October 31, 2012 7:14 pm

Poor by default

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Argentina’s stonewalling of foreign creditors is costly

It has long been an article of faith for Argentina’s government that it will never negotiate with those creditors that held out against restructurings of the country’s defaulted dollar bonds in 2005 and 2010. So determined is the president, Cristina Fernández, to have no truck with those she deems to be “vultures” that she has even written this commitment into law.

Unfortunately for Ms Fernández, her pledge has collided with US law, under whose provisions the original bonds and their restructured successors were issued. A New York court has ruled that Argentina must pay $1.4bn owed on unrestructured paper to some hedge funds. The ruling dismisses the idea that Argentina has the power to discriminate between those investors who accepted the restructuring and those who held out. In effect, Ms Fernández must either repeal her law and repay the hated vultures or default on the whole lot – restructured or not.

True, it remains questionable whether the judgment will in practice be enforced. In theory, what gives it teeth is that Bank of New York Mellon – which, as custodian, distributes Argentina’s bond payments – can be charged with “aiding and abetting” if it does not comply. But this may not stop Argentina seeking to frustrate it – perhaps by seeking to reroute the payments, although this itself may be fraught with legal perils.

In a sane world, Buenos Aires would revisit its iron refusal to settle with foreign claimants. (In addition to snubbing the holdouts, it has defaulted on almost $10bn of debt owed to the Paris club of sovereign creditors.) This has not only led to a series of embarrassing judgments against Argentina, including the recent impounding of a naval vessel in Ghana, it has also left the country’s inhabitants with among the highest borrowing costs in the world.

But Ms Fernández seems more likely to respond by wrapping herself ever more tightly in the Argentine flag. Her government is drifting fast towards an almost certainly ruinous policy of autarky, with the nationalisation of the main oil company, YPF, and imposition of currency and import controls. Her bitter fight with Clarin, Argentina’s biggest media group, hints at an increasingly intolerant attitude to critics.

Ms Fernández, who likes to play the victim, typically says all her problems are of someone else’s making. Yet this is a convenient rewriting of recent history. Like the debt ruling, most of these problems are of Argentina’s making, or even her own.

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