BY JOSIAH WOLFSON
With current president Cristina Fernández Kirchner unable to run for another consecutive presidential term, the hedge funds look to be waiting to negotiate with one of the more business friendly candidates that will take office at the end of the year.
In 2001, Argentina defaulted on nearly $100 billion of its external debt caused by an economy hampered by debt that reached 150 percent of the GDP [1]. “The dead do not pay their debts,” stated former Argentine President Néstor Kirchner following the 2001 Argentine debt crisis [2]. Many of the investors heeded the then president’s warning and voluntarily restructured 93% of the defaulted bonds at a significantly discounted rate [3]. However, a couple of hedge funds, including NML Capital, Ltd. (NML), who purchased 6% of the original bonds at a significant discount, rejected Argentina’s offers to restructure the debt [4]. The hedge funds chose instead to litigate the conflict in an attempt to collect the full face value of the defaulted bonds plus interest [5]. NML first filed suit against Argentina in 2003 in the Southern District of New York and has since filed eleven subsequent actions [6].
In 2012, Judge Griesa of the Southern District of New York, in an unprecedented decision, ruled in favor of NML and ordered Argentina to pay the face value of the bonds to the holdout hedge funds [7]. Specifically, Griesa prohibited Argentina from paying interest to the restructured bondholders until it also paid the holdout hedge funds [8]. Griesa based his findings on the principal of “pari passu” clause that requires equal treatment of all bondholders [9]. The New York Second Circuit Court of Appeals upheld Judge Griesa’s decision, and in June of last year the U.S. Supreme Court declined to hear the case [10].
Argentina defaulted on its debt again on July 30th of last year [11]. The current Argentine administration has argued that the default was inevitable following the Griesa decision [12]. The restructured loans held by 93% of the investors contained a Rights Upon Future Offers (RUFO) clause, which would require Argentina to pay those 93% of investors that already restructured the full amount of the original face value of the bonds, reflecting the payment Griesa ordered Argentina to pay the holdout hedge funds [13].
More than eight months removed from the expiration of the RUFO clause, both President Kirchner and the holdout hedge funds remain idle, with both sides opposed to compromise or negotiations [14]. President Kirchner has taken a strong political stance against the hedge funds, or so-called “vulture funds.” [15] She claims that the hedge funds that have refused to restructure the defaulted bonds are extortionists and accuses Griesa as “contemptuous” of Argentine sovereignty [16]. The Chief Economist at Argentine consultancy Management & Fit, Matias Calugati, claims that Kirchner’s rhetoric regarding the “vulture funds” is allowing her political party to collect significant political capital before what is sure to be a hard-fought presidential election [17]. So even though Argentina has the economic means to pay the holdout bondholders [18], with the current administration’s political stance and the presidential elections on the horizon, it is all but certain that nothing will be resolved before Kirchner’s successor takes office.
The first round of elections to decide the next president of Argentina begins next month. Daniel Scioli, of the ruling Front for Victory (FPV) party, and Mauricio Macri, of the Let’s Change opposition coalition, are the only remaining competitive candidates, according to recent polls [19]. Macri is transparent regarding his strategy to negotiate an end to the more-than-a-decade long battle with the hedge funds [20]. However, Scioli has failed to reveal any details on how he would proceed with what he has labeled as “vulture funds” if elected president [21]. Scioli has remained silent on his strategy to lock in “Fernandez’s left-leaning base without alienating the wider electorate.” [22] This seems to justify his contradictory stance in the weeks leading up to the 2012 default, when he said that he was “convinced that [President Cristina Kirchner would] be able, with a lot of intelligence, to overcome this situation.” [23] However, Scioli named Carlos Zannini to the current administration, which may be revealing of the stance he is likely to take if elected. Zannini was behind legislation that aimed to bypass Griesa’s ruling [24].
While it is uncertain who will be Argentina’s next president, it is clear that he will decide whether the incumbent administration continues with the political posturing or sits down with the hedge funds to settle the dispute of the country’s unpaid debt. In the mean time, the hedge funds look to continue targeting Argentina’s global assets in an attempt to offset the funds they are owed according to Griesa’s judgment [25].
