Sometime ago the Economist described the stand-off between the then government of Argentina and some hold-out creditors as “watching a movie in which The Joker battles Lex Luthor,” the famous supervillains of comic books, concluding that “neither side arouses much sympathy.”
Cristina Fernández de Kirchner (The Joker?) has paid politically, with her candidates losing not only the Argentina’s Presidency, but also the Governor’s elections in a total of 12 provinces with about 76% of Argentina’s population (including the five large Provinces, which was a first for the Party she nominally represented). Furthermore, there is an expanding wave of legal proceedings against people associated with the former President, related to allegations of widespread corruption in public works and other government operations during her tenure, money laundering, and illegal payments to businesses owned by her and her family. If what is being alleged is true, it is hoped that the highest moral, political and legal punishment comes to all involved.
But now, and following The Economist’s metaphor, comes Paul Singer (Lex Luthor?) claiming the high moral ground as defender of the rule of law in an Opinion piece in the Wall Street Journal (The Lessons of Our Bond War, by Paul Singer, April 24, 2016). I beg to differ. He repeats several of the arguments that Jay Newman presented in an article in the Financial Times on October 7, 2013, basically a) that Argentina took an unnecessary long time to make an offer, and then made an unilateral offer in 2005; b) that the offer was unfairly discounted; c) that was accepted mainly by Argentines, which did not have other alternative, while 50% of the external creditors did not accept it; d) that in 2010 Argentina made another unilateral offer, again unfairly discounted, that was accepted by dispirited bond holders; and e) that Elliot was all along trying to negotiate with Argentina in good faith a fair settlement. I argued in a previous Economonitor blog that all those arguments were wrong or misleading. My main points were:
- The Argentine debt re-structuring took time because it has been the most complex in the history of emerging markets (and until Lehman’s bankruptcy probably not only for emerging markets): it encompassed 152 bond issues for more than 80 billion US$ in 7 separate currencies under 8 distinct governing laws. Impartial observers (like Nouriel Roubini) recognized at that time that the only workable approach was what the then Argentine government did: to hold numerous meetings (over 70 altogether) with different groups in many countries and then define and present an exchange offer that considered the different interests and possibilities. It was simply not operationally possible (or even legally permissible) to negotiate with each group that claimed to represent this or that group of bondholders. Another fact that prolonged the negotiations was the existence of two general paradigms for debt resolutions. The previous traditional model had been the public-sector approach funded and led by international public institutions (the IMF basically). The competing approach was called the market-based approach, which postulated that the private creditors and the debtor government have to work out a solution by themselves without financing from the international community (which in any case was running out of money) in order to avoid the moral hazard generated by the other approach. Argentina was placed under the market-based paradigm while the majority of the other countries (that are presented as examples of “friendly arrangements”) received new public money (substantial at times). In addition, not only there was no new money for Argentina from the international financial organizations under the new paradigm, but Argentina kept on paying them (a net outflow of close to 1% of GDP). That by itself limited the size of Argentina’s debt-exchange proposal.
- Furthermore, the 2005 offer had to reflect the economic recession suffered by Argentina. When Argentina defaulted in 2001, it had already experienced 3 years of economic recession (an accumulated decline of GDP per capita of about 11.4%, one of the main reasons for the default), and in 2002 the economy declined about as much again, for a total GDPpc decline of 22% since 1998. As a comparison, GDPpc in the US declined about 30% between 1929 and 1933, and the country defaulted on its debt in 1934, for an amount equivalent of more than 400 billion US$ in current dollars. At the time of the first offer in 2005 Argentina’s GDPpc in constant local currency and constant dollars was still below the peak of 1998. Given the economic realities at the time, and the historical evolution of the Argentine economy, the offer presented was the one that gave some assurances that there was not going to be further restructurings in the immediate future (which would have been bad for almost everyone, except those profiting from other people’s misery). More importantly, and in another demonstration of good faith, the 2005 offer included a GDP-linked coupon with the intention to share with bondholders the potential upside in case actual economic performance proved to be better (as it happened) than what history would have suggested. With the GDP coupon the value of the 2005 debt restructuring is not the about 30 cents on the dollar mentioned both by Messrs. Newman and Singer, but reached about 60 cents on the dollar by 2013, and there was some margin to continue to go up (see J. F. Hornbeck. Argentina’s Defaulted Sovereign Debt: Dealing with the “Holdouts.” Congressional Research Service. February 6, 2013. 7-5700. CRS. R41029).
- The percentage of acceptance of the 2005 debt exchange by place of emission was about 81.5% in New York, 68% in UK, 64% in Germany, 94% in Japan, and almost 69% in other jurisdictions outside Argentina. That added up to 76.15% of the total eligible debt for that exchange. But both Messrs. Newman and Singer keep on repeating that 50% of non-Argentine creditors rejected the offer.
- The 2010 was not a second unilateral offer by the Government that was accepted by exhausted creditors as both Messrs. Newman and Singer argue. In previous blogs, I explained how the disingenuous mischaracterization of the 2010 debt exchange as “a second unilateral offer” by the Argentine Government is crucial to maintain the pretense that Elliot Management always wanted to negotiate and it was ignored by the Argentine governments. The truth is that the 2010 debt exchange was the result of the proposal by several funds that also bought debt at discounted values after the 2002 default (I know that because the main group of bond holders that lead that offer approached me, who was representing Argentina and Haiti at the Board of Executive Directors of Inter American Development Bank, with their ideas about the offer, which I relayed to the Argentine authorities at that time). It was clear, that different from Elliot et al, they really wanted to negotiate with the Argentine government, and they did. Those funds, and not the Argentine Government, put together the 2010 offer, and it was negotiated and accepted by the then government of Argentina, exactly the opposite that Messrs. Newman and Singer imply. With that debt exchange, the participation rate reached about 93%.
- Contrary to the claims by Messrs. Newman and Singer that they always wanted to negotiate, their business model is NOT to negotiate, but to stay out, and then try to get an extraordinary return by free-riding on the previous debt exchanges and by breaking the potential resistance of the indebted country through aggressive litigation and thuggish lobbying. They brought the first legal claim against Argentina in New York courts in 2003, and, since at least 2006, were funding lobbyists in the US and other countries whose only job was to trash Argentina’s reputation. It is difficult to negotiate with people that bring 10-meter inflatable plastic rats to international meetings where Argentine officials were participating. It is even more difficult to negotiate with people that, as noted by the legal representatives of Lehman in its bankruptcy procedures (in which Mr. Singer’s company made a killing), “They just take a position and say, ‘That’s the way it has to be because we say so” (see the Fortune article of April 9, 2012. “Mitt Romney’s hedge fund kingmaker”). In any case, when other holdouts presented their offer to the Argentine government in 2010, Elliot Management stayed out of it. The fact that other funds presented an offer in 2010 and it was negotiated and accepted by the then Argentine government should put to rest all the disingenuous claims by Messrs. Newman and Singer that they always wanted to negotiate but the Argentine government ignored them.
Besides rehashing some of the previous arguments in Jay Newman’s article, Paul Singer adds a new section criticizing the attempts by governments and international organizations to insert clauses that would basically ban his firm’s business model (at least the one they used in the cases of Argentina and other developing countries). His argument is that Argentina’s case was unique, having to deal with an obdurate and rogue government that flaunted the rule of law. In his view the legally appalling ruling by Judge Griesa that Elliot sought and won (which re-defined the equal-treatment clause of the contracts -“pari passu”- as meaning that Elliot would get 100% of the original bond value when others got far less, and then violated the property rights of the 93% of the bondholders that entered in previous debt exchanges by keeping them hostage when the Argentine government was not allowed to pay the restructured debt until Elliot was paid the full, un-restructured original amount) was just the special situation of a “uniquely recalcitrant debtor.” It is true that the government of Cristina Fernández was Elliot’s best ally through a series of atrocious and inexcusable legal, political, ethical, and economic decisions that greatly facilitated Elliot’s narrative according to which this case was about disciplining a rogue government and enforcing the rule of law.
But make no mistake: the real threat to an orderly resolution of always painful debt crises, public or private, is the business model by Elliot et al. Paul Singer is on the record criticizing Dodd-Frank because “it will diminish the predictability and protections of the rule of law”, when the FDIC general counsel argued that “Dodd-Frank eliminates the ability of distressed-debt investors to manipulate the bankruptcy process through endless rounds of negotiation and legislation…” (see the Fortune article I mentioned before). Now Paul Singer argues that the new clauses in sovereign debt contracts that impedes the possibility of holding-out when a reasonable high number of bondholders have agreed to a debt restructuring (which would basically ban Elliot’s business model) would lead to higher costs to bonds with those new clauses and would impair the rule of law (sounds familiar?).
On the contrary, I think a stronger argument can be made that buyers of bonds should not want to be left at the mercy of free-riders like Elliot Management and of legal precedents such as the ruling that allowed bond holders that entered in a good faith debt restructuring (and took a discount in their claims) to be hold hostage until free riders are paid in full. I think it would be difficult to convince the bondholders whose property rights were violated by the ruling that Elliot was upholding the “rule of law.” The problem is not “a fair balance of power between sovereign debtors and their creditors,” as Paul Singer claims, but between creditors that entered into a debt restructuring and the free riders that want to make a killing out of the misery of the countries and creditors that participated in good faith in a debt restructuring.
To his credit, President Macri and his government, has successfully concluded this painful chapter in Argentina’s history. By the way, I wonder if Time Magazine realizes that having Paul Singer write an article praising the Argentine President is politically damaging for a government that had to do a very heavy lifting to solve a problem that, as noted, The Economist characterized as a fight between The Joker and Lex Luthor.
Personally, I praise Paul Singer for his efforts to fight against the emergence of crude chauvinism in the current US presidential campaign. But I still believe what I wrote in my previous blog arguing that “the thuggish legal and political lobbying approach with which Elliot tries to bludgeon countries into submission is a moral disgrace (and in itself a significant barrier to any civilized negotiation) and its free-rider and greedy attitude to the always painful process of debt restructurings is a great threat to the adequate working of the world financial system.” Now it is time for the international community to permanently ban Elliot’s business model.