When Argentina defaulted on around US$81bn of debt back in 2001 few would have imagined it would still be dealing with debt repayment a decade and a half later. But here we are, still trying to come to an agreement with creditors. With talks between Macri’s economic team and the vulture funds’ legal team resuming this week and a new offer imminent, here’s a helpful guide to bring you up to speed to Argentina’s 15-year battle with its creditors.
The Argentinazo, a period of rioting and civil unrest begins during the ‘Argentine Great Depression’. President Fernando de la Rua is unable to prevent an economic crisis and resigns amid bloody protests on 20th December. In a volatile period, Adolfo Rodriguez Saa takes over for a week and defaults on around $81bn of debt.
NML Capital and other hedge funds – or ‘vulture funds’, so named because they exist to buy cheap debt and then litigate until they make money off it – bought some of Argentina’s ‘junk’ debt at a fraction of the face value. The group is led by Paul Singer, a billionaire hedge fund manager.
Public debt reaches 166% of the GDP and unemployment climbs to 21%.
Néstor Kirchner comes to power at a critical time in Argentina’s history, with the economy sagging under US$178bn in debt. He would go on to repay a large portion of the debt with international organisations like the IMF and launch a bond exchange to restructure public debt.
NML Capital files 11 claims against Argentina in New York, demanding to be paid back the defaulted debt in full.
A majority of Argentina’s creditors accept a one-time deal to receive around 33 cents per dollar of defaulted debt. After the government repeats the offer in 2010, over 92% of debt holders had taken the restructuring deal, but NML Capital and other creditors held out for full repayment.
NML Capital files another claim against Argentina in New York, suing the country for breaking the pari passu clause in the bonds. A pari passu clause gives equal treatment and rank to bondholders, so the holdout creditors demanded they be treated equally to the creditors who had accepted the restructuring deal (exchange bondholders) and were receiving payments.
Based on his interpretation of pari passu, New York judge Thomas Griesa rules that Argentina must pay NLM Capital in full, including interest, for the debt it owes. Argentina appeals the verdict.
The Frigata Libertad ship is seized in Ghana after the Commercial Court of Accra ruled in favour of NML Capital, allowing them to claim Argentine assets as part of their repayment. Argentina claims diplomatic immunity because it is a military ship, and the Libertad is released 7 days later after a UN tribunal rules in favour the Buenos Aires.
Meanwhile, the Court of Appeals in New York upholds the verdict requiring Argentina pay NLM Capital in full plus interest. Judge Griesa says the bondholders have been “waiting for years to get some money” and that “they’re going to get something.”
Griesa orders Argentina to pay NML Capital $1.3bn. He rules that Argentina cannot make payments on some of its restructured bonds (due in December 2012) unless it pays the holdouts, as this would violate the pari passu clause. “After 10 years of litigation this is a just result,” says Griesa.
Argentina appeals and the New York court suspends the ruling that Argentina must pay back the vulture funds by December, so that it does not default while negotiations continue. It gives Argentina and the holdouts until 27th February 2013 to present their arguments.
President Fernández criticises judge Griesa’s ruling at a Unasur summit, calling it “absolutely unequal”.
The court asks Argentina to provide a different payment plan before the end of the month. Argentina offers to pay the vulture funds the same deal that the majority (92%) of its creditors had accepted, but they refuse.
German and French courts side with Argentina as other holdouts seek similar repayment terms to that awarded to NML Capital and the vulture funds look to embargo more Argentine assets abroad.
The US Second Circuit Court upholds its initial ruling requiring Argentina to pay back the hedge funds the full amount owed. It says the original ruling “affirms a proposition essential to the integrity of the capital markets” and that borrowers and lenders can negotiate whatever terms they like, but they “will be held to those terms.”
By then, lawyers representing Argentina had already presented an appeal for the US Supreme Court to review the decision.
The US Supreme Court declines to review Argentina’s appeal, confirming the original ruling. After Judge Griesa refuses a request for another stay, Argentina is required to make a payment to exchange bondholders due on 30th June, while continuing to negotiate with NML Capital.
President Fernández calls the court’s decision “extortion”. Mauricio Macri, then mayor of Buenos Aires and opposition leader, criticises the government, saying: “Now we have to go to Griesa’s court, and do what he says.”
Argentina deposits over US$500m in the Bank of New York Mellon to pay exchange bondholders, but Griesa orders the bank to return the money.
After missing the 30th June payment, Argentina enters a 30-day grace period before entering a ‘technical default’. Negotiations between the two parties continue through the month, but no breakthrough emerges. Argentina claims that if it paid NML Capital in full it could trigger a landslide of claims from other holdouts and exchange bondholders that would go far beyond the country’s payment capacity.
Mauricio Macri, then Buenos Aires mayor and opposition leader, says the country has to “do what Griesa says” and he thought the government would comply.
30th July comes and goes without a resolution. As a result, Argentina technically defaults on its debt for the second time in just over a decade.
The government says it is not in another default as it had made the required payment, adding that it will take the case to International Court of Justice at The Hague.
The Argentine Senate approves a bill to move the payment jurisdiction from the US to Argentina for its outstanding debts. This will allow Argentina to pay its debts through the Banco de la Nación rather than the Bank of New York Mellon, where Judge Griesa has jurisdiction.
Later that month, President Fernández tells the UN Assembly that the vulture funds are like “economic terrorists“.
The UN creates a new framework for restructuring sovereign debt, with support from over 120 countries. “Today is a special day for all Argentines. We should feel proud,” said President Fernández in support of the resolution. The resolution requires the creation of an international convention to deal with sovereign debt.
The RUFO (right upon future offer) clause, which could have allowed exchange bondholders to claim a better deal if Argentina paid the vulture funds in full, expires at the turn of the year. Still, Argentina does not negotiate with the vulture funds.
In February a London judge declares that Argentina was not actually in default because it was the Bank of New York that had not made the bond payments. Justice David Richards said that Argentina’s euro-denominated debt falls under English law, but stopped short of ordering the US bank to distribute the funds it is holding.
BONAR 2024 bonds were launched by the former Economy Minister. Since they were technically issued under local law, they don’t count as external debt, and wouldn’t affect the ongoing battle with the holdout creditors. The bonds raise US$1.4bn, and the vulture funds begin legal proceedings to have them included under Griesa’s ruling.
The UN overwhelmingly approves a set of “basic principles for sovereign debt restructuring“.
Businessman Mauricio Macri took over as president on 10th December. He promised to negotiate with the vulture funds and reach a deal, possibly in 2016. “We don’t want to remain listed as a defaulter, we want to resolve all outstanding issues,” he said in a press conference. “Even though things haven’t been done well in the past, there’s now a change.”
Judge Griesa again urges Argentina to reach a settlement, saying he wanted to put “some emphasis on the need to work on as prompt a resolution to this litigation as possible.”
The new government’s economic team meets with Judge Griesa and the vulture funds’ legal team. The government also balks at creditors’ requests to keep the negotiations confidential. “It’s better for the whole process to be fully transparent,” said Finance Minister Alfonso Prat-Gay.
Prat-Gay also says that the debt owed has risen from US$2.9bn to US$9.9bn de to interest accrual “as a result of washing our hands of this for more than 10 years”.
At the World Economic Forum in Davos, Macri says the negotiations with creditors were “unfortunately” not going so well. “We want to reach a settlement, we want to find a fair agreement,” he says in an interview with Reuters.
Prat-Gay softens his stance on confidentiality, saying “Everything is negotiable, although I don’t understand the logic of negotiating secretly.” He adds that even if the terms of the offer are negotiated secretly, they will still have to go through Congress for approval.
Meanwhile, Foreign Affairs Minsiter Susana Malcorra accuses bondholders of slowing the process to continue making interest on the defaulted debt when the mediator appointed by the court asked Argentina to wait to make a proposal until 1st February.
Talks between Macri’s economic team and the hold-out creditor’s legal team resumes. Luis Caputo, the finance secretary, says he will submit a new offer to the hold-out creditors this week. Mediator Daniel Pollack adds that: “Ideas were discussed, informally, on settling the demands which add up to approximately US$9bn.”
Finance Minsiter Prat-Gay announces a ‘pre-agreement’ with a group of Italian bondholders that had not entered the restructuring deal. The deal will involve a payment of US$1.35bn, representing 150% of the original capital owed (US$0.90bn).