Don't Drink The Water. Punk.

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The following post is by a hedge fund manager friend of DB who shall remain nameless. He runs the emerging markets desk at his firm.
Last week, Côte d'Ivoire and its creditor committee reached an agreement on a restructuring of the African country's defaulted Brady bonds. Your correspondent, at the risk of showing his age, admits his involvement in the birth of the Bradies back in 1998, at the crest of a wave of optimism about Africa. Abidjan, no longer a defaulter, proudly hosted the emerging markets lending community at African Development Bank annual meetings a few weeks later. Côte d'Ivoire's payments lasted longer than the African boom, but still managed only three coupon payments before lapsing into default.


With Côte d'Ivoire's 9 years of default set to end, Argentina stands out as the longest-standing deadbeat of the Brady countries. Argentina defaulted in 2001; it managed to persuade a plurality of its bondholders to accept a steep haircut in 2005, but $20 billion of bonds stayed out of the deal. Argentina has continued to stiff-arm these creditors since then. But now Argentina seems close to making an official proposal to the so-called "hold-out" creditors. As Argentina's economic meets with the official sector and investors in Istanbul for the annual IMF/World Bank confab, the local press reports that a filing with the SEC for an exchange offer is imminent. While it would be sensible to think - if we were talking about normal people and not Argentine politicians - that embarrassment about being the worst laggard among defaulters (and without nearly as good an excuse as Côte d'Ivoire, which could blame a civil war for delaying things) would spur action to address the situation, we're talking about Argentine politicians, so another explanation is required: Argentina wants money and, having tapped out domestic sources of lending, needs access to the international capital markets. The Argies believe that dealing with the defaulted debt is a prerequisite to market access.
There are really two classes of hold-out from the 2005 deal. First, creditors who rejected the Argentine deal in the hopes that a low degree of overall participation would force the Argentine government to offer a less punitive restructuring. Second, creditors with experience litigating against sovereign debtors, what the Argentines refer to derogatorily as fondos buitres ("vulture funds"). The former category simply miscalculated the arrogance and stubbornness of President Kirchner and his team. No improvement would be forthcoming. As the prices of untendered Argentine debt faded, these creditors, a mix of European retail holders and hedge funds, have progressively lowered their expectations. The latter category fully expected to hunker down for a long fight with Argentina. These creditors - foremost among them are Elliott Associates and Dart Management -- were not playing for a slightly better deal from Argentina, but rather a much, much better deal, perhaps even par. They've spearheaded legal action against Argentina that has resulted in some vexatious asset-freezes and some embarrassment for the debtor, though not in any meaningful recovery for the creditors. That so many creditors from the first category also held out presented a complication for the second category, as Argentina would likely only strike a very favorable separate deal with the hard-core holdouts if they represented a small enough group for the richer deal to prove affordable. The rumored upcoming offer is materially less favorable than the 2005 deal. Exhausted creditors from the first category will likely take it. The latter will as surely reject it.
Given that outcome, will Argentina re-establish access to the international market? The answer to that question depends on another: is Argentina barred from the international market for reputational reasons or for legal reasons? Clearly, Argentina is infamous as an unashamed serial defaulter. For example, beyond outright default, it has screwed holders of local inflation-indexed bonds by brazenly manipulating inflation statistics. And yet, when the economy was enjoying a vigorous bounceback from the '01 crisis, foreign investors were significant buyers of new local debt (for what it's worth, Cote D'Ivoire, too, at times during its long default managed to entice some foreigners into buying CFA franc-denominated local debt backed by cocoa customs receipts ) Jamming exhausted creditors with a unilateral restructuring on worse terms than the original deal after years of refusal to negotiate doesn't seem like it will exactly burnish Argentina's reputation.
From a legal standpoint, the country does find itself amid a tangle of litigation in the United States. Judge Thomas Griesa, in whose courtroom most of the Argentina-related litigation has landed, has awarded judgments to several creditors and criticized the Argentines for their failure to make any attempt to honor them. Yet, no one has been able to point to a specific legal bar to new USD issuance by Argentina. Could judgment creditors, for example, seize the proceeds of a new issue before their remittance to Argentina? It's not clear. The hard-core holdouts are not so confident of their ability to interfere that they haven't worked to create new legal impediments. The American Task Force Argentina, a lobby group established by these creditors (though now with many other members), has pushed for the passage of the Judgment Evading Foreign States Accountability Act. The proposed law would bar "middle-income and high-income" foreign countries with unsatisfied U.S judgments in excess of $100 million against them from issuing securities or borrowing money in the U.S.. Only one sovereign fits the law's criteria: Argentina. Whether the hard-core holdouts have a legal cudgel to wield or not, as noted above, they are not likely to accept the new deal. Therefore, it is hard to see how the new deal, in reconciling non-litigating creditors with the debtor, would materially improve the legal prospects for Argentina's ability to access the international markets.
Likely, the questions of what's really preventing Argentina from issue and whether a new deal can overcome these barriers will only get answered when Argentina actually attempts to borrow. It's a high stakes gamble: recognize $20 billion in debt that so far you've escaped paying anything on in order to maybe get market access. Hey, Argentina: do you feel lucky, punk?

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