The Casa Rosada, the seat of the Argentine government, which is seeking to reopen a debt swap to overcome the legal action brought by “vulture funds”. Credit: Marcela Valente/IPS

By Marcela Valente
BUENOS AIRES, Aug 29 2013 (IPS)

As a sign of Argentina’s willingness to repay its bondholders, President Cristina Fernández introduced a bill for a new swap of the foreign debt held by “holdout” creditors who refused earlier restructurings after the country’s late 2001 default.

This time around, most of the opposition backs the proposal.

In the initiative that the Senate began to discuss on Wednesday Aug. 28, the government seeks authorisation to reopen the debt restructuring process for a second time.

Although 93 percent of bondholders accepted the earlier restructurings, in 2005 and 2010, the remaining seven percent refused the offer of about 35 cents on the dollar, and insisted on full repayment.

Through the restructuring, Argentina renegotiated 90 billion dollars in debt.

The new swap, expected to be approved by Congress, would offer the same conditions as the previous deal. The difference is that it would be open-ended, whereas the earlier exchanges gave bondholders only a few months to swap their debt.

“Equity is a foundation stone of this debt restructuring process,” states the bill, which prohibits offering holdouts who have brought legal action more favourable treatment than those who did not do so.

The government initiative is in response to the Friday Aug. 23 ruling by the U.S. Court of Appeals for the Second Circuit in New York – the last step before the Supreme Court – that upheld an earlier decision that Argentina must pay the holdouts in full.

Fausto Spotorno, an economist with the Centre for Economic Studies, told IPS that the bill “is very reasonable.”

“They should never have closed the swap. But opening it now is a good political signal to the justice system and could get some more of the bondholders to agree to an exchange,” he said.

Spotorno said that if the case was accepted by the Supreme Court, a favourable verdict for Argentina was unlikely.

The hedge funds that sued in federal court in New York for full payment of 1.3 billion dollars in Argentine bonds had acquired them in 2008 at 20 to 30 percent of their nominal value.

They are known as “vulture funds” – opportunistic investors who purchase the debt of heavily indebted countries cheap and then sue for full repayment.

The lawsuit in New York is led by hedge fund billionaire Paul Singer’s Elliott Management.

The bill presented by the Argentine government stresses that the holdouts who sued represent only a small portion of the unrestructured debt. It also points out that if they were paid 100 percent of the nominal value, as they are demanding, they would make a profit of 1,300 percent.

The bill also states that “it is common knowledge that our country is the object of ruthless legal attacks and heavy political pressure by these vulture funds.”

When she unveiled the proposal on Monday Aug. 26, centre-left President Fernández said the Aug. 23 U.S. court ruling was “unfair to our country” because it ignored the restructuring agreements reached with 93 percent of the bondholders.

She also said “we are serial payers, not serial debtors.”

Since the restructuring began, Argentina has serviced its debt punctually.

By 2003, the country’s debt represented 150 percent of GDP, the bill presented to the legislature states. The country has not had access to the global credit markets since 2002.

But as the economy began to recover from the 2001-2002 severe economic crisis, the debt situation began to improve as well.

According to the latest report by the Economy Ministry, as of late 2012 Argentina held 83 billion dollars in net debt, equivalent to 18.8 percent of GDP.

And with the payment of restructured bonds scheduled for September, the foreign currency denominated private debt to GDP ratio will drop to just 8.3 percent, Economy Minister Hernán Lorenzino said.

However, the country’s successful reduction of the debt burden is threatened by the small group of litigious hedge funds, which found their first ally in District Judge Thomas Griesa, who handed down the initial sentence in New York, in March.

The Aug. 23 ruling, which will be appealed by Argentina, dealt a blow to the restructuring process that Fernández’s late husband Néstor Kirchner, her predecessor, began while serving as president from 2003 to 2007.

If Argentina was forced to pay 100 percent of what the holdouts are owed in principal and accrued interest, the bondholders who agreed to the 2005 and 2010 restructurings could invoke the “most favoured creditor clause” and demand the same treatment.

Fernández also proposed that the voluntary debt swap invite holders of foreign-law bonds to exchange them for new debt that would be paid under Argentina’s local legislation, in order to evade eventual embargoes in case the Supreme Court upholds the Aug. 23 ruling.

The Radical Civic Union, the main opposition party in both houses of Congress, responded positively to the bill overall. But some of its leaders said the measure came too late, or contained overly critical language when referring to the holdout creditors and the judges.

The right-wing PRO also called the bill “reasonable.”

“Argentina has to do whatever it can to get the Court to open the case and turn around the sentence,” PRO lawmaker Federico Pinedo told IPS.

He said it was necessary to act “responsibly and in a serious manner, and to send out a message that we want to ensure equal conditions for all of the creditors. That is an argument that holds a great deal of weight with the Court.”

Many legislators, including members of the governing Frente para la Victoria, believe it will be difficult to get the vulture funds to agree to any kind of swap. But they say it is necessary to show a willingness to restructure the debt – as long as it is under conditions set by Argentina.

Flooding in Trinidad's capital of Port of Spain in May 2013 left residents little choice but to wade through the deluge. Credit: Peter Richards/IPS

By Jewel Fraser
PORT OF SPAIN, Trinidad, Aug 19 2013 (IPS)

The Caribbean is in danger of becoming “a region of serial defaulters” with respect to international debt obligations, according to one expert, and this may partly be due to its economies suffering frequent shocks from natural disasters.

Caribbean nations are among the world’s most vulnerable to natural disasters, with the region being struck by 187 such disasters in the past 60 years.

According to an International Monetary Fund study entitled “Caribbean Small States: Challenges of High Debt and Low Growth” and published in February, “The effects of natural disasters on [the region’s] growth and debt are also significant,” and “many Caribbean economies face high and rising debt to GDP ratios that jeopardize prospects for medium-term debt sustainability and growth.”

Commenting on the region’s restructuring of loans after some countries had defaulted on bond payments, a Bloomberg news report quoted an expert in international finance from American University who claimed Caribbean governments find it easier to default on bond payments than to reduce their spending.

Over the past three years, a number of Caribbean countries have restructured bond payments, making this period one of the highest for defaults on loan agreements by Caribbean governments. The Bloomberg report cited Grenada, Jamaica and Belize as three of the Caribbean countries restructuring debt obligations.

However, Michael Hendrickson, an economic affairs officer with the Economic Commission for Latin America and the Caribbean (ECLAC), emphasised the pressures brought by natural disasters on these countries’ economies over the past decade.

“In Grenada, GDP contracted largely due to the fallout from Hurricane Ivan, the growth rate declined from 9.5 percent in 2003 (before Ivan) to -0.7 percent in 2004 (year of Ivan) then recovered strongly in 2005, with growth of 13.3 percent, no doubt related to strong reconstruction, i.e. investment, but declined again in 2006, after the investment had run its course.

“Jamaica also felt the impact of Ivan and its growth rate slowed from 3.7 percent in 2003 to 1.3 percent in 2004 [the year Ivan struck the island]. This reflected the impact on productive sectors such as agriculture, mining and tourism.

“Moreover, the impacts lingered into 2005, when the economy grew by only 0.9 percent. In Belize, growth slowed to 1.1 percent in 2007 from 5.1 percent in 2006, partly as a result of the impact of Hurricane Dean, owing to damage to agriculture and productive infrastructure,” he told IPS.

Regional governments’ tendency to fund social and economic development through borrowing rather than through establishing an appropriate framework for sustainable economic development has also contributed to the high debt to GDP ratio.

Some Caribbean countries “have debt levels that can be considered unsustainable”, Hendrickson said. “Moreover, debt service payments, namely, interest and principal repayments, absorbed a full 29 percent of government revenue in 2011.

“We are still collating numbers for 2012. This reduces the ability of governments to finance public investment and social protection programmes.”

The 2013 IMF study noted that “part of the build-up can be traced to the cost of natural disasters, successive years of fiscal deficit, public enterprise borrowing and off-balance-sheet spending, including for financial sector bailouts.”

An IMF working paper entitled “Macroeconomic Implications of Natural Disasters in the Caribbean” observes that following natural disasters in the Eastern Caribbean region, “the tendency appears to have been a marked increase in expenditure and a small reduction in total revenue (including grants) despite an increase in inflows of official assistance and aid.”

The working paper said this “is not surprising, as governments and households would be expected to borrow in response to temporary shocks.”

Since natural disasters affect two of the largest economic sectors in the region, tourism and agriculture, the impact on countries’ economic growth is considerable.

According to ECLAC’s “The Economics of Climate Change in the Caribbean Summary Report,” it is estimated that natural disasters due to climate change will likely cost countries in the subregion up to five percent of annual GDP between 2011 and 2050.

It is also estimated that GDP in the region has declined by about one percent annually over the past several years because of natural disasters.

However, because of their middle income status, the majority of the region is unable to benefit from international debt relief, says the 2013 IMF study on Caribbean debt. The study also noted that “only a few Caribbean countries still qualify for concessional borrowing at the World Bank.”

“Given the exceptionally high costs of natural disasters, small states in the Caribbean should be seen as frontline candidates for support from climate-change funding,” the IMF report stated.

The president of the Caribbean Development Bank (CDB), Dr. Warren Smith, also stated a case for increased insurance coverage to help offset the impact of natural disasters due to climate change, at a recent meeting of the CDB’s governors.

He made specific reference to the region’s need to make greater use of the Caribbean Catastrophe Risk Insurance Facility (CCRIF), an organisation set up to insure Caribbean countries against natural disasters.

Dr. Simon Young, who heads Caribbean Risk Managers Ltd., which supervises most of the technical aspects of CCRIF, said 16 countries in the region have policies with CCRIF.

“Those policies cover hurricane and earthquake and the total amount of risk that is covered amounts to just over 600 million” for all 16 countries, he told IPS.

Dr. Young conceded, “It is not adequate, but the adequacy of the coverage is a function of the countries’ ability to pay premiums that would be needed to buy adequate coverage. CCRIF provides premiums at less than half of what the commercial market would require.”

Yet, many countries find it difficult to pay for coverage even at those preferential rates. As a result, the insurance coverage has provided only “a very small amount” of compensation to islands hit by natural disasters in recent years.

Dr. Young added that insurance coverage should not be seen as a “silver bullet” for disaster risk reduction.

“Caribbean countries need to look for cost efficient ways to manage disaster risk reduction,” he said, and CCRIF provides just one tool for doing so.

The fate of countries with major debt problems is at stake in federal courts in New York, which are to decide in April whether or not they accept Argentina’s proposal to the bondholders who rejected two restructurings of sovereign debt.

Since Argentina defaulted on nearly 100 billion dollars in debt in late 2001, close to 93 percent of the bonds have been restructured at a deep discount, with lower interest rates and at longer terms.

But a group of hedge funds that refused to participate in the 2005 and 2010 restructurings sued for full payment of 1.3 billion dollars in Argentine bonds in federal court in New York.

On Tuesday, the 2nd U.S. Circuit Court of Appeals in New York declined to grant a full-court rehearing of a decision by a three-judge panel that went against Argentina in October, ruling that this country had to deal with all of its debt holders equally.

The suit not only threatens to return Argentina’s debt restructuring process to square one. Experts warn that it could have an impact on the decision-making capacity of other countries that run into severe financial difficulties at times of global crisis.

The government of centre-left President Cristina Fernández has until Friday Mar. 29 to present a solution for making the payments to the hedge funds.

The government says it will offer the holdouts the same conditions as the ones accepted by the rest of the creditors in the 2010 restructuring: discounts, lower interest and longer terms.

But that would involve a new debt swap, which would require congressional approval because a law passed after 2010 banned the reopening of debt restructuring.

Argentina is now financially stable and makes its debt payments on time, despite the fact that it lost access to global credit markets after the December 2001 default, which was announced in the context of an economic and social meltdown.

According to the latest report by the Economy Ministry, as of mid-2012 Argentina holds 183 billion dollars in debt, equivalent to 41.5 percent of GDP, one of the lowest proportions in Latin America. The report did not include the defaulted bonds.

Up to now, the Fernández administration had refused to settle with the hedge funds, referring to them as “vulture funds” – opportunistic investors who purchase the debt of heavily indebted countries cheap and then sue for full repayment.

The lawsuit in New York is led by hedge fund billionaire Paul Singer’s Elliott Management. The hedge funds acquired the Argentine bonds at 20 to 30 percent of their nominal value.

If the courts finally come down on the side of the hedge funds, Argentine assets could be embargoed internationally.

Some experts in Argentina believe the U.S. court will accept the Fernández administration’s proposal, in order to put an end to the dispute and to defend the credibility of global payment systems.

But others are more sceptical.

Fernando Porta, an economist with Centro Redes, a research institute in Buenos Aires, told IPS that if the courts in New York refused to recognise Argentina’s restructuring proposal, “a huge level of uncertainty would be introduced in the system.”

“The potential negative impacts would go beyond Argentina and would throw into question the operation of the international debt restructuring system when countries are having trouble meeting their payments,” he said.

Porta said that with respect to debt restructuring, there are no multilateral agreements setting rules, but merely precedents that give the process predictability.

For that reason, he believes Argentina’s proposal “will be accepted in the end,” although several other obstacles may have to be overcome first.

But analyst Fausto Spotorno with the Orlando Ferreres y Asociados consultancy was less optimistic. “I don’t think this proposal will be accepted by the holdouts,” he said.

In Spotorno’s view, the New York appeals court is unlikely to accept Argentina’s offer if it does not have unanimous support among the creditors. “The holdouts have the first-instance ruling in their favour, which means they aren’t going to accept a proposal with discounts and longer terms now,” he said.

The analyst said it was naive to believe that the court would take into account the impact that its decision could have on future cases of debt restructuring. “New bond issues contain clauses that prevent this problem,” he noted.

He was referring to collective action clauses (CACs), first proposed by Mexico in 2003, which since then have been included in bond issues to facilitate eventual restructuring.

CACs allow a majority of bondholders to agree to a legally binding debt restructuring. By forcing potential holdouts to accept the restructuring if a large majority of other creditors do so, it provides protection against vulture funds.

The clauses were used controversially by Greece in 2010, when it introduced them retroactively to restructure the country’s debt and avoid default, according to “Un ensayo sobre las Cláusulas de Acción Colectiva”, a paper on collective action clauses published in Mexico.

The study, published this year by Mexican economists Alejandro Castañeda and Pablo Newman in the Gaceta de Economía journal, says the new mechanism became widely used as a result of the threat posed by opportunistic creditors in the cases of Argentina and Peru.

The European Union has required the inclusion of CACs in all new eurozone bond issues since January.

But they had already been incorporated by most countries in Latin America and other regions, with varying minimum percentages of support required from bondholders.

In their report, the Mexican academics point out that the bonds issued by Argentina in its debt swaps contain CACs, but older rules requiring unanimous acceptance of new conditions apply to the bonds held by the holdouts.

Under the older rules, if one single bondholder rejects the proposed new financial terms, the process can be blocked by litigation which, if successful, can also benefit the rest of the bondholders – and seriously affect the state issuing the bonds.

But there are still countries with bonds issued in the 1990s that would be affected by a resolution against Argentina.