Thursday, December 13th 2012 - 07:04 UTC

US court ruling against Argentina threatens Greek Collective Action Clause

A legal clause that is the key to smoothing future debt restructurings could be undermined by a US court ruling that Argentina must pay creditors holding its defaulted debt.

“Argentina vs NML Capital” revives the threat that such holdouts will stall future debt restructurings.

The case has implications for emerging markets, source of protracted and painful past defaults, and for Europe, where the rules setting up the Euro zone’s bailout fund state that government bonds must carry Collective Action Clauses from 2013.

Known as CACs, the clauses make a restructuring binding for all creditors if agreed by a specified majority — usually 75%. They are intended to eliminate the risk that some investors will shun offers and take legal action to squeeze cash from the debtor, often dragging the process out for years.

But “Argentina vs NML Capital” revives the threat that such holdouts will stall future debt restructurings. The US court ruling upheld the principle of pari passu, meaning debtors cannot pick and choose between creditors.

In Argentina’s case, that means the hedge funds which brought the litigation, and which refused to participate in two debt restructurings (2005 and 2010) accepted by 93% of bondholders, must be paid what they are owed alongside those who did take part.

That has galled investors who took a 70% write-down on Argentine debt during the 2005 and 2010 swaps. The Argentine debt did not have a CAC, but the ruling could make it harder to secure the majority needed to trigger CACs in future.

“Such a ruling creates a big incentive to be a holdout going forward,” said Bart van der Made, lead portfolio manager at ING Investment Management, which swapped its Argentine bonds.

“If you think there’s a judge waiting around the corner who says you will be paid in full and with past due interest — well, in that case, everyone will hold back and you won’t hit the 75% approval rate required to (trigger) the CAC.”

As the process drags on, more interest accrues, pushing the debt up further and impelling the borrower to concede more to creditors — some of whom may have bought their debt at vastly discounted prices — to secure a deal.

Perhaps emboldened by the Argentine case, hedge funds last week proved reluctant to participate in a Greek bond buyback, the timetable for which had to be extended after Greece initially fell short of its target despite generous pricing.

Greece retroactively inserted CAC into its domestic bonds to enable a successful swap in March, but still has 6.4 billion Euros of foreign law bonds, the terms of which can’t be altered.

Some of these will have been tendered in the new buyback, but many hedge funds say they plan to hold on to their Greek debt in expectation they will be repaid at par later.

Analysts at JP Morgan advised Greece prior to the buyback to enforce its CACs, estimating that by doing so debt relief would be double what it would get if it allowed some creditors to hold out.

Alexandre Tombini, the central bank governor of Brazil, itself a past debt defaulter, has said the rulings against Argentina set a bad precedent.

8 comments Feed

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1 Pirat-Hunter (#) Dec 13th, 2012 - 02:55 pm Report abuse
Why are we still talking about this, I guess the vultures can't take no for an answer sounds like they need be reminded that what IMF considers a loan we Argentines have long accepted it as theft. Maybe USA and IMF need to be reminded that you can fool some people sometimes but you can't full everyone all the time. We don't pay crooks and if we pay them we will have to do it their way. With a scam. I don't think Argentina should be wasting time with the vultures, I think Argentina should strengthen our national bank and tell IMF and USA to go to hell.
2 Nostrolldamus The 2nd (#) Dec 13th, 2012 - 03:09 pm Report abuse
As I predicted by the Italians, Spanish, Germans, British undermining Argentina through the vultures, they are in fact undermining themselves and possibly leading to their economic collapse by the collapse of the EU (which whether the Brits like it or not to hear, would cause at the very least at short term DEPRESSION through the total collapse in trade and devaluation of national currencies post-Euro).

And as I also predicted, in the USA you now have a civil war between the 93% of those bondholders that accepted the terms, and the vultures. If you all remember I also stated this scenario, that any “technical default” by Argentina that sees the settled bonds not being payed would be blamed on Singer and not on Argentina, causing a major mess in the US financial jurisprudence.

As I predicted, mess with Argentina and it will severely backfire.
3 Anbar (#) Dec 13th, 2012 - 06:35 pm Report abuse
“As I predicted, mess with Argentina and it will severely backfire.”

best one liner ever!

How'd that go for you in '82?
4 Conqueror (#) Dec 13th, 2012 - 06:54 pm Report abuse
@1 Many years of court cases ahead. Also many years of “state” assets being “inconveniently” seized. How's the old Libertad and Espora getting on? Woodworm? Rot? Rust? Bits dropping off? Also many years of WTO disputes. And ICSID cases. Poor little “victim” argieland.........NOT. REMEMBER, everyone must contact all cruise companies at every opportunity to request that all argie ports are removed from cruise itineraries. If they won't pay their debts, make it difficult for them to make money.
@2 The usual propaganda. No signs of “economic collapse” due to argieland in Britain. Spain? Who cares? Another cowardly, greasy, slimy enemy. France? Definitely don't care. Nasty habits. Frogs' legs. Oozy cheese. Incompetent, uneconomic attempts at farming. Germans. Ve vant no Forze Reich. The Germans can spend their money supporting the southern European wasters. And, just look, guess where the argie wasters came from. Ve are not european, they zay. Aside from being physically indistinguishable from Spaniards and Italians. And speaking, guess what, a european language. Perhaps some argie no-nothing could point out the vote and legislation by which argieland decided it would speak Spanish instead of a native language.

As for “backfiring”, who hates argieland? The crooks, the crims, the debtors, the genocides, the liars, the thieves. A “place” well worth hating because of the scum that inhabit it.

And don't forget to do your bit. Contact all cruise companies that go into the South Atlantic. Make them aware of how they are supporting colonialist, imperialist, tyrannical dictators. Persuade them to drop all argie ports from their itineraries. Uruguay, Falklands, Chile and then onwards. Next step will be to interfere with ALL tourism. And the new advertising is: “Travel to argieland. Get mugged, beaten, robbed, murdered. Don't miss out. You too can die in argieland!” For those travelling by air: “As your plane turns to land, open the door and jump. Save La Campora trouble.”
5 ChrisR (#) Dec 13th, 2012 - 07:26 pm Report abuse
But none of the haircut brigade took the hit themselves; they were big corporations or banks and their customers or shareholder took the hit either directly or via paying shareholders less. So you could argue, that having re-established their finances thay are no longer owed the 70%.

The little people who could not afford a 70% cut on the value of their money are part of the holdouts and I hope that they do get all of their money in full and that the others just get their 30%.

It doesn’t really matter if future restructuring is going to be impossible: GOOD. No country should KNOWINGLY deprive anybody of their money as AG did. Uruguay did not, and they were a very tiny country then and are not that much bigger now.

Argentina may well find that their wishes of isolationism are going to be fulfilled after the IMF removes them from the register.

Get ready to lose virtually ALL your foreign investment presently making cars, etc. They won’t be able to get insured loans thus effectively closing them down.

But TMBOA, The Chief Crackhead (cream buns a speciality) and Thin (ugly) Girl NYC’s finest will be alright, so that’s OK then.
6 Brit Bob (#) Dec 13th, 2012 - 08:01 pm Report abuse
The yanks are coming and they will catch up with Argentina:
And, let's not forget
Default Day - 15th December
Red Card Day - 17th December
7 Pirat-Hunter (#) Dec 13th, 2012 - 11:43 pm Report abuse
CFK is the best president Argentina had in the last 40 years, and to top it all of she is loved by many Argentine myself included, if people don't like her rather then cry and cry everyday here why not vote against her next elections, Simple! lol good luck with that, keep us posted on how productive your life is. I wonder if in 2001 the bankers give the Argentines their money back.
8 British_Kirchnerist (#) Dec 22nd, 2012 - 11:02 pm Report abuse
The irony is this pro-finance ruling would even be bad for finace, if generalised...

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