Friday, June 7, 2013
|9:25 AM||John Boyle|
Argentinas debt crisis continues to roll through the courts in New York, but in order to explain where we are today one needs to go back in time and explain the various stages of the economic meltdown and bounce back of the Argentine economy.
December 21 2001
Argentina defaults on 100 Billion U$S Dollars of debt and the economy which is at that time pegged to the U$S Dollar at a rate of 1 U$S Dollar = 1 Arg Peso collaspes.
The currency peg breaks and all Argentines with saving in the banks see their savings decimated losing roughly 70% in one day as the peso goes into free fall.
Food kitchens spring up accross the country and millions lose their jobs. Argentina become a pariah nation and is excluded from borrowing on the international markets.
The economy is left bobbing along almost dead in the water, but for a small silver lining, Argentina has just gone from being one of the worlds most expensive citys to one of its cheapest.
By 2005 Argentina had recovered to a point where it was able to offer payments to the bond holders although with heavy discounts. The offer amounted to about 29cents on the Dollar plus interest and was accepted by the majority of bondholders.
The key to note here is that those who were against the debt restructure were not forced to accept the haircut as in Greece Spain Cyprus and other countries where debts have been restructured. In Argentinas case the holdouts have continued fighting in the New York Courts seeking to receive 100 cents on the dollar. Another point to note is that almost all of the holdouts are Vulture funds who purchased the bonds at only cents on the Dollar at the time of the Argentine melt down.
The battle has raged on it the courts and in 2010 Argentina reopened the offer to the holdouts. With this they managed to reduce to holdouts to only 7% of the bondholders.
But the tail is still wagging the dog and the vulture funds have been trying to seize Argentine assets around the world ,most notably the frigate Libertad which was held in Ghana for several months last year.
So the stage is now set for New York.
Argentina has once more opened the offer so that the vulture funds can climb aboard.
It is widely expected they will reject this.
So what are the options for the courts and what could be the responses.
1) The courts could order Argentina to pay the bondholders in full. Approx U$S1.3 billion.
But if Argentina were to accept this then the 93% of bondholders that have accepted the haircut could then claim they also want the full amount.
The result would be almost instant default and nobody would be paid.
2) Argentina could ignore the New York courts and continue paying the 93% of the bondholders by using European or Asian clearing banks.
This would cause a technical default. IE Some would claim Argentina is in default and Argentina would say " No we are NOT".
3) The courts could come down in favour of Argentina and say that 7% cannot demand to be treated differently to the 93% who accepted the haircut. After all in Greece Ireland Cyprus Portugal Spain ect the haircut was enforced on everybody in order to save the countries from bankruptcy. Imagine if 7% or even just one bond holder were allowed to stop the bail outs in there tracks.
It would mean that no country could ever default again and no debt could ever be restructured.
The very factors that led to world war two would now be enshrined in international law.
Posted by John Boyle at 9:25 AM