Argentine debt restructuring

thumb|Minister [[Alfonso Prat-Gay takes part in meetings with the IMF and the World Bank, shortly after the end of the default.]]

The Argentine debt restructuring is a process of debt restructuring by Argentina that began on January 14, 2005, and allowed it to resume payment on 76% of the US$82 billion in sovereign bonds that defaulted in 2001 at the depth of the worst economic crisis in the nation's history. A second debt restructuring in 2010 brought the percentage of bonds under some form of repayment to 93%, though ongoing disputes with holdouts remained. Bondholders who participated in the restructuring settled for repayments of around 30% of face value and deferred payment terms, as well as warrants that paid investors based on annual economic growth as part of the same offer, and began to be paid punctually; the value of their nearly worthless bonds also began to rise. The remaining 7% of bondholders were later repaid 25% less than they were demanding, after centre-right and US-aligned leader Mauricio Macri came to power in 2015.

As part of the restructuring process, Argentina drafted agreements in which repayments would be handled through a New York corporation and governed by United States law. The holdout bondholders found themselves unable to seize Argentine sovereign assets in settlement, The courts ruled that as Argentina had itself drafted the agreement, and chosen the terms it wished to propose, it could not now claim the terms were unreasonable or unfair, and that this could not be worked around by asserting sovereign status since the injunction did not affect sovereign assets, but simply ruled that Argentina must not give preferential treatment of any group of bondholders over any other group when making repayments.

Subsequently, though Argentina wanted to repay some creditors, the judgment prevented Argentina from doing so, because being forced to repay all creditors, including the holdouts, would have totaled around $100 billion. The country was therefore categorized as being in selective default by Standard & Poor's and in restricted default by Fitch. The ruling affected New York law Argentine bonds; Argentine bonds issued under Buenos Aires and European law were not affected.

Proposed solutions include seeking waivers of the RUFO clause from bondholders, or waiting for the RUFO clause to expire at the end of 2014.

Although the media widely reported that the default ended with payments to the principal bondholders in early 2016, during the presidency of Mauricio Macri, several hundred million dollars in outstanding defaulted bonds remained unpaid, which resulted in continuation of litigation. In November 2016 Argentina announced that it had settled with additional creditors for US$475 million.

Argentina defaulted again on May 22, 2020, by failing to pay $500 million on its due date to its creditors. Negotiations for the restructuring of $66 billion of its debt continue.

Overview

Argentine financial crisis

Around 1998 to 2002, Argentina's economy went into severe recession. On December 26, 2001, Argentina defaulted on a total of US$93 billion of its external debt; of around $81.8 billion in bonds that were defaulted, 51% were issued during this three-year period. Foreign investment fled the country, and capital flow toward Argentina ceased almost completely from 2001 to 2003 (though it later recovered). The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly to nearly 4-to-1, producing a sudden rise in inflation to over 40% and a fall in real GDP of 11% in 2002.

Economic recovery eventually allowed Argentina to offer large-scale debt swaps in 2005 and 2010; the first brought 76% of bonds out of default and the second, 91.3%. Dart renounced his U.S. citizenship in 1994 for tax avoidance purposes, and his interests in Argentina became the focus of tax evasion charges in 2013. Italian nationals had become the largest group of foreign retail investors in Argentine bonds when during the 1990s, banks in their country purchased $14 billion in bonds and then resold them to nearly half a million investors; the vast majority rejected the first swap but accepted the second.

Background and holdout problem

Upon default, Argentina's bondholders sued to be repaid 100% of their bonds' face value. Among the bondholders were vulture funds, who had speculatively acquired US$1.3 billion of the bonds' total value on the secondary market for cents on the dollar after the 2001 default. Vulture funds also owned a large quantity of credit default swaps (CDS) against Argentine bonds. This created a further incentive to not only trigger a default against Argentina; but also to undermine the value of the bonds themselves, as the CDS would pay out at a higher rate if the defaulted bonds decline to extremely low values. A similar strategy had been successfully pursued previously by vulture funds against Peru and a number of African nations, as well as against corporations in the United States itself, such as Delphi Automotive, which was forced to pay Paul Singer's Elliott Management Corporation a return of over 3,000% on corporate bonds defaulted during the 2008 recession. NML Capital Limited, the Cayman Islands-based principal vulture funds in this dispute, is also owned by Singer. NML paid $49 million in the secondary market for bonds worth $832 million by 2014. Its lobbying group, American Task Force Argentina, is the most prominent and best financed opponent of Argentine bond restructuring efforts, spending over $7 million lobbying U.S. Congressmen and becoming the top campaign contributor to a number of these; the most prominent, former Western Hemisphere Subcommittee Chair Connie Mack IV (R-FL), became the main sponsor of a bill in 2012 designed to force Argentina to pay NML nearly $2 billion before losing his Senate bid that year.

In August 2013, the Government of Argentina lost a U.S. appeals court case and was told it had to repay the full face value amount to these holdouts. Courts in Europe have backed Argentina on the basis of the equal terms clause, however. A third debt restructuring offer to remaining holdouts on similar terms to the 2010 swap was announced on August 27, 2013. However, meeting vulture funds' full face-value demands is problematic for Argentina, because although bonds held by vulture funds are a small share of the total (1.6%), such a settlement would lead to lawsuits from other bondholders demanding to be paid on similar terms under the agreement's "rights upon future offers" (RUFO) clause, effectively unwinding the settlement by allowing all bondholders payment in full, and creating an unaffordable liability of up to $120 billion more than at present.

As a result, Argentina has still not been able to raise finance on the international debt markets for fear that any money raised would be impounded by holdout lawsuits; their country risk borrowing cost premiums remain over 10%, much higher than comparable countries. Consequently, Argentina has been paying debt from central bank reserves, has banned most retail purchases of dollars, limited imports, and ordered companies to repatriate money held abroad. Nevertheless, between 2003 and 2012 Argentina met debt service payments totaling $173.7 billion, of which 81.5 billion was collected by bondholders, 51.2 billion by multilateral lenders such as the IMF and World Bank, and 41 billion by Argentine government agencies. Public external debt denominated in foreign currencies (mainly in dollars and euros) accordingly fell from 150% of GDP in 2002 to 8.3% in 2013.

In January 2005, the Argentine government offered the first debt restructuring to affected bondholders; nearly 76% of the defaulted bonds (US$62.5 billion) were thus exchanged and brought out of default. The exchange offered longer term par, quasi-par, and discount bonds—the latter with a much lower nominal value (25–35% of the original). The majority of the Argentine bond market thereafter became based on GDP-linked bonds, and investors, both foreign and domestic, netted record yields amid renewed growth. One of the largest single investors in Argentine bonds following these developments was Venezuela, which bought a total of more than $5 billion in restructured Argentine bonds from 2005 to 2007. Between 2001 and 2006, Venezuela was the largest single buyer of Argentina's debt. People who criticize Vargas have said that he made a $1 billion "backroom deal" with swaps of Argentine bonds as a sign of his friendship with Chavez. The Financial Times interviewed financial analysts in the United States who said that the banks profited from the resale of the bonds; the Venezuelan government did not profit.

President Néstor Kirchner on December 15, 2005, announced his intention of liquidating all the remaining debt to the IMF, in a single payment of US$9.81 billion, initially planned to take place before the end of the year (a similar move had been announced by Brazil two days before, and it is understood that the two measures were to be coordinated).

Argentina under the Kirchner administration had already reduced its debt to the IMF from $15.5 billion in 2003

The payment served to cancel the debt installments that were to be paid in 2006 ($5.1 billion), 2007 ($4.6 billion), and 2008 ($432 million). This disbursement represented 8.8% of the total Argentine public debt and decreased the Central Bank's reserves by one third (from $28 billion to $18.6 billion). According to the official announcement, it also saved about a billion dollars in interest, though the actual savings amounted to $842 million (since the reserves that were in the BIS were until then receiving interest payments).

The Ministry of Economy reported in June 2005 that the total official Argentine public debt was down by $63.5 billion from the first semester to $126.5 billion as a result of the restructuring process; of this, 46% was denominated in dollars, 36% in pesos, and 11% in euros and other currencies. Due to the full payment of the IMF debt and several other adjustments, as of January 2006 the total figure decreased further to $124.3 billion; bonds not exchanged in 2005 accounted for $23.4 billion, of which 12.7 billion were already overdue. The Central Bank's reserves surpassed their pre-payment levels on September 27, 2006.

A similar agreement was reached eight years later with the Paris Club of creditor nations (the last remaining Argentine debt still in default besides bonds held by holdouts) on debt repayment totaling $9 billion including penalties and interest.

Second debt swap: debt exchange reopens (2010)

On April 15, 2010, the debt exchange was re-opened to bondholders who rejected the 2005 swap; 67% of these latter accepted the swap, leaving 7% as holdouts. and by suing to attach future Argentine payments on restructured debt to receive better treatment than cooperating creditors.

A total of approximately US$12.86 billion of eligible debt was tendered into the exchange launched in April 2010; this represented 69.5% of outstanding bonds still held by holdouts. A total of 152 types of bonds in seven different currencies under eight distinct jurisdictions were issued during the two debt exchanges. The 2010 re-opening thus brought the total amount of debt restructured to 92.6% (the original 2005 debt exchange restructured 76.2% of Argentine government debt in default since 2001). The final settlement of the 2010 debt exchange took place on August 11, for bondholders that did not participate in the early tranche that closed on May 14 and settled on May 17. the presidential airplane, and the . Eventually this approach proved fruitless. The holdout bondholders soon discovered that due to a number of sovereign immunity laws, it was impossible to actually enforce their judgments by seizing the handful of Argentine assets still within the reach of U.S. jurisdiction.

In a lawsuit filed by NML, the lower UK courts found that Argentina had state immunity. Before 2011, Elliott successfully appealed the case to the UK Supreme Court, which ruled that Elliott had the right to attempt to seize Argentine property in the United Kingdom.

Holdout parties win the right to have "equal payment" terms enforced

The basis of the holdout bondholders' next approach arose from oversights on Argentina's part, due to both its economic history and partly from the legal wording chosen by Argentina's government.

Because Argentina had been historically so unstable, it would have been difficult for it to solicit investors to buy bonds in Buenos Aires under Argentine jurisdiction, as few external investors trusted Argentina courts to enforce bonds against their own government. This consideration led Argentina to transfer the issue of bonds to New York, under United States law, on April 20, 1976, as were most subsequent bond issues. The bonds were therefore issued under a special kind of bond contract, a "Fiscal Agency Agreement" that was drafted by Argentina's U.S. attorneys under the law of the state of New York. The FAA stipulated that the repayments on the bonds were to be made by Argentina through a trustee, The Bank of New York Mellon, which meant that the U.S. courts did have jurisdiction over that party to issue injunctive relief.

In the Fiscal Agency Agreement, Argentina's attorneys included a boilerplate pari passu clause, but neglected to include a collective action clause. Pari passu is a term generally used to signify equal priority or treatment, and a collective action clause would have obligated any holdouts to accept the generally offered terms if enough other bondholders agreed to accept them. As a result, the holdouts realized that while Argentina could not force the holdouts to accept the terms in the 2005 or 2010 restructurings, NML could use the pari passu clause to force Argentina to choose between paying all its bondholders (including NML) or none of them.

NML Capital therefore sued Argentina in the U.S. District Court for the Southern District of New York (i.e., a federal trial court) by invoking that court's diversity jurisdiction as well as forum selection and choice of law clauses in the Fiscal Agency Agreement itself.

Pari passu litigation case

Federal district judge Thomas P. Griesa was assigned to hear the case. The crucial expression pari passu had not previously been interpreted in any published decision by the courts of the state of New York, but there is no way in U.S. federal civil procedure for a federal district court to directly transfer a case to state court if it had not originally started there. (By way of contrast, if NML Capital had sued Argentina in a New York state court, Argentina would have had the option to "remove" the case to federal court.) Instead, the district court was required by Erie Railroad Co. v. Tompkins (1938) to make an "Erie guess" as to how a New York state trial court would interpret that clause by applying general principles of contract law in the state of New York as articulated in the published decisions of the New York Court of Appeals and the New York Supreme Court, Appellate Division. The district court ruled in NML Capital's favor and issued broad permanent injunctions against Argentina and the bond trustee. The U.S. Court of Appeals for the Second Circuit (the federal appellate court with jurisdiction over New York) in turn affirmed the district court's interpretation, but did not exercise its optional right to certify that specific issue to the New York Court of Appeals for a ruling on New York state law.

According to the Second Circuit's opinion issued on October 26, 2012 (signed by senior circuit judge Barrington Daniels Parker, Jr.), Paragraph 1(c) of the 1994 version of Argentina's Fiscal Agency Agreement was as follows:

The Second Circuit interpreted this clause under New York law and concluded "that in pairing the two sentences of its Pari Passu Clause, the FAA manifested an intention to protect bondholders from more than just formal subordination ... the two sentences ... protect against different forms of discrimination: the issuance of other superior debt (first sentence) and the giving of priority to other payment obligations (second sentence)." The decision of the appeals court was adverse and a motion for rehearing by a full panel was denied on March 26.

On August 23, 2013, the Second Circuit (in another opinion also signed by Judge Parker) affirmed the lower court's latest ruling clarifying the scope of the permanent injunctions. The court implied at the start of its opinion that since Argentina had taken a calculated risk to enjoy the benefit of New York law (i.e., a lower interest rate), it now had to bear the burden of New York law as well: "In order to enhance the marketability of the bonds, Argentina made a series of promises to the purchasers."

The United States Supreme Court repeatedly denied Argentina's petitions for certiorari, on October 7, 2013, and June 16, 2014, meaning that it was effectively refusing to hear Argentina's appeals from the Second Circuit's decisions. The petition denied on June 16 had presented two issues: (1) sovereign immunity and (2) the Second Circuit's decision to simply affirm the trial court's Erie guess as opposed to exercising the option to certify that issue to the New York Court of Appeals.

On the same day it denied to review the injunction, the U.S. Supreme Court affirmed Judge Griesa's worldwide discovery order in Republic of Argentina v. NML Capital, Ltd.

Citigroup, which has operations in both New York and in Argentina, was caught in the middle, being required to conform to both New York and Argentine law, an international conflict of law. The trial court has granted temporary relief to the bank, allow payment of a few of the interest payments due to holdout bondholders, but the obligation to repay all holdouts as the cost of continuing to service Argentine bonds had resulted in a decision to terminate its Argentine debt servicing operation absent legal relief.

Argentina 2014 "selective default"

The pari passu ruling had a grave impact on Argentina's route out of economic difficulty. The issue perceived by Argentina was that the agreement also included a "rights upon future offers" ("RUFO") clause. The effect of such a clause was that, if a later settlement paid more, or on better terms, all existing settlements would be repaid on the improved terms. This was intended to reassure bondholders that it was safe to settle early, and reduce the incentive to hold out for a better later offer.

As a result of the earlier rulings for the holdout bondholders, Argentina now faced a situation whereby:

The 7% of bonds held by the "Holdout" bondholders had to be paid at full face value, whereas the other 93% had agreed to be repaid around 30% of the bonds' face value;
The 93% of renegotiated bonds could not have repayments made without also making repayments (on a larger scale) to the 7% of holdouts;
Any repayments to the holdouts related to full face value would potentially trigger all earlier bondholders being entitled to repayments at full face value as well, effectively unwinding the entire intent of the renegotiations of 2000–2010, and creating an extra liability of $100 billion that Argentina could not afford to incur.

The U.S. judicial pari passu ruling therefore forced Argentina to miss the scheduled bond payments being managed from New York, as from July 30, 2014 (bonds issued under Argentine law (paid through Citibank Argentina) The expiration of Rights Upon Future Offers (RUFO) in December 2014 will preclude other bondholders from suing for better terms should the Argentine Government and the vulture funds settle, making such a settlement all the more likely after that date should the dispute continue. and was responsible for permitting judicial malpractice and gross incompetence in allowing two small hedge funds to trigger a needless default against most other bondholders. Information was likewise requested from the Securities and Exchange Commission concerning the possibility of securities fraud involving the bonds by plaintiffs in the case. Observers note that the United States must consent to the case being heard, which has only happened 22 times in the ICJ's 68 years of existence, the G-77 (133 nations), and the Council on Foreign Relations, as well as by bondholders whose payments were stopped by the Griesa court.

Financial responses

Large banks, investors, and the U.S. Treasury Department objected to the federal courts' decisions and expressed concern over losses that could be incurred by bondholders and others, as well over disruption in the bond markets. Vladimir Werning, executive director for Latin American research at JPMorgan Chase, observed that vulture funds "are trying to block the payments system" in the United States itself, something "unprecedented in the New York jurisdiction". Kevin Heine, a spokesman for Bank of New York Mellon, which handles Argentina's international bond payments, said the ruling "will create unrest in the credit markets and result in cascades of litigation, which is precisely the opposite effect that an injunction should have." The ISDA, of which Singer's Elliott hedge fund is one of 15 bank members, granted Singer and fellow vulture fund plaintiff Aurelius Capital CDS insurance payout of $1 billion on August 1.

Wider implications for the financial system

The possibility that holdout creditors can attach future payments on restructured debt and receive better treatment than cooperating creditors distorts incentives, can derail efforts for a cooperative restructuring,

The Second Circuit has acknowledged that New York Judiciary Law Section 489 (descended from an 1813 statute) appears to facially prohibit "essentially all 'secondary' transactions in debt instruments where the purchaser had an intent to enforce the debt obligation through litigation", but then ruled in a 1999 decision involving Elliott Management's earlier case against Peru that the history of that section as interpreted in New York state courts revealed that it was intended only to prohibit purchases made with the sole intent of bringing a lawsuit in and of itself. That is, the New York Legislature was trying to stop attorneys or debt collectors from exploiting cost-shifting clauses in worthless promissory notes to obtain judgments for minuscule amounts (i.e., the face value of the notes) that also awarded massive costs incurred in the course of litigation. As of 2014 70% of the world's sovereign bonds are issued in New York, and 22% in London.

According to Reuters in 2013, the case is likely to be of particular importance in cases in which the creditors are being asked to accept substantial debt and debt service reduction, though it is unclear given the special circumstances of the Elliot/NML case whether it will be broadly applicable to holdouts in other restructurings. The American Bankers Association warned that the district court's interpretation of the equal terms provision could enable a single creditor to thwart the implementation of an internationally supported restructuring plan, and thereby undermine the decades of effort the United States has expended to encourage a system of cooperative resolution of sovereign debt crises. Argentina made an offer to pay $6.5 billion to settle lawsuits on February 5, requesting that the prior ruling on payments be lifted. Daniel Pollack announced in February 2016 that Argentina had reached an agreement with Paul Singer. The deal would still need to be ratified by the Argentine Congress. The deal would only last until April 14, 2016.

Although Cambiemos, Macri's political coalition, did not have a majority at either house of the Congress, the bill was approved by both of them in March. Many Peronist legislators supported it because the province governors would also benefit from access to international credit markets. With the bill approved, Argentina faced a court hearing in New York on April 13. The court confirmed the ruling of Griesa, and allowed Argentina to pay to the bondholders of 2005, 2010 and those that were still in default. The payment will be done with a bond sale. This appeared to the media to be the end of the Argentine default, which had started in 2001.

However, nearly US$1 billion in defaulted bonds remained unpaid, which resulted in continuing though less publicised litigation. Argentina finally reported in November 2016 that it had reached agreements to pay US$475 million to settle the outstanding defaulted debt. On March 6, 2017, Barron's reported that Moody's Investors Services had "raised its outlook on Argentina's credit rating to positive from stable."

A severe devaluation of the Argentine Peso caused by high inflation, an increase in the price of the US dollar at local markets, and other international factors led the country into a monetary crisis. The interest rate increased to 60%.

thumb | 220x124px | right | Macri negotiating the loan with [[Christine Lagarde, managing director of the IMF]]

Macri announced on May 8 that Argentina would seek a loan from the International Monetary Fund (IMF). The loan was $57bn, and the country pledged to reduce inflation and public spending.

Presidency of Alberto Fernández and debt terms restructuring

Since December 2019, Alberto Fernández

was seeking to restructure its US$100 billion debt with private bondholders and US$45 billion borrowed by Macri from the International Monetary Fund.