Tit for Tat Media Battle between Argentine Government and US Lobbyists

1 Aug

Tit for Tat Media Battle between Argentine Government and US Lobbyists

News Update

vulture

A proposal to settle the Argentina debt crisis collapsed after what the country’s economy minister Axel Kicillof described as the “vulture funds” – hedge funds to the rest of us – reportedly rejected it.

The offer entailed the Argentine banking association, backed by Citigroup, HSBC and JPMorgan, buying out the so-called ‘holdouts’ (those under US jurisdiction), offering a reduced $1.4billion for their $1.6billion claim on principal and interest accrued.

Despite a US Supreme Court order requiring it to honour its debt to the holdout investors, who took at civil lawsuit out to enforce their payments, Argentina seems to have effectively defaulted. It cannot pay the other bondholders who accepted a restructuring and reduced value package back in 2005, because the Rights Upon Future Offers (RUFO) clause in the contracts of the restructured bonds will not allow the government to make higher payments to other creditors.

When the Argentine government tried to make a separate payment to the restructured bondholders on July 30, it was barred by US judge Thomas Griesa. The RUFO clause expires at the end of 2014, when a settlement may become possible.

At the same time as fierce negotiations were taking place between financial stakeholders, the country’s administration paid for several high-profile ‘advertisements’ in the Financial Times, laying out its objections to the lawsuit brought by – the so-called ‘holdouts’.

The adverts’ message states that Argentina considers the judicial verdict enforcing its payment of full interest on the bonds to be disproportionate, and prejudicial to the interests of the majority bondholders who did accept restructuring. It also questions the limits of US jurisdiction on this matter.

In response, a US group, ‘American Task Force Argentina’, formed largely of farmers’ and agricultural associations, who I am too much of a diplomat to call ‘interfering hicks’, took out its own advert. It accused the Argentine administration of a campaign of misinformation; to prove its case, it has drawn on its own roster of slanders, half-truths and hearsay. The campaign even has its own dedicated website, www.FactCheckArgentina.org, funded by the American Task Force Argentina.

Whose campaign of misinformation?

The American Task Force Argentina’s advert in the FT, just several pages across from Argentina’s latest dispatch, sets out three ‘myths’ the Argentine government is propagating. First is that ‘Holdout creditors and a judge in NY are forcing Argentina to default.’ To be exact, the initial Argentine advert claimed that paying the sum owed the holdouts – it said $15billion – would make it unable to pay the majority bondholders.

The second alleged ‘myth’ is this sum of $15billion, a figure which the Task Force claims has not been substantiated or broken down by the Argentine administration. It quotes CNN which quotes an emerging markets economist at Capital Economics, David Rees, who puts the sum at “about half what the government claims.” It does seem an exaggerated number, as Argentina has only been court ordered to pay the US-based holdouts; those residing in other jurisdictions would have to start their own costly legal proceedings to enforce their payments.

But the Task Force makes no attempt to calculate this figure for itself. Surely it would be a simple matter to work out the end value of the debated bonds, by looking at the price paid to acquire them: the projected present future value (PFV) of the instrument would be incorporated in the pricing model for its initial sale price. Interest payments on this, even if compounded, could easily be totalled and added to the principal returned when the bond matured.

What, do the Montana Cattlemen, Kansas Cattlemen’s Association and Nebraska Taxpayers for Freedom not have any among them who can do bond maths? I am not hugely surprised, though there are some heavyweights within the American Task Force Argentina, like the National Taxpayers’ Union and the National Black chamber of Commerce which mean you have to take their campaign seriously. Though what the taxpayers’ union see as support-worthy in spending taxpayers’ dollars on a chain of repeated verdicts as the case moved up the legal hierarchy to the Supreme Court, I don’t know.

Tit for Tat

Admittedly, Argentina’s refusal to negotiate an extension – which the Task Force quotes Reuters as saying the ‘Argentine holdouts say they would discuss… in good faith’ – makes it look intransigent, even stubborn. Ostensibly this is because it maintains that US legal verdicts cannot extend to financial instruments issued and governed by Argentine, and in the case of the Euro bondholders, of English and Welsh law. Reportedly the minority bondholders are prepared to accept a combination of cash and, you guessed it, more bonds.

This seems like a solution. The question is, who would determine the interest rate, benchmark and the maturity of these newly issued instruments? Surely they would be subject to a similarly vicious haggling process? The holdouts have shown themselves unable to accept a 20% reduction in their assets’ value. Do they have an alternative proposal?

Passing the Baton

The Argentine government’s payments on bonds to all its US bondholders is carried out by BNY Mellon which acts as trustee for the Argentine government for these specific instruments. In its own announcement, Argentina effectively delegates responsibility for payment of all the bonds to BNY Mellon. Unfortunately the American bank is not able to ignore a US court order in the way the Latin American government can…

Argentina states that it has paid interest due on the 2005 and 2010 sovereign exchange offers “as required under Argentine law and the laws of England and Wales,” into its trustee’s account and that if it does not distribute them as required, then the government is not responsible. This is what is popularly known as ‘passing the baton.’

It’s difficult not to compare these events to the case of the Greek and Portugese default, where the European Central Bank unilaterally forced sovereign debt-holders to accept a 50% write-down on the value of their securities, with no chance of receiving further payments long-term. There the interests of the ordinary people, who rely on the government to fund the services they pay tax to be entitled to, took priority and wealthy investors had to subjugate their demands. The current payment verdict has a similarly asymmetric bias imposed by an overarching institution, but in favour of the financial elite who were funding the legal process.

There is a silver lining for both Argentina and the US finance community, as reportedly some hedge funds have been moving in to buy up Argentine stocks, in the expectation that a default on payments will do nothing to hold back its economy; and that after a downgrade by ratings agencies, many of the country’s assets are undervalued. Guess it shows that no grudge can getin the way of the prospect of a healthy profit.

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