October 27, 2013 4:16 pm
Few disputes in international finance are as intractable as that between Argentina and a group of dissident hedge funds holding out for full payment on the country’s defaulted bonds.
After more than a decade of fruitless denunciation, this has now descended into legal trench warfare. In a case that illustrates the need for a sovereign debt restructuring mechanism, the funds have secured judgments against Buenos Aires in two New York courts. If they succeed when the suit finally winds its way to the US Supreme Court next year, Argentina will have either to pay them in full or default on all the bonds – including holders with whom it has settled in past restructurings.
The dissident hedge funds emerge from the dispute with little credit. Their claim that the Argentines used strong-arm tactics to impose an unreasonable haircut on those who accepted past restructurings ignores the fact that warrants linked to economic growth have recouped much of the losses.
But their conduct pales in comparison to the recklessness of the government. The grandstanding of President Cristina Fernández, who has condemned the hold-outs as “vultures” and vowed never to pay, is irrational.
Argentina’s debt restructurings have not re-opened its access to international capital markets. Twelve years after its $82bn default, the country is a financial pariah struggling to raise funds to develop its shale gas reserves.
Given the positions fiercely and very publicly taken, there is no obvious way back from the brink. Of course, things might be different were there to be political change in Buenos Aires – something that is not impossible given the state of the economy.
But such is the potency of Ms Fernandez’s anti-vulture rhetoric that even this might not shift discussions to a new course.
An alternative would be for the creditors to come up with a solution, cutting out the Argentines altogether. Last week, Gramercy Fund Management floated an idea that would involve the restructured bondholders giving up part of the coupon on their holdings for five years in return for the dissidents abandoning their legal battle.
While unorthodox, this is not illogical. True, the restructured holders would be giving up some value, but they would be doing so to avert an outright default. The dissidents, meanwhile, would get a sweetener to enable them to climb down from the ledge. The government would avoid capitulation.
But there is no certainty that such a deal would be practicable. And even if the dissidents would support such a proposal, three-quarters of the restructured bonds would have to be voted in its favour, and it would almost certainly need the president’s consent.
But after more than a decade of deadlock, Argentina’s bond dispute badly needs fresh thinking. With the table otherwise bare, the creditors’ proposal merits investigation.
It is better to clutch even at possible straws than to slide passively towards a denouement in the Supreme Court.
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