Argentina shows why an Irish default would have been folly

After 15 traumatic years of legal conflict between Argentina and holders of its defaulted debt, it took a 14-hour debate in the country’s senate before a deal to settle the imbroglio was finally endorsed. Holdout creditors will collect billions of dollars, but Argentina, a global financial pariah since its 2002 default, will regain access to international money markets.

There are grim lessons here for anyone who ever reckoned that Ireland could simply walk away from the crash by repudiating debt. Such a move was never seriously in play, although Sinn Féin’s policy in 2011 was to tell the IMF “to go home and take their money with them”. It’s a given that such a move would have risked default. The Argentine example – and many others besides – shows that such a course is no pain-free panacea to the problem of over-indebtedness.

“An emerging country that defaults once . . . pays a penalty either through a large recovery rate in the short term or through higher borrowing costs in the long term,” says a recent paper by IMF economist Tamon Asonuma. “If it chooses to repay less than full recovery rates it will face high borrowing costs, which leads to increased risks that the country will default again in the future.”

The fractious Argentinian story has its roots in the country’s default on $95 billion of foreign debts in December 2001, the biggest in history at that time. The affair was ruinous for millions of Argentines. Most but not all holders of the original bonds, and investors who later acquired them at a steep discount, agreed to swaps in 2005 and 2010 for new debt worth far less. Participants in the first restructuring received 30 cents in the dollar.

None of this was to the liking of a group of holdout investors led by billionaire hedge fund manager Paul Singer. It took action against Argentina, demanding full repayment in the courts of New York, where the original debt was issued. It won the case, securing injunctions compelling Argentina to pay it at the same time as holders of the renegotiated debt. Argentina baulked at the notion of repaying greedy “vultures” 100 per cent of face value when their bonds were acquired at pennies on the dollar. Then the New York court blocked payments on restructured bonds, prompting a second default in 2014. Shut out still from international markets, the country issued domestic bonds and found itself seeking back-door money from China.

Bank reserves

The new settlement is the centrepiece of a plan by Argentine president Mauricio Macri, who took office in December, to revive the country’s economy. Wracked by low investment, high inflation and perilously low central bank reserves, Argentina needs international money to tackle big fiscal deficits, boost infrastructure and rebuild international confidence.

The first act, however, is to go ahead with a $12.5 billion debt issue to fund repayments to the holdouts. There is no cheer in that for impoverished Argentines and nothing but cheer for the holdouts. Zinger’s fund, Elliot Management, is on the cusp of a 400 per cent return on its $617 million bet on defaulted bonds. Another fund, Bracebridge Capital, is in line for a 1,000 per cent gain.

All of this might seem quite remote from the circumstances of Ireland’s all-too- scary brush with financial catastrophe. Yet the protagonists and the practices in the debt netherworld tend not to vary. One of the holdouts in conflict with Argentina is a fund called Aurelius Capital Management, which took High Court action in Dublin against the government in 2011 after moves to impose losses of more than €1.6 billion on junior bondholders in Allied Irish Banks.

Kevin Cardiff, former secretary general of the Department of Finance, tells in his recent book how Aurelius used its influence in Washington to get the US treasury, the state department and members of Congress to apply pressure on Ireland. Aurelius ultimately withdrew the High Court action.

All signs suggest Argentina will succeed in finding international investors for new debt issuance, but at a high price in a market very hungry for yield. That’s the way these things work. In his paper on defaults, Asonuma of the IMF finds emerging countries that have defaulted in the past are more likely to do so again than non-defaulters even with the same external debt ratio. “These countries actually have repeated defaults or restructurings in short periods.”

The hope must be that Argentina can avoid that fate.