Argentina "Determined to Default" Second Time

Townhall.com ^ | July 20, 2014 | Mike Shedlock

[Kaslin]

Background: Argentina defaulted on bonds following a debt crisis in 2001-2002. 92% of the investors agreed to haircuts, but a vulture fund picked up an 8% share at rock bottom prices and refused to negotiate.

In June, the US Supreme Court ruled that Argentina Cannot Selectively Default on the small group of hold-outs.

The problem with the ruling is that if Argentina pays the vulture fund full value, it will have to pay all the bondholders full value, and that would wreck the country again.

In the future, bond agreements will force everyone to go along with a majority decision.

Second Default

For now, and as a direct consequence of the court ruling, Argentina "Appears Determined to Default", for the second time, on everyone.

A lead holdout investor in the Argentine debt dispute said on Friday that Argentina still refused to meet with it and negotiate a settlement before a July 30 deadline, after which the country faces a new default.

"The Argentine government appears determined to default. We hope it chooses to avoid this dead-end path," a spokesman for NML Ltd, a division of Elliott Management Corp, said in a statement.

Dead-End Path

The Dead-End Path is failure to negotiate. NML Ltd. put Argentina in a position where it would lose either way. Argentina now attempts (and I hope it finds a way), to pay the 92% while defaulting totally on the 8% so they never get a cent ever.

Unfortunately, all Argentina's efforts to circumvent the ruling eventually went through US banks or through other banks that will not accept payments only to the 92%.

At this point Argentina is stuck and will default on everyone.

Personal Note

I am in Glacier National Park, Montana (to be more precise, just outside the park). There is no phone or internet in the park. It can take 1 hour to do an email on the park satellite Wi-Fi. I return to Chicago tomorrow.

On this monitor I cannot tell exposures correctly. Hopefully these look OK. Color and exposure-corrected pictures will look much better.

Avalanche Lake



Avalanche Gorge

[Jim from C-Town]

Why would Argentina even respond to a law suit in this country. Are they not a sovereign nation? Why would they just not tell the U.S. Supreme Court to get bent. After all that is what Obama does.

[BobL]

“Why would Argentina even respond to a law suit in this country. Are they not a sovereign nation? “

Judgment day is what they have to worry about. Fly a plane here and it may not get to go home...instead it may be auctioned off.

[Ellendra]

“Second time”???

Doesn’t Argentina default about twice a year?

[reg45]

Yes, the Argentine government has the sovereign right to ignore the law suit. However, there would be consequences.

1. No bank outside of Argentina would ever do business with them again except perhaps at loan-shark rates.
2. Argentine assets outside of Argentina could be seized to cover the default.

[Moltke]

Why would Argentina even respond to a law suit in this country. Are they not a sovereign nation? Why would they just not tell the U.S. Supreme Court to get bent.

Right. Some day the U.N. just might decide to declare the US Supreme Court a terrorist organisation.

...and issue a strongly worded letter.

[bajabaja]

The bonds probably have a choice of forum clause. That means that investors from all over the world get one place to litigate. Then there are only one set of bond security laws to evaluate, rather than 192 (or thereabouts — the number of countries in the world) when they buy the bonds.

Christina Fenandez is term limited out in late 2015. She has an under-30 year old banker running economic policy. Don’t expect great things until someone with experience is in charge.

[Socon-Econ]

Our mostly leftist leftist financial press has been using the word “default’ too conservatively — any failure to pay what is owed when it is owed is a default, notwithstanding any coerced settlements for lesser sums.

[zeestephen]

Re: “Why would they just not tell the U.S. Supreme Court to get bent.”

If the bond covenant allowed for adjudication in Argentina, bond buyers would have demanded much higher interest rates.

[Moltke]

“probably”

OK, let’s assume that is true - thanks for expounding.

Still, though, I have a hard time getting on board with those who would cash in on high yields in a risky deal (hence the high bond yields) and then go crying when the deal turns sour. The whole risk/return concept gets thrown out of the window, and we all know who gets to pick up the bill in the end... (hint: it’s not the bankers)

[bajabaja]

Part of the risk is understanding what you are buying. In Greece, some of its bonds were sold with “to be litigated under UK law” — and others had other locations provided. UK law made the bond more valuable for a bunch of reasons, and those who bought UK law Greek bonds (as opposed to those to be litigated in Greece or elsewhere) properly assessed the risk. They made out well as those bonds were paid out on more than the defaulted ones with other litigation locales. Just like you said: determine your risks and measure your reward against it. Or “read the fine print.” I didn’t know any other this until I studied the Greek government’s implosion. Which is not over.

[Moltke]

OK, thanks. These things are of course always more complex than seems at first glance (my simplistic view).

[Elsie]

In June, the US Supreme Court ruled that Argentina Cannot Selectively Default on the small group of hold-outs.

Scotus must be having feelings of adequacy...