When Argentina defaulted on its debt last month, it was the eighth time in its history – averaging every 25 years since independence. Its latest difficulties stem from its previous default – $81 billion (€60.44 billion) – in 2001, in what was then the world’s biggest sovereign default. Argentina, in the two subsequent debt restructurings, offered creditors an opportunity to cut their losses, by exchanging non-performing bonds for new government securities worth far less. This involved investors taking a huge – 65 per cent – loss. Nevertheless, 93 per cent of bondholders did accept the financial haircut. However a small minority, mainly US hedge funds, refused the bond exchange offer, and held out for full repayment of the debt.
For more than a decade the holdouts – bondholders refusing to settle – have waged a legal battle to force the Argentinian government to pay up; but without much success, until 2012. Then a New York court found in their favour, and ruled that all bondholders should be treated equally. The court decided that unless Argentina agreed to reimburse the holdouts in full, it could not continue to pay the exchange bondholders – those that had already swapped their debt. The dollar bonds that Argentina had issued are subject to New York law, and last month the US supreme court upheld the decision of the lower court. Argentina’s mistake was not to include a collective action clause provision in its original bonds. This allows a supermajority of bondholders to agree to a debt restructuring that becomes legally binding on all, including those voting against a restructuring.
Argentina, so far, has refused to pay the holdouts, insisting they are “vultures” who bought the distressed debt after the 2001 default, at low prices, and who by seeking full repayment, are preventing the 93 per cent of investors who accepted the restructuring terms from being paid. To further complicate matters, Argentina has said that the terms of its restructured bonds prevent it from offering the holdouts a better deal, at least without paying those who have accepted the restructuring the same terms. And this, it says, it cannot afford. Argentina’s failure to make the payments, as required, has placed it in default.
As matters now stand everyone loses, not least Paul Singer, the US hedge fund operator, whose Elliott Management has helped to force Argentina into default for the second time in 13 years. To succeed in securing full repayment of the distressed debt of sovereigns in default needs deep pockets and great patience. A billionaire, Mr Singer’s investment record suggests he has both. A deal must be done soon with Argentina’s creditors, if the country is to prevent what for now is a technical default, from becoming a far more serious matter.