Last updated: June 17, 2014 10:49 am

Argentina refuses to submit to ‘extortion’ on debt

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President Cristina Fernández©AFP

President Cristina Fernández of Argentina has raised the prospect of a sovereign default, saying that her government could not succumb to the “extortion” of a US Supreme Court decision that orders it to repay $1.5bn to “holdout” investors before servicing its restructured debt.

In a 20-minute nationally broadcast speech on Monday, Ms Fernández said she was willing to negotiate but Argentina could not pay a group comprised mostly of hedge funds by June 30.

The president said she was willing to continue repaying the restructured debt, but the US Supreme Court on Monday said Buenos Aires had to pay $907m to the investors who had not joined restructuring programmes or lose the ability to use the US financial system to pay an equal amount due by June 30 to holders of other Argentine bonds.

“What I cannot do as president is submit the country to such extortion,” Ms Fernández said.

The president gave no details on how she would continue to pay the more than 90 per cent of bondholders who agreed, in 2005 and 2010, to a more than 70 per cent haircut on their loans after Argentina defaulted on $100bn of debt in 2001-02. She said she had told her economy minister to set up “all the tools needed to make the payment to those who trusted in Argentina”.

Ms Fernández said the total owed to the plaintiffs was $1.5bn including interest, and paying it all immediately in cash in the way that the courts had ordered could trigger another $15bn in other cash payments to the remaining holders of defaulted debt. That “is not only absurd but impossible”, since it represents more than half the central bank’s remaining foreign reserves, she said.

“It’s our obligation to take responsibility for paying our creditors, but not to become the victims of extortion by speculators,” Ms Fernández said.

The holdout investors fighting the legal battle, which Ms Fernández described as “vultures”, are led by hedge funds Aurelius Capital Management and NML Capital, a unit of billionaire Paul Singer’s Elliott Management Corp.

During her address, Ms Fernández said NML’s practices were unethical; she said it bought the bonds in 2008 for $48.7m and in 2014 alone saw them gain 1,608 per cent.

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“I don’t even think that in organised crime there is a return rate of 1,608 per cent in such a short time,” she said.

The judges not only rejected Argentina’s appeal – they also ruled 7-1 that bondholders could force Argentina to reveal where it owns property around the world. That could make it easier to collect on other debts that have gone unpaid since Argentina’s economy collapsed.

Justice Antonin Scalia wrote that US federal law offered no shield to Argentina’s assets. Justice Ruth Bader Ginsburg was concerned that this could expose even Argentina’s embassies and military ships to seizure if the government does not pay.

Argentina’s Merval stock index dropped 11 per cent after the court decision, its largest one-day loss in more than six months. Share prices for the state-run YPF energy company fell nearly 13 per cent, while the Edenor electricity utility fell 20 per cent.

The cost of insuring Argentine bonds against default soared, and the value of Argentina’s currency fell to 12 pesos to the dollar on the black market, implying a 33 per cent loss to anyone needing to buy foreign currency legally.

Argentina has hinted it might consider negotiating with holdouts but could not do so until after December 31, when a clause in its debt swaps prohibiting it from offering holdouts better terms expires.

Whether Argentina can keep stalling investors and US courts until that date remains to be seen.

The International Monetary Fund has said it is worried that the rulings against Argentina could make it more difficult for other countries to restructure their debt and put financial calamity behind them.

“This is surprising because it is giving a precedent for any ‘vulture fund’ to go against any country, so any country is vulnerable in a restructure,” Sebastian Centurion at ABC Exchange told Reuters.

But other analysts believe collective action clauses now broadly used in sovereign debt issuance should prevent Argentina’s case becoming a precedent, and there was little reaction in other emerging markets to the Supreme Court decision.

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