Q. & A.: Exploring What’s Behind the Battle Over Argentina’s Debt

Argentina is on the verge of defaulting on billions of dollars of government debt. It has reached this point after years of battling a group of New York hedge funds that have been demanding full payment on bonds that defaulted in 2001. The battle has already rocked international debts markets and may affect the economies of other countries in the future. Below are answers to questions about the fight, which has taken complicated twists and turns over the years.

Q. Is Argentina out of money?
A. No.

Q. So if Argentina has enough money to stay current on its government bonds, why is it on the verge of defaulting for the second time in 13 years?

A. Argentina would like to keep paying its main class of government bonds, but a Federal District Court ruling says it cannot pay those creditors if it does not also make payments on a small amount of defaulted bonds that are held by a group of hedge funds that are suing the country.

Q. How does an American court have any power over Argentina’s bonds and its government?

A. Argentina issued bonds under New York law. The country defaulted on them in 2001, when its debt burden became unsustainable. Some years later, Argentina allowed holders of the bonds to enter two exchanges, in which they got new bonds that were worth as little as a fourth of the value of the original securities. Argentina has since consistently made contractual payments on these “exchange” bonds. But 7 percent of the bondholders did not agree to exchange their bonds, and the country has vehemently refused to make payments on them. These so-called holdout bondholders — mainly hedge funds — sued the Argentine government to be repaid in full. Argentina has fought these holdouts at every step.

Q. But why doesn’t Argentina just go ahead and pay the exchange bondholders and ignore the New York court? Don’t sovereign nations have extralegal rights and immunities that companies and individuals don’t have?

A. Judge Thomas P. Griesa of Federal District Court in Manhattan ruled that any financial institution that passes the money from Argentina to its exchange bondholders would be in contempt of his order. Banks and payment processors that want to conduct any business in America cannot risk falling afoul of an American court order. Argentina, for instance, deposited $539 million at the Bank of New York Mellon to make a June 30 payment to its exchange bondholders, but the bank has not passed it on. The bonds have a 30-day grace period, which ends on Wednesday.

Q. Does Argentina have a get-out-of-jail free card it can use?

A. Argentina could, in theory, attempt to bypass the ruling by swapping the exchange bonds for new securities issued under Argentine law and pay them out of Buenos Aires. But it needs to have the official list of exactly who holds it bonds, which is kept by a foreign financial firm. That firm may not want to do anything that is seen to go against Judge Griesa’s order.

Q. So, why doesn’t Argentina just pay the holdouts and put its troubles behind it? After all, the leading hedge funds are only looking for about $1.5 billion.

A. This dispute has weighed on the country’s economy. It has most likely pushed up borrowing costs for Argentine companies and depleted economic confidence in a country that is already facing high inflation and sagging growth. Still, settling with the holdouts may have its own costs.

Paying off the holdouts after years of defying them could undermine the standing of Argentina’s president, Cristina Fernández de Kirchner, in the eyes of the Argentine people. Many Argentines believe that the 2001 default was necessary to relieve the country of the burdens placed on it by previous governments. It is also possible that paying $1.5 billion to the leading holdouts could create even greater obligations.

There are other holdouts as well, most of whom have not been participating in the lawsuits. Settling with all the holdouts might cost about $13 billion, according to calculations by JPMorgan Chase.

The Argentine government also asserts that doing a deal could activate a clause in the exchange bonds that might allow their holders to demand the same terms as the holdouts. According to some estimates, this clause could lead to new obligations for Argentina that exceed $200 billion, an overwhelming amount, according to various Wall Street estimates. The holdouts, however, strongly dispute whether this clause would lead to such an outcome.

Argentina’s benchmark exchange bond has been trading higher in recent days, suggesting that investors do not believe they face big losses. As a result, the view in the market seems to be that a resolution is in sight, even if the country technically defaults on Wednesday.

Q. So what’s next?

A. It looks as if Argentina will miss its payment on Wednesday. It may be calculating, however, that a default will strengthen its hand if it continues to negotiate with the holdouts over the next few weeks. The clause affecting the exchange bondholders expires at the end of this year, so Argentina may wait until then to forge a settlement.

Even so, any kind of a default also carries the risk of unleashing unpredictable reactions that may undermine any future attempts to reach a deal.

Q. Why should anyone outside of Argentina and its debt markets care about this dispute?

A. A victory for the holdouts could, in theory, strengthen creditors’ rights in other markets. This could make governments think twice before taking on debt that may turn out to be unsustainable. The holdouts also assert that they do not go after countries that cannot afford to pay their debts and that governments that renege on their obligations are also often corrupt. Some debt market specialists also note that clauses added to recent sovereign bonds make it harder for investors to hold out.

The opponents of the holdouts, however, contend that the Argentine dispute will make it much harder for indebted countries to cut their obligations to manageable levels. Now, after Judge Griesa’s ruling, investors will have a greater incentive to demand stiffer terms from a sovereign that wants to lessen its debt load. In other words, a small group of litigious hedge funds may have ushered in a new more stringent era in debt markets that could frustrate a country’s efforts to get back on its feet after an economic crisis.

More From NY Times

This entry was posted in Featured Articles and tagged . Bookmark the permalink.