Argentina regains access to international finance markets after debt settlement
An immediate priority for President Macri on taking up his post in December was to resolve the debilitating dispute with Argentina’s hold-out creditors which, after the intervention of the US courts, had prevented the settlement of Argentina’s debts following Argentina’s massive $100bn default in 2001. In a court-brokered deal, Argentina was allowed to raise the necessary funds to pay off the ‘hold-out’ hedge funds in April, ending Argentina’s exclusion from the international finance markets. Argentina’s credit rating improved but remained high risk. Despite this, Argentina’s bond sale attracted eager investors and was heavily oversubscribed. Overall, Argentina’s debt settlement has been applauded by international leaders, although some remain concerned about the high profits made by hedge funds (dubbed ‘vulture funds’ by the Kirchners) and Argentina’s continued high rate of indebtedness.
Following concerted negotiations in early 2016 between the Government of Argentina (GoA) and the remaining creditors under a court-appointed mediator, Judge Griesa of the US District Court of New York indicated on 2 March that he would be prepared to lift his injunction, imposed in 2012, preventing the repayment of GoA debts until all creditors had settled, subject to various conditions. These were that GoA would have to repeal the two pieces of ‘lock out’ legislation, enacted during Cristina de Kirchner’s Presidency, that prevented a settlement by Argentina and that the deal would have to be endorsed by the US Circuit Court to which some of the ‘hold out’ creditors had appealed.
Perhaps surprisingly, President Macri faced little opposition from Congress in repealing these two laws. The amending legislation was passed in the House of Deputies on 16 March by 165 to 85 votes and in the Senate on 1 April by 54 to 16 votes, albeit after 14 hours of debate. The US Circuit court dismissed the ‘hold out’ creditors’ appeal on 12 April leaving the way open for GoA to raise the necessary funds for payment.
GoA raised $16.5bn on 19 April on the bond market at an average of 7-8% in terms of yield over terms of 3 -30 years. There was huge investor demand, sufficient for over $60bn in loans, despite Argentina’s relatively poor credit rating. But this excitement was set against much lower bond yields available elsewhere (1.75% in the US, 1.5% in the UK and under 1% in Germany). The main investors were from the US (65%) and Europe (25%). The international credit rating agencies promptly uprated Argentina by a notch or two (Moody’s to B3; Fitch to B; Standard & Poor’s to B-), indicating that investments would still be speculative and but less high risk than before.
With that, Argentina cleared the way towards full integration into the global financial arena, to the applause of international leaders. In a related move, GoA sought a timetable from the IMF for an early Article IV evaluation (under the IMF treaty, Member States have to undergo regular such reviews). The target will now be for the Macri Administration to attract international business investment in Argentina to generate real economic growth. It is a good step forward for the country.
But the big winners were the ‘hold-out’ hedge funds, which received high returns on their initial investments. They had bought at heavily discounted rates following Argentina’s default in 2001 – and some were reported as profiting hugely. They had also embarrassed Cristina de Kirchner in October 2012 by persuading a Ghanaian court to impound the Argentine training vessel, the ARA Libertad, pending repayment. A tribunal set up under the UN Law of the Sea Convention (UNLOSC) finally allowed the release of the ship but not until the GoA had had to pay the repatriation costs of its crew – and subsequent media speculation suggested that the Argentine President’s plane was grounded in case similar action was taken, causing further costs for GoA. This has led to some public concern about the power of hedge funds to exacerbate weak economies – and Argentina has been left with a high debt service to GDP ratio – but the hedge funds would argue that the rule of law has been upheld.