Argentina vs. Hedge Funds: Who is Seeking a Sweet Deal?

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The United States court decision ordering Argentina to pay $1.3 billion to hedge funds is threatening to throw the South American country and the entire sovereign debt market into turmoil.

However, are the two holdout investors— Elliott Management and Aurelius Capital Management—in the Argentina debt restructuring case looking for a better deal? Are they trying to use the U.S. court system to circumvent international positions on debt restructuring to get a better deal than the holders of the other 93% of Argentina’s restructured debt? Or are they planning force another debt crisis to use credit swaps to get an even sweeter repayment deal at the expense of the creditors who agreed to the earlier swap agreements for the 2002 default?

Is seems that the law of unintended consequences, where effects are unanticipated or unintended, will rules this case.

According to the Debt Reorganization paper prepared by Richard Shepherd and Andrew Kitili of the Statistics Department of the International Monetary Fund:

“The principle underlying the treatment of debt restructuring [or reorganization] is that the debt instrument that is being restructured is considered to be extinguished and replaced by a new debt instrument with the new terms and conditions.”

Thus, Argentina is acting properly as a sovereign country. And the NY judge likely overstepped his authority since he acted/ruled against international law and agreements.

As the result, any new agreements for restructuring (for the holdouts) would probably reflect the position of bonds issued since the 2002 debt restructuring where holders agree that no one gets a better deal than anyone else—similar to the securities industry mandatory “binding arbitration.”

So why should holdout creditors potentially get a better deal than creditors who agreed to the terms of the 2005 and 2010 default deals? Who stands to gain?

If Argentina “re-defaults” on the negotiated terms, bond holders will likely see even less than the .30 cents on the dollar they are currently getting. The country itself is already unable to get favorable financing and will see its international financial standing fall even further.

The holdout creditors will find their “win” in the New York Court of Appeals to be no more than a symbolic victory. And, if the U.S. Supreme Court eventually weighs in to prevent one or two creditors from getting a better deal than the other creditors (circumventing pari passu), the roiling of U.S. and global financial markets could be on a par with the U.S. government going over the “financial cliff.”

So what do the two holdouts want…really?

Anna Timone (195 Posts)


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