Argentina Debt Swap Won’t Avoid Default

Argentina is appealing to the U.S. Supreme Court (photo), but is unlikely to get a hearing given the strength of the case made by the creditors, experts say. (Supreme Court Photo by Library of Congress)

Unless a practical solution is found for the 'holdouts,' a default is going to occur, experts say.  


Inter-American Dialogue 

Argentine President Cristina Fernández de Kirchner on Aug. 26 announced a new debt-swap plan in defiance of a U.S. appeals court that ruled just days before that the South American country must pay a small group of bondholders more than $1.3 billion. If approved by Argentina's Congress, the new plan would allow all its bondholders to exchange their bonds for new ones issued under Argentine law instead of U.S. law. Does Argentina's new plan mark a turning point in the government's dispute with its so-called 'holdout' bondholders? Will bondholders accept the deal? Is Argentina headed toward a technical default, and how would a default affect the country?


Claudio Loser, visiting senior fellow at the Inter-American Dialogue, president of Centennial Group Latin America and former head of the Western Hemisphere Department of the International Monetary Fund: In dealing with the threat imposed by its 'holdout' creditors, the Argentine government has reacted in a simplistic way. President Fernández de Kirchner focuses on alleged issues of principle to sway domestic public opinion. She forgets the broad picture and is not considering the possible reactions of other interested parties. Without getting into the legal details, Argentina implemented a one-sided restructuring of its defaulted external private debt a few years ago. It applied a very harsh 'haircut' and left out a relatively small but significant group of creditors, the 'holdouts,' who Argentines characterizes as vulture funds. In practice, Argentina broke its contracts under New York law by excluding these creditors. The holdouts sued for full payment and have won in every instance so far in American tribunals. Argentina is appealing to the U.S. Supreme Court, but is unlikely to get a hearing given the strength of the case made by the creditors. By changing the venue of payments, Argentina seeks to escape the U.S. decisions and attract new bond holders. However, by seeking to circumvent the United States, Argentina's government will be in contempt of the courts, with adverse effects regarding other creditors, including the Paris Club. This and the unpredictability of local legislation and dollar rationing will make the proposal very unattractive. Unless a practical solution is found for the 'holdouts,' a default is going to occur, to the annoyance of the Argentine government but, more so, to the detriment of the Argentine people.


José Octavio Bordón, former Argentine ambassador to the United States: Bondholders who already participated in the debt swap expressed to the Second Circuit Court of Appeals in New York that the court's decision violated constitutional norms, caused irreparable damage to bondholders and affected the future credibility of the international financial system. Nobel laureate Joseph Stiglitz expressed similar concerns, and IMF Managing Director Christine Lagarde said that the court's decision was a concern and that the IMF believes it is necessary to preserve procedures that permit negotiation of debt, which help protect countries. The Argentine government's appeal in the case was part of its efforts to buy time as it seeks a positive gesture from the Obama administration and waits for the U.S. Supreme Court to accept the case. Argentina must accompany the reopening of the debt swap with a more prudent and constructive attitude in its public statements, presentations and decisions. The U.S. government should be more involved in the subject despite the distaste of the Fernández government and the Argentine Foreign Ministry for such involvement. The region's stability and U.S. relations in the region could worsen if there is a new debt crisis. New terms on sovereign bonds, which were put into place after the debt crisis, have not yet been tested, and this could be a negative precedent for new bonds. Depending on decisions by U.S. courts, it is possible that some holdouts will accept the deal.


Ricardo Seeber, senior partner at Estudio Beccar Varela in Buenos Aires: Personally, I do not think that the new plan that the Argentine government wishes to implement means a turning point in the dispute with the holdout bondholders. It is just another reaction of the present administration, obliged by the circumstances, and in this case because of the ruling of the U.S. Court of Appeals. The Argentine government has never had a plan on this matter. All its reactions were and are somehow childish. Chances that the bondholders will accept this plan, if approved by the Argentine Congress, are small. The basis for my assumption is Argentina's conduct in the recent past. Argentina could head toward a technical default, but it will not affect the country more than Argentina's other defaults have affected it. We are still in default with the Paris Club, and external markets do not trust Argentina. It is sad to say, but this administration does not care about performance, compliance or negotiations.


Republished with permission from the Inter-American Dialogue's daily Latin America Advisor