Argentina default fear over ruling

A US Supreme Court ruling may have serious implications for bond markets and for Irish debt, writes Kyran Fitzgerald.

The US Supreme Court has dealt a damaging blow to Argentina’s efforts to restructure its debts, raising the possibility of another sovereign default while casting doubts over the future of the bond markets.

In a ruling announced last week it handed an important victory to billionaire American investor, Paul Singer, who runs a hedge fund, Elliott Management, which specialises in the acquisition of the debt of deeply troubled sovereigns at knockdown prices.

Singer, over the past two decades, has used the courts to secure favourable deals at the expense of governments, usually in Third World countries such as the Congo and Vietnam.

Having picked up the debt on the cheap, he and his advisers have turned around and pressed for full repayment of the debts now owed to his fund, or its affiliates.

Elliott has stood out against the sort of sovereign debt restructuring arrangements favoured by the IMF which have become the norm.

Funds such as Elliott have been termed ‘holdouts’ because of their strategy of holding out for full repayment. The question is whether the American Supreme Court decision now casts into doubt a whole series of such restructuring agreements around the globe.

Viewed from an Irish perspective, these events are a source of interest, if not deep concern.

Analysts speculate that one impact could be raised yields (interest rates) on sovereign bonds, in response to the writing into contracts of greater legal protections from the depredations of opportunistic ‘vulture investors’. This will concern the NTMA, which is charged with rolling over the country’s large stock of debt. Clearly, a raised sovereign interest rate bill is not good news for the taxpayer.

Moreover, Singer, it seems, may have Ireland in his sights. Last September, the Financial Times reported that the Elliott hedge fund was seeking further details from Ireland and that legal proceedings were “at a very early stage”.

As the reporters pointed out, Singer already had a “ferocious reputation” for having doggedly sued Argentina since 2003.

Elliott has been seeking more details on the wind down of IBRC, news of the sudden demise of which was broken to the world in February 2013.

The liquidation, news of which accompanied confirmation of the re-negotiation of the costly Anglo promissory notes arrangement, left IBRC creditors out of pocket, including Singer & Elliott investors. It was reported that two Elliott subsidiaries held IBRC debt to the value of $75m.

The liquidation allowed the Irish State to jump to first place in the queue for IBRC assets.

Ahead of the Supreme Court ruling last Monday, the New York Post speculated that the billionaire investor “could get closer than he’s ever been to taking down an entire country”.

According to the paper, “eventually, Singer stands to collect more than $3bn on bonds with a face value of $650m.”

Others put the collection figure at around $2.5bn. What is clear is that Argentina stands to lose out even more heavily.

Prior to last week’s decision, it was on the cusp of agreeing a restructuring of around $36bn in debts in a major move to engineer a re-entry to global financial markets from which it has been shut out since a world record $95bn sovereign debt default in 2001.

The Supreme Court decision puts all of this at risk. Elliott is not the only ‘holdout’ creditor. Other ‘holdouts’ will now press for full repayment on debts also acquired at a fraction of their face value. Great news for financial vultures all round.

The amount due with interest to all such ‘holdout’ funds could amount to $15bn — more than half the country’s total reserves amounting to $28bn. This outcome will hardly please the creditors who have agreed to accept just 22c in the dollar, under the proposed restructuring.

One of the country’s lawyers, in a confidential memo, has suggested that Argentina could now default on all of its debts to avoid paying Singer and the other holdouts.

The country’s president, Christina Kirchner, a leftist populist, reacted defiantly to the Supreme Court ruling which has also been criticised by the IMF and the US State Department.

Argentina’s economy has contracted in recent months. Inflation is soaring, while the country’s commodity boom, based on sales of agri goods to China, has gone into reverse.

However, realists within the government baulk at the implications of a default, involving a shut out from the global debt market.

Already, yields on Argentine sovereign debt are around 7% above those on US debt.

It is worth examining the Supreme Court decision, which comes in two parts:

First, it upheld an earlier decision of a New York Federal Court of Appeal allowing the Elliott hedge fund to unearth Argentine bank records in search of assets to seize as compensation for $2.5bn in defaulted bonds and interest.

Some time ago, Elliott engineered the seizure of an Argentine naval craft in Ghana — it was released after two months following pressure from the United Nations.

Justice Antonin Scalia, delivering the majority Supreme Court decision, rejected arguments from the Argentine and US governments that Federal law prohibits courts from ordering discovery (of documents) against a sovereign nation.

According to Scalia: “the Foreign Sovereign Immunities Act, limiting the seizure of assets from foreign countries, says nothing about the court-ordered fact finding process known as ‘discovery’.”

The court also upheld a ruling of the New York Second Circuit Court of Appeals, prohibiting Argentina from paying out to holders of newly issued bonds unless they pay the hedge funds their share of what is owed.

In other words, the restructuring deal is halted pending a payout to the ‘holdouts’.

The decision puts the vultures in the driving seat.

US legal expert, Anna Gelpern, warns that all those involved in international financial services involving state entities are now, in effect, sovereign debt enforcement agencies.

“Any provider, or intermediary dealing with a government in default should expect orders and subpoenas targeting the sovereign’s assets, anywhere and everywhere.”

And she warns, courts such as those in Britain, tending to favour debtrestructurings, “cannot ignore the fact that the US Supreme Court had blessed a contractual interpretation and remedy that might conflict with their own jurisprudence”.

The decision may boost opportunist financiers. It arguably boosts those who favour a strict interpretation of the rule of law and who oppose repeat sovereign debt offenders.

However, it threatens disruption in sovereign debt markets and certainly does not serve the interests of the US and the West generally, at a time of real geopolitical stress.

Will many other debt-laden countries now come under legal assault from ‘holdout’ lenders and how willing now will other creditors be to enter into debt renegotiations?

In Gelpern’s view, “the fallout from the decision is with us until the existing (sovereign) debt stock runs off”.

Yet again, it seems, the rich are about to get richer and the poor are left to suck it up.