Don’t Cry for Argentina

nestor kirchner 2 getty Dont Cry for ArgentinaAs New York State faces budget woes and the impending threat of a government shutdown, you’d expect the Legislature would find itself too occupied with problems close at hand to take on questions of international finance. Yet amid the chaos in Albany, the Senate has mooted the issue of deadbeat foreign government borrowers. Senator Brian Foley last month introduced a bill that would subject to special taxes any foreign governments that have defaulted on their debts and defied U.S. court judgments.

Castigating bum government borrowers would seem like a reckless rock-toss in the glass house that is New York’s fragile credit. However, this bill is not about general principles. It’s about one judgment-evading foreign state, the only one that fits the bill’s criteria: Argentina. After nearly a decade of nonpayment, some of the country’s most disgruntled creditors have decided that in order to make Argentina pay, they’ll have to behave more like Argentines. Rather than wait bootlessly for justice, they’ll have the law tailor-made.

It was just a few days before Christmas 2001 that the Argentine government stuffed its bondholders’ stockings with lumps of coal, ceasing payment on over $80 billion in debt, at that point the largest sovereign default in history. Foreshadowing the tone of future relations with its lenders, President Adolfo Rodríguez Saá announced the default before Congress, which-in the manner of people without a sense of shame and for whom pride is the closest substitute-immediately erupted into joyous cheers of “Argentina! Argentina!” Few creditors would have denied that Argentina needed to restructure. (In fact, plenty of shorts were betting on it, and many of us spent the morning of Dec. 23 jumping up and down in our pajamas-Santa had a hard act to follow that year.) It was the country’s utter refusal to engage that shocked. 

Uruguay was sucked into the same undertow, but unlike its neighbor, Uruguay dealt in an open and expeditious manner with its bondholders, who agreed to debt reduction proportionate to the country’s fundamental need; the whole process took no more than a few months. Argentina stiff-armed creditors for the next four years, as a global boom, a rise in the price of Argentina’s export commodities and, of course, the freeing-up of funds that ought to have gone to debt service helped Argentina to a remarkable spurt of economic growth. Despite its rebounded economic fortunes and manifestly increased ability to pay, in 2005 Argentina tabled a take-it-or-leave-it exchange offer, one that left bondholders who accepted the deal with a mere 25 cents on the dollar.

Holders of $20 billion of the debt refused the coercive deal and entrusted their fate to the U.S. legal system. (The Argentine local courts were a non-starter, and most of the debt contracts were written under New York law.) While judgments proved relatively easy to come by, the law offered little recourse for their enforcement. For the better part of a decade, creditors have returned again and again to Judge Thomas Griesa’s courtroom, having identified assets to seize, and almost as often, the Argentine government has managed to snatch them away, its actions sometimes verging on contempt of court. The executive branch has proved no more helpful, showing more concern about placating Argentina’s kleptocratic government than vindicating the claims of its own citizens. It was true under George Bush; as for President Obama, if his administration won’t full-throatedly support the U.K. in the face of renewed Argentine irredentist ravings about the Falklands, mere bondholders shouldn’t expect much.

Today, profligate government spending has outstripped Argentina’s growth and its ability to expropriate wealth. As a result, Argentina needs to come back to the market. Of course, that will prove hard to do with $20 billion of defaulted debt still out there. The government has launched a new exchange offer, hoping to clean up the situation sufficiently to reestablish market access. Clearly, many remaining creditors (as of June 14, 57 percent have tendered) are exhausted enough-or bought the bonds cheaply enough in the post-default period-to accept the offer, which, in typical Argentine sore-winner style, was crafted to be just slightly more punitive than the ’05 deal. Yet, Argentina’s most steadfast creditors see in the exchange a point of leverage. That’s where the bill comes in.

Rumor has it that one of the biggest holdouts, Elliott Associates, is behind this bill, which, if passed, would require New York banks, including the New York Fed, to collect a tax on any financial transactions conducted by Argentina. The law would impose new costs on the exchange and complicate it, leading to a delay or even forcing Argentina and its advisers back to the drawing board. That in turn would keep Argentina frozen out of the bond market. The holdouts want to force Argentina to negotiate. It’s ironic that to achieve this goal, they have resorted to tactics very similar to those used by the Argentine government when it wanted to forestall negotiation in 2005. Back then, President Néstor Kirchner rammed the so-called Ley Cerrojo (“Deadbolt Law”) through a supine Congress; the law made it virtually illegal to offer a new debt deal on better terms than the ’05 exchange. Today, the creditors are working the home-court advantage in their own turbid legislative forum.

It’s disgraceful that creditors with legitimate claims should have to resort to this-and likewise embarrassing to New Yorkers that our Legislature is where it happens. As the U.S. sorts through the aftermath of its own debt-driven financial crisis, reformers rightly clamor for accountability. On the left, there are calls for banks to pay special taxes as recompense for the costs imposed by failures in that industry. On the right, Rick Santelli’s Tea Party-igniting rant decried individuals who (not unlike the Republic of Argentina) took advantage of easy money to borrow their way to high living and then left others with the bill. Argentina’s deadbeat decade by comparison makes TARP executives look responsible and jingle-mailers positively contrite. If our legal system can’t or won’t hold a foreign deadbeat to account without political finagling, how will it possibly succeed at reconciling our even more muddled intramural debt disputes?

 

HFM’s Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager is out this month.