Wednesday, March 23, 2016

A 15-year legal battle enters its final chapter

People walk past posters against the ‘vulture’ funds, printed during the Cristina Fernández de Kirchner administration

By Fermín Koop
Herald Staff

Argentina set to end its conflict with the ‘vulture’ funds as it sees stronger support from the US

Having already settled with more than 90 percent of creditors, Argentina is on the verge of closing the 15-year long chapter with the so-called “vulture” funds, having gained strong support from the United States after years of silence and rejection over the conflict.

Following weeks of debt talks, President Mauricio Macri’s administration proposed a US$6.5-billion payment this month to settle the long-term legal battle stemming from Argentina’s record US$100-billion default in 2001.Of the approximately US$9 billion still outstanding in claims, the government has asked creditors to accept an average 25-percent haircut, vowing to pay them up front in cash, facilitated through the issuing of new bonds.

Thanks to the deal, the “vulture” funds — which purchased the defaulted bonds at knock-down price — would score a 1,100-percent profit (lower than the 1,300 percent previously claimed). It’s a much better deal than the one offered by the Cristina Fernández de Kirchner administration, which was only willing to pay them the same as the creditors who had accepted the 2005 and 2010 debt swaps.

“The precedent is troubling — the reward for the creditors is enormous. The message for the future is that if you are creative and aggressive enough and can wait you will be fabously rewarded,” Anna Gelpern, a sovereign law expert at Georgetown University and the Peterson Institute, told the Herald.

“The government is seeking to grow the economy. Its priority can’t be the fight with the holdouts, it has to (get on with) being a government,” she added.

The offer has already been accepted by small and large creditors, including the toughest holdout funds Elliott Management and Aurelius Capital. That led to New York district Judge Thomas Griesa agreeing to lift an injunction against Argentina, which prevented it from servicing its restructured debt. The ruling frees Argentina to pay holders of its restructured bonds, who are now owed more than US$3 billion in past-due interest.

Argentina has until April 14 to pay the US$4.6-billion deal agreed with the largest funds while it moves forward in the Congress with its attempt to remove the Sovereign Payment and the Padlock laws, which prevent the country from offering holdouts better terms than those the nation offered in 2005 and 2010.

“(The) holdouts always had limited but real weapons. They had a bow and an arrow. Now they have also been given a gun. It doesn’t fire all the time and maybe it only has one bullet but it’s still a weapon,” Mark Weidemaier, a law professor at the University of North Carolina (UNC) told the Herald. “If you were looking for a case to undermine the holdouts strategy — this is not it.”

But there’s still one last chapter in this story that’s lasted over a decade.

Creditors who haven’t settled and the largest holdout funds have appealed Griesa’s decision to lift the injunctions and the issue is now being heard at the United States Second Circuit Court of Appeals.

Not reaching a deal with all the creditors before the injunctions are lifted could lead to new appeals and could even prompt the debt talks to fall apart, some argue.

A story with many twists

The dispute that’s played out in the US courts is one of the longest in sovereign bond restructuring history, stemming from Argentina’s high-profile and socially devastating US$100-billion default in 2002. Resolving the feud would enable the country to officially emerge from default and return to global credit markets, a goal Macri promised to deliver when running as a presidential candidate.

Argentina refused in 2014 to heed Griesa’s orders to pay the holdout hedge funds, led by NML and Aurelius, at the same time it paid out bondholders who participated in the debt swaps following the country’s 2001 default. That order came after the US Supreme Court declined to hear Argentina’s appeal against Griesa’s ruling and stuttering settlement talks went nowhere.

Former president Fernández de Kirchner wasn’t willing to pay the holdouts more than what was given to the creditors who accepted previous offers. Negotiations were essentially on hold until December 31, 2014, when the Rights Upon Future Offers (RUFO) clause expired. That had prohibited Argentina from offering a better deal.

When the clause expired, a series of meetings with former Economy minister Axel Kicillof in New York too place, but no deal was reached. The Kirchnerite politician claimed that paying the so-called “vultures” what they wanted would have had a severe economic impact. Kicillof has repeatedly warned Macri about the consequences of the deal.

The Kirchnerite government frequently questioned the holdouts actions during international summits and did receive support from many well-known economists, world leaders, countries and even the United Nations, which created a new legal framework for sovereign debt restructuring to limit the actions of such funds.

But the administration’s strategy was confronted head on by the holdouts, who published paid ads in local and international newspapers denouncing the actions of the CFK administration. The American Task Force of Argentina (ATFA) was the visible lobbying arm of the holdouts, spending about US$7 million since 2007 trying to put forward its argument.

Ultimately, the government was unsuccessful and last year, the decision of voters in the general election to back Macri for president shook up negotiations dramatically.

A key issue for macri

After winning the election, Macri made solving the holdout creditors case its main priority, but the stance of the new administration has altered at times. At first, the president said the government should pay the holdouts whatever they were asking for. But then Macri adopted a tougher tone, though he had been highly critical of the strategy led by his predecessor, Cristina Fernández de Kirchner.

As negotiations moved forward, Macri received strong signs of support from world leaders, including the United States, which had initially refused to offer a clear, public position on the issue. Washington at one point even voted against the United Nations’ debt principles framework, claiming that a statutory mechanism for debt restructurings would sow uncertainty in international financial markets.

Attending the G20 summit in Shanghai, Finance Minister Alfonso Prat-Gay met with US Treasury Secretary Jack Lew, who welcomed Argentina’s “continued efforts” to solve the litigation with the holdout funds. The US official said he hoped “all creditors (would) resolve their differences” — a stance that looks more and more likely to happen, with only one vote in the Senate now standing in the way.

@ferminkoop