the Peronist FPV still holds an absolute majority in the Senate. Macri could choose to rule by decree on this issue. Approval of one chamber of congress would suffice for the decree to stand as law and the current situation augurs well for support in the lower house. However, a decree could increase political tensions with those outside his Cambiemos coalition. Even if these conditions were met, the judge cannot vacate the injunction until a pending Appeal Argentina had started with the 2nd US Circuit Court of Appeals in Manhattan is solved.

Alexandra Dumitru
RaboResearch RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 2326 6856

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