In 2001, Argentina defaulted on an astounding $95 billion debt. Unable to repay the amount in full, Argentina struck a deal with lenders in 2005 and 2010 to restructure the debt. Ninety-three percent of all debt holders agreed to take a financial loss by trading in their bonds for new ones at a few cents on the dollar—at a 70 percent discount. However the remaining 7 percent of debt holders did not agree to the restructure, holding out for the full amount owed. These “holdouts,” as they have come to be known, are a group of U.S. hedge funds that buy debt on the verge of default at a discounted price, only to sue the debtor after it inevitably fails to repay the loan. Accordingly, NML Capital, a subsidiary of Elliott Management Corporation representing the collection of hedge funds, sued the state of Argentina in the U.S. District Court System for the full amount owed on the debt, plus interest.
The ruling of NML Capital Ltd. v. Republic of Argentina in the Southern District of New York was highly unfavorable to the Argentine state. U.S. District Judge Thomas Griesa sentenced Argentina to pay holdout investors in full—$1.5 billion—before it could pay back the holders of its restructured debt. This meant that the Bank of New York Mellon, where Argentina had deposited the $539 million in funds for a bond payment due by July 30th, was unable to distribute the money to the appropriate debt holders until Argentina repaid NML Capital.
Thus, as the clock stuck 12:00 am on August 1, 2014, the Republic of Argentina missed the deadline to pay interest on $13 billion of restructured bonds and defaulted on its debt. But Argentina’s failure to pay the holdouts was not only a matter of insufficient means; it was a matter of Argentine law. The Republic’s bond agreements have a clause called RUFO, or Rights Upon Future Offering. This clause, which expires in 2015, stipulates that if Argentina negotiates better terms with some bondholders, all bondholders have a right to those terms, subjecting the country to $15 billion worth of payments.
While the current economic situation in Argentina is tragic, it is possible that the Argentine debt saga is also helpful. Some economists argue that this 13 year financial crisis should have served as a roadmap to navigating the Greek financial crisis in 2010. Much like the U.S.’s financial difficulties spurred Argentine turmoil, the Eurozone crisis in 2008 exposed many weaknesses in the Greek economy. After Greek debt overwhelmed the country’s finances, Greece received billions of euros in bailout funds accompanied by harsh austerity measures. However, according to the IMF, the absence of a corresponding growth plan only deepened Greece’s economic crisis.
Argentina and Greece are similar in that they had both found themselves in a currency regime with no flexibility—with the Argentine peso pegged to the dollar and Greece tied to the European Central Bank. While this helped to control inflation, it made both economies dependent on capital inflows rather than local production. This increased their vulnerability to changes in external financing. This international dependency lends itself to laying blame on others—unfounded or not—with Argentina claiming that the court-appointed mediator in their suit is heavily biased, and with Greece calling foul on the backwards nature of troika’s austerity measures. Similarities also exist in what lays beneath the surface. While inflation has been controlled, corruption and tax evasion has not, fueling the black market economy in both Argentina and Greece.
It may be hasty, however, to conclude that the crises in Argentina and Greece are comparable. When Argentina defaulted on its debt in late 2001, it devalued its currency, experienced a natural resource boom, and quickly became one of the fastest growing economies in South America. Had Greece returned to its original currency, it would have depreciated against the euro, faced opposition from Germany, and limited the likelihood of finding alternative international trade beyond the European Union given its weak local productive capacity. Furthermore the parties responsible for Greece’s debt—French, German, and British banks—are unlikely to sponsor a restructuring plan large enough to restore Greece’s economic strength, whereas Argentina was able to distribute its debt in various individual and institutional creditors. Furthermore, the EU, the European Central Bank, and the IMF are spearheading Greek reformation, limiting Greece’s options to accepting loans attached to fiscal austerity packages. But in the Argentine case, the IMF alone controls Argentina’s fate, encouraging the implementation of orthodox measures such as the reduction of social spending.
While parallels can certainly be drawn between the generalities of both economic crises, the reality is that the Argentine trajectory could not have applied to Greece. But, there is still much to be done in both countries. Greece is still in the midst of spending cuts and tax increases, and regarding Argentina’s default, Judge Griesa explained that, “nothing that has happened this week has removed the necessity of working out a settlement… The debts are still there.” The years ahead will show Greece and Argentina traveling down very long, but distinctly separate, roads.
This article was originally published in the Diplomatic Courier's September/October 2014 print edition.
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Moment: Implications of Argentina’s Default
September 9, 2014
In 2001, Argentina defaulted on an astounding $95 billion debt. Unable to repay the amount in full, Argentina struck a deal with lenders in 2005 and 2010 to restructure the debt. Ninety-three percent of all debt holders agreed to take a financial loss by trading in their bonds for new ones at a few cents on the dollar—at a 70 percent discount. However the remaining 7 percent of debt holders did not agree to the restructure, holding out for the full amount owed. These “holdouts,” as they have come to be known, are a group of U.S. hedge funds that buy debt on the verge of default at a discounted price, only to sue the debtor after it inevitably fails to repay the loan. Accordingly, NML Capital, a subsidiary of Elliott Management Corporation representing the collection of hedge funds, sued the state of Argentina in the U.S. District Court System for the full amount owed on the debt, plus interest.
The ruling of NML Capital Ltd. v. Republic of Argentina in the Southern District of New York was highly unfavorable to the Argentine state. U.S. District Judge Thomas Griesa sentenced Argentina to pay holdout investors in full—$1.5 billion—before it could pay back the holders of its restructured debt. This meant that the Bank of New York Mellon, where Argentina had deposited the $539 million in funds for a bond payment due by July 30th, was unable to distribute the money to the appropriate debt holders until Argentina repaid NML Capital.
Thus, as the clock stuck 12:00 am on August 1, 2014, the Republic of Argentina missed the deadline to pay interest on $13 billion of restructured bonds and defaulted on its debt. But Argentina’s failure to pay the holdouts was not only a matter of insufficient means; it was a matter of Argentine law. The Republic’s bond agreements have a clause called RUFO, or Rights Upon Future Offering. This clause, which expires in 2015, stipulates that if Argentina negotiates better terms with some bondholders, all bondholders have a right to those terms, subjecting the country to $15 billion worth of payments.
While the current economic situation in Argentina is tragic, it is possible that the Argentine debt saga is also helpful. Some economists argue that this 13 year financial crisis should have served as a roadmap to navigating the Greek financial crisis in 2010. Much like the U.S.’s financial difficulties spurred Argentine turmoil, the Eurozone crisis in 2008 exposed many weaknesses in the Greek economy. After Greek debt overwhelmed the country’s finances, Greece received billions of euros in bailout funds accompanied by harsh austerity measures. However, according to the IMF, the absence of a corresponding growth plan only deepened Greece’s economic crisis.
Argentina and Greece are similar in that they had both found themselves in a currency regime with no flexibility—with the Argentine peso pegged to the dollar and Greece tied to the European Central Bank. While this helped to control inflation, it made both economies dependent on capital inflows rather than local production. This increased their vulnerability to changes in external financing. This international dependency lends itself to laying blame on others—unfounded or not—with Argentina claiming that the court-appointed mediator in their suit is heavily biased, and with Greece calling foul on the backwards nature of troika’s austerity measures. Similarities also exist in what lays beneath the surface. While inflation has been controlled, corruption and tax evasion has not, fueling the black market economy in both Argentina and Greece.
It may be hasty, however, to conclude that the crises in Argentina and Greece are comparable. When Argentina defaulted on its debt in late 2001, it devalued its currency, experienced a natural resource boom, and quickly became one of the fastest growing economies in South America. Had Greece returned to its original currency, it would have depreciated against the euro, faced opposition from Germany, and limited the likelihood of finding alternative international trade beyond the European Union given its weak local productive capacity. Furthermore the parties responsible for Greece’s debt—French, German, and British banks—are unlikely to sponsor a restructuring plan large enough to restore Greece’s economic strength, whereas Argentina was able to distribute its debt in various individual and institutional creditors. Furthermore, the EU, the European Central Bank, and the IMF are spearheading Greek reformation, limiting Greece’s options to accepting loans attached to fiscal austerity packages. But in the Argentine case, the IMF alone controls Argentina’s fate, encouraging the implementation of orthodox measures such as the reduction of social spending.
While parallels can certainly be drawn between the generalities of both economic crises, the reality is that the Argentine trajectory could not have applied to Greece. But, there is still much to be done in both countries. Greece is still in the midst of spending cuts and tax increases, and regarding Argentina’s default, Judge Griesa explained that, “nothing that has happened this week has removed the necessity of working out a settlement… The debts are still there.” The years ahead will show Greece and Argentina traveling down very long, but distinctly separate, roads.
This article was originally published in the Diplomatic Courier's September/October 2014 print edition.
