November 28, 2014
We can’t work it out
Latest debt crisis could shape rest of year
A fortnight ago this column headlined “Sane on the Seine” and illustrated with photographs showing the vast difference of size between the Statues of Liberty in Paris and New York, suggested that achieving the surprisingly quick and easy agreement with Paris Club creditors in late May, sparking equally facile celebrations, was an overrated triumph barely ranking as a skirmish against the mother of battles lying ahead in United States courtrooms with technical default at stake — this perspective would seem to be vindicated by the events of this week.
The US Supreme Court’s decision to shun Argentina’s appeal against a Manhattan court ruling in favour of hedge funds seems to have taken most people by surprise even if President Cristina Fernández de Kirchner said during her Monday night nationwide broadcast that she had been expecting it (markets do not have that retroactive freedom because they work in hard figures like MerVal’s Black Monday slump of 10 percent which cannot be denied). And in fact it should not really have been a surprise even if considerable prior optimism had been created by all that lobbying on Argentina’s behalf (by France, Brazil, Mexico and the American Bankers Association among other amici curiae) over the presumably negative precedents of an Argentine technical default for debt restructuring at a global level. But at a time when the US government is wearying of being the world gendarme and pulling out of places like Iraq and Afghanistan, why should its Supreme Court have any interest in suddenly starting to police global debt problems?
We are thus moving to default by default, you might almost say — more through inaction and indifference than making any statement on Argentina. Yet the local reaction came soon enough. On Monday night CFK was more explicit about what she would not do than what she would — the option of paying off the “vulture funds” was roundly dismissed as “extortion,” correctly pointing out that the US$15 billion owed to all holdouts were over half Central Bank reserves, but she did nothing to confirm the buzzing speculation that she would be announcing a new plan to continue paying the 92 percent of creditors accepting the 2005 and 2010 haircuts but under Argentine jurisdiction (still a technical default in most books). That step was taken the next day by Economy Minister Axel Kicillof (while not ruling out further talks, which are now indeed underway in New York with the legal team hastily sent there) — even if the presidential reluctance to take the plunge the previous evening seemed to confirm the logic that a negotiation suits both sides.
It is perhaps too early to say whether Kicillof’s Tuesday announcements mark a turning-point, now that his not very Maoist long march over the last several months toward a return to global capital markets has fallen at the last but biggest hurdle — successively honouring certain rulings against Argentina by the International Centre for the Settlement of Investment Disputes (whose Spanish acronym is CIADI), cleaning up inflation data, compensating Spain’s Repsol for the 2012 YPF expropriation and most recently the Paris Club last month were all stepping-stones along that path. Indeed it is probably too early to say anything much about Kicillof’s bond swap ahead of fuller details, except perhaps that it risks breeding a new generation of holdouts (and indeed “vulture funds” with the gaps opening up between the face and real values of bonds) amid all the uncertainty arising this week. Any new bond swap under Argentine jurisdiction would reportedly require at least 85 percent acceptance and this could be a tall order (especially with the currency curbs of the last 30-plus months).
But (unless there is an unexpected breakthrough in the latest talks, highly unlikely given the implacable nature of the hedge funds and the almost equally implacable Manhattan judiciary), the general thrust seems to be away from US courts siding with the “vulture funds” towards local jurisdiction yet the US Supreme Court decision should not be confused with the last word there. The negotiating possibilities evidently still exist, as a CFK administration holding back from anything resembling the total default of 2001 fully realizes — even with New York judge Thomas Griesa although they are somewhat of the “heads-you-win, tails-I-lose” variety. Negotiate within the Manhattan court whose authority has now been confirmed and the CFK administration is playing an away match, try to settle out of court and all the other holdouts enter the picture.
Furthermore, there is still scope for putting the ball in Griesa’s court (so to speak), despite his triumph. In his original ruling he asserted the pari passu principle of equal treatment as disqualifying the Kirchnerite policy of paying compliant creditors while denying the intransigent but is not preferential payment of holdouts also a problem for pari passu? In any case the onus is on Griesa to define how his upheld ruling is to be enforced with a stay still in force, the option of a Supreme Court rehearing to buy another 25 days of time (although this would also kill the stay) and scope for new legal complications. In real terms the next D-Day will be the last day of this month when the next bond payment falls due.
Meanwhile, the government has found another way of kicking the ball forward (to use a World Cup metaphor) by sending the issue to Congress, as announced by Cabinet Chief Jorge Capitanich, but this is an almost total irrelevance.
Last Thursday’s column ducked comment on this issue on the very valid grounds that there was no point in speculating about something which would be defined later that same day (regardless of whether or not the Supreme Court’s decision was made then, its disclosure did not come until last Monday). Since then everything seems to have happened but it is almost as difficult to draw any conclusions — talks are still underway in New York and we have no details about Kicillof’s Plan B of a new bond swap. This state of flux will probably continue until things come down to the crunch at the end of the month. Unless anybody is actually responsible for the course of events, there is little enough which can be done for the moment but enjoy the World Cup.