sovereign debt

Standard & Poor’s campaign to get back into the good graces of the U.S. government continues. Read more »

Yesterday the Second Circuit held arguments in the Argentina sovereign debt case. This case is … I mean, you kind of had to be following along, but quick summary: back in the day Argentina defaulted on some old bonds, and exchanged most of them at a discount into new bonds, which it’s been making payments on. Elliott Management bought a bunch of old bonds, which Argentina has not been making payments on, and sued Argentina to make them pay the old bonds pari passu with the new ones. Elliott won in a lower court, and then sort of won on appeal, and then Argentina raised some mind-melting consequences in the lower court, and then Elliott won again anyway, and now it’s back up on appeal again, and the oral arguments were yesterday. Also there’s a boat.

It sounds like yesterday’s hearing was sort of a nightmare for Argentina, though the nice thing for Argentina is that, as a sovereign nation, they have the option of waking up:

“We are representing a government, and governments will not be told to do things that fundamentally violate their principles,” Jonathan Blackman, a lawyer for the deadbeat South American country, told a Manhattan US appeals court.

“So the answer is you will not obey any order but the one you propose?” Judge Reena Raggi asked.

“We would not voluntarily obey such an order,” replied Blackman — who later said Argentina would be no more likely to obey a US court than the US would be to obey an Iranian court.

If you get to choose whether or not to obey it, it’s not so much of an order. Read more »

  • 05 Dec 2012 at 6:03 PM

Greek Bonds Now Defaulted, Also Extra Attractive

You can see why no one likes rating agencies. It’s not exactly a surprise to anyone that Greece’s debt situation is Not Good, so the fact that S&P just downgraded Greece to selective default is (1) not particularly helpful to anyone attempting to make an investment decision re: Greek bonds and (2) not particularly helpful to anyone else either.

That said, I admire S&P’s role as a stickler for the rules of a game that it invented and no one else is playing. Greece is conducting an essentially non-coercive exchange for its bonds at above their all-time high prices. Is that a “default”? Well, for what purposes? Legally, mostly no. For CDS, no. But for S&P, yes. (Yes, it is.) They’re paying off their debt for less than par, so default it is. And since those are the rules, S&P must pointlessly note that Greece is in selective default.1

Nobody else seems to care much. What do you make of this? Read more »

  • 03 Dec 2012 at 3:44 PM

Greece Sells Low, Buys High

Here is a thing that might be worth considering about this here Greek bond buyback:

That’s the entire history of the shortest-dated of bonds targeted for a buyback at, you might notice, their all-time high price.1 Various people have various reactions to this but one reaction that no one can have is of the variety of “well, I paid more than that to buy it, so I’m not selling it to you for less, since I live in a non-mark-to-market dreamworld.” Nobody paid more to buy these bonds than Greece is planning to.2

At least, not in money. Some people paid for these bonds in suffering; others – most others – paid for them in the form of old Greek bonds, which once upon a time were, I guess, worth 100 cents on the dollar. Later, they weren’t. Eventually they were rounded up in a restructuring where every €1,000 of old bonds got exchanged into €315 face amount of new bonds, €150 face amount of let’s say par-ish EFSF notes, and €315 face amount of Greek GDP-linked securities which were worth around nothing. The total package was worth around €210-250, depending on what day you looked at it, which if you do the math assuming the EFSF bonds were worth par and the GDP warrants zero, gets you a value for those new bonds of €60-100, or 19 to 32 cents on the dollar of face amount.3 Read more »

I suppose we have to talk about Greece. Things occurred yesterday! The main things are here and here, basically the Troika is pleased that Greece has done everything right, to some approximation, and therefore they are disbursing some new loans and revising the terms of their old loans to make things even better, and all will be well by the time the aid program concludes in, I believe I have this right, 2057.1

The particular things that are or might be happening are, officially:

  • Greece is getting €43.7bn in new loans from the European Financial Stability Fund,
  • Its old, direct loans from other EU countries will have a 100bps lower interest rate than they used to, and its old and new EFSF loans will have a 10bps lower “guarantee fee cost.”
  • The old and new bilateral and EFSF loans will have be extended by 15 years, and the EFSF loans’ interest will be deferred for 10 years.
  • The other EU countries will give Greece the profits from Greek bonds they bought at a discount in previous support programs.
  • Greece will try to buy back some public bonds in the open market at prices “no higher than those at the close on Friday, 23 November 2012,” which means about 35 cents on the dollar (16.3% yield) for the ten-year.

This structure – except for the last part, which is just fun2 – is designed to accomplish the two perennial goals of: Read more »

  • 26 Nov 2012 at 3:28 PM

Argentina Can Make Its Problems The Snake’s Problems

Oh Argentina. Still a mess! Basically all the bad things happened on Wednesday: Judge Griesa ruled that (1) Argentina really can’t pay holders of its exchange bonds without also paying off Elliott Associates on its old, unhaircut, defaulted bonds, and (2) neither can anyone else, including such luminaries as Bank of New York (the indenture trustee) and DTC (the clearing system for the bonds). These things are good for Elliott Associates and bad for various other people; you can read about some of the badness here or here or elsewhere.

Here is a note from JPMorgan’s Vladimir Werning on what might happen next; my favorite outcome is this:

- Argentina deposits GDP [i.e., GDP warrants, the first thing that gets paid, but the same logic applies to actual bonds – ed.] by sending check to Cede,
– Argentina does not deposit money for holdouts in escrow
– Cede has property of funds on behalf of bond holders
– Cede does not transfer to DTC but its possession means Argentina has extinguished its obligation de Jure
– The funds for GDP sits idle in Cede – they cannot be attached by Court, but cannot be taken out by bond holders
– Holdouts claim Argentina has re-routed the payments and is not complying with injunction
– Argentina’s lawyers claim payment to Cede is contemplated in the indenture and does not constitute re-routing
In Cede option there is no dispute, obligations have been extinguished de jure, no default, technical or otherwise.

Cede, of course, being the DTC nominee that is the registered holders of all of Argentina’s bonds;1 Werning points out that, while the normal method of paying bondholders is by sending a check to BoNY to send to Cede, sending a check straight to Cede also fits the requirements of the indenture. And because Cede is the only holder of the bonds, if Argentina pays it, then it’s paid the bonds, and there’s no default, technical or otherwise, no triggering of CDS, and nothing bad has happened. Argentina-wise and bond-wise. Actual bond investors might disagree. Read more »

  • 21 Nov 2012 at 2:39 PM

Argentina Beset By Pirates, Snakes

Let’s check in on Argentina. It’s a lovable mess! You can read some background here or here or here. In brief:

  • Argentina had some Old Bonds, decided not to pay them (in 2005, more or less), got most of their holders to exchange into New Bonds at pennies on the dollar, started paying the New Bonds, stopped paying the Old Bonds, the usual.
  • Elliott Associates bought up lots of Old Bonds at pennies on the dollar, didn’t exchange, travelled the earth suing and capturing warships and stuff.
  • Elliott won a big lawsuit against Argentina, getting a US district court and the Second Circuit to declare that Argentina couldn’t make any interest payments on the New Bonds without ratably paying off the Old Bonds.
  • Argentina doesn’t want to pay off the Old Bonds.
  • But it does want to keep paying the New Bonds.
  • The district court now has to, among other things, clarify its injunction saying that Argentina can’t pay New Bonds without paying Old Bonds.
  • Specifically: how, if at all, will that injunction apply to various people in the “payment snake” – indenture trustee, securities depository, banks and brokers and whatnots – that snakes between Argentina, which has the money, and the New Bondholders, who want it?
  • Simplistically: Elliott thinks that anyone in the snake who takes money from Argentina and passes it on toward New Bondholders is “aiding and abetting” Argentina in violating the injunction. The snake members are more of the opinion that they’re just a snake and can’t be held responsible for what passes through them.

The head of the snake is Bank of New York Mellon, the indenture trustee on the New Bonds, who are in the unfortunate position of getting money from Argentina and dishing it out to New Bondholders. If the injunction applies to BoNY, then they will be in contempt of court if they do their job. They don’t like this, and filed a brief last Friday saying why.1 They are not alone in this; various other bits of the snake and their caretakers – the New York Fed, DTC, the Clearing House Association, etc. – have expressed similar emotions. Read more »