November 28, 2014
Swapping the swap
Ahead of criticizing President Cristina Fernández de Kirchner’s nationwide broadcast on Tuesday evening announcing a Congress bill to repatriate foreign debt jurisdiction and before spelling out the huge risks entailed, it is worth asking what the alternatives were, as well as giving due credit to the flexibility shown. It is neither CFK’s debt (largely the inheritance of previous administrations) nor her default (the product of Manhattan judge Thomas Griesa’s dogmatic obstructionism) although this does little to diminish her responsibilities as the current head of government. So total is the New York courtroom deadlock that some alternative had to be found to pay the 93 percent of creditors frustrated by this legal impasse. Nor is there an overt contempt of court in the form chosen because the idea is to offer a voluntary option to bond-holders aspiring to collect from a government willing and able to pay, not to assert local jurisdiction over the pre-agreed Manhattan venue — creditors may continue to bash their heads against that brick wall if they so prefer. Last but not least, the decision to deposit money in Banco Nación on behalf of 100 percent of creditors including all holdouts is a goodwill gesture of vast potential significance.
The emphasis is on the voluntary nature of the new strategy but in many ways this is where the problems begin — all too many creditors do not enjoy the option of changing jurisdiction due to the contractual entanglements of their bonds. Quite apart from any skepticism about the Argentine court system, a change of jurisdiction thus risks breeding a new generation of holdouts and dismantling the current architecture of the 2005 and 2010 bond swaps (already in deep trouble) — were the latter to happen, there could be the worst-case scenario of those haircuts being replaced by the acceleration of demands for the full payment of all creditors even before the RUFO (Rights Upon Future Offers) clause expires at the end of the year. Neither the justice of the case against the vulture funds nor the lack of any better alternatives to this strategy change the harsh reality that clashing with the established rules leaves Argentina outside global capital markets.
Yet unless the opposition (or anybody else) has a better idea, this bill effectively poses the question of “Fatherland or vultures” and stands to clear Congress — even if this question serves to cloak the government’s often self-inflicted economic problems which are another story when it comes to criticism. But the bill deserves its chance because nothing would be more irresponsible than inaction in the face of the default crisis.