3. OFFICIAL FIGURES REPORT 18TH CONSECUTIVE MONTHLY FALL IN ARGENTINE PRODUCTION, HIGHLIGHTING DOWNWARD TREND AND LOWER EXPECTATIONS (IHS Global Insight Daily Analysis)6. SOVEREIGN DEFAULT AND DEBT RESTRUCTURING: WAS ARGENTINA’S ‘HAIRCUT’ EXCESSIVE? (VOX CEPR’s Policy Portal)By Nick Brown3 March 2015NEW YORK, March 3 (Reuters) – A U.S. judge on Tuesday said he would not yet rule on whether Citigroup Inc can process interest payments by Argentina on bonds issued under its local laws following the country’s 2002 default.U.S. District Judge Thomas Griesa told the lawyers for Citigroup and holdout investors in a hearing in New York that he would not issue a decision on Tuesday afternoon.The hearing marked the latest courtroom tussle over whether Griesa has authority to block Citigroup’s branch in Argentina from processing payments on bonds issued under the country’s local laws.Argentina defaulted in July after refusing to honor Griesa’s court orders that it pay $1.33 billion plus interest to holdout bondholders when it paid holders of bonds swapped during the country’s 2005 and 2010 debt restructurings.While the injunction has been in place, Griesa has since last year allowed Citigroup to process three interest payments while holding off on a final determination on whether it can always do so.On Tuesday he said: “The injunction does not just enjoin the Republic, but also the participants in the bonds. The issue before me is to decide whether Citibank is a participant.”Legal counsel for Citibank, Karen Wagner of Davis, Polk & Wardwell told U.S. District Judge Thomas Griesa that the injunction would put Citibank at risk of breaking Argentine law.“There’s nothing to be gained from enforcing the injunction. There will be no benefit to the public and Citibank will be in danger. It seems fundamentally unfair and inequitable to put Citi in that position,” Wagner argued.Edward Friedman, counsel for holdout bond investors, said the debt in question was offered not just to Argentine investors.“Were these bonds offered exclusively in Argentina?’ And what the evidence shows is overwhelmingly they were not,” said Friedman, of Friedman Kaplan Seiler & Adelman.He said offers were made in countries include Denmark, Italy, Spain.Griesa, at the end of the 2-1/2 hour hearing, noted the challenge before him of determining Citibank’s role in an environment where there was no “set of financial transactions in the regular way.”3 March 2015BUENOS AIRES, March 3 (Reuters) – Argentina’s economy minister said on Tuesday “me-too” investors who want compensation for debt owed since the country’s 2002 default have lodged claims for between $7 billion and $8 billion in the hope of gaining from its legal battle with other holdouts.A U.S. judge ordered Argentina in 2012 to pay a group of hedge funds that did not participate in its 2005 and 2010 debt restructuring, including Elliott Management Corp’s NML Capital Ltd and Aurelius Capital Management, $1.33 billion plus interest.Argentina refused to pay, calling the creditors “vulture funds” for seeking to pick clean the carcass of Latin America’s third-largest economy after its devastating 2002 default on $100 billion in debt.The country now says it wants to reach a deal, after its legal battle with the holdouts pushed it into default on its restructured debt in July. But it wants to settle claims from all creditors who refused the swaps at the same time.U.S. District Judge Thomas Griesa in New York said he would deal with “me too” claims filed by March 2 on the same schedule as those of the hedge funds.“Those who presented new claims to Griesa worth $7 or $8 billion are also vultures,” Economy Minister Axel Kicillof said in a radio interview on Tuesday.Separately, Kicillof criticized Griesa for preventing Argentina’s payment of interest on restructured bonds under Argentine law, ahead of a hearing later on Tuesday in New York on whether Citigroup Inc can process such payments.In November, Griesa put off a determinative ruling while allowing the bank temporarily to process payments.“Argentine legislation makes clear that bonds under Argentine law are a question of Argentina,” the minister told state broadcaster Radio Nacional.“Griesa is trying to extend his arm further than it actually reaches. … (He) has created a legal mess that is very difficult to solve.”Citigroup has said it faces regulatory and criminal sanctions by Argentina if it cannot process the interest payment on U.S. dollar-denominated bonds issued under Argentine law.BNP Paribas said in a research note on Tuesday that if the court decides to define “external” debt as any dollar-denominated bond, rather than a foreign law instrument, “there will be negative implications, as this would put any new issuance by the government at risk.”3. OFFICIAL FIGURES REPORT 18TH CONSECUTIVE MONTHLY FALL IN ARGENTINE PRODUCTION, HIGHLIGHTING DOWNWARD TREND AND LOWER EXPECTATIONS (IHS Global Insight Daily Analysis)By Paula Diosquez-Rice, Mario Guillen3 March 2015According to Argentina’s National Statistical Office (Instituto Nacional de Estadística y Censos: INDEC), industrial production in January fell by 2.1% year on year (y/y), or 1.8% y/y after correcting for seasonal factors. On a monthly basis, the report indicated growth of 1.1% month on month (m/m). The biggest contraction was in the automotive industry, down by 28.7% y/y, followed by the textile industry, down by 10.8% y/y. The food industry grew 1.6% y/y, while the tobacco industry contracted by 9.2%. A strong fall was also recorded in the rubber and plastics industry, down by 9.5% y/y, with tyre production contracting 33.3% y/y. Oil refining rose by 3.7% y/y. The monthly estimate of economic activity for December 2014 reported a rise of 0.6% y/y and, after correcting for seasonality effects, an increase of 0.1% m/m.Although official polls suggest that a large majority of the industrial sector expects stability in economic indicators over the next quarter, trends have been shifting in the last few months. Data indicate a fall in expectations regarding a rise in internal demand among companies; this is also the case for exports and imports. Compared to the January poll, more companies expect stocks to fall in the next quarter, while expectations for working hours and personnel have shown no relevant variation.Significance: A closer look at the different industrial sectors in Argentina reveals a strong contraction affecting several industries, besides anaemic growth or downright stagnation of the productive sector in general. Lack of foreign currency and high levels of government intervention make a recovery in production unlikely in the short term, despite government efforts such as the allocation of more US dollars to the automotive industry in the coming months ahead of the October elections. According to expectations, major changes in economic policy remain unlikely despite the country’s current woes.By Andrew Osborn3 March 2015LONDON, March 3 (Reuters) – Britain derided a new Argentine banknote featuring the disputed Falkland Islands as a stunt on Tuesday and said it had no intention of discussing sovereignty over the archipelago with Buenos Aires.Tensions over the Falklands, known as Las Malvinas in Argentina, still crackle more than 30 years after Argentine forces seized them and the then British prime minister Margaret Thatcher sent a task force to retake them. More than 600 Argentine servicemen and 255 British died in the brief war.Hit by high inflation, Argentina issued a new 50-peso banknote this month described by the central bank as a reminder of the South American country’s “undying claim” to Las Malvinas.“On the issue of the 50-peso banknote, we can’t stop the Argentinian government from these stunts,” Hugo Swire, a minister of state at the British Foreign Office, said when asked about the note in parliament.“It’s worth a whopping 3.72 pounds ($6) according to today’s exchange rate,” he added. “And I think it probably has the equivalent political value.”The note features a map of the islands, 300 miles off the Argentine coast and 8,000 miles from Britain, on one side and an image of a gaucho who rebelled against British rule there in 1833 brandishing an Argentine flag on the other.Swire said the Argentine embassy had recently sent a book and a letter to the British parliament, complaining about a lack of dialogue on sovereignty.“It (the book) ignores the inconvenient truth that some people on the islands can trace their Falklands ancestry back through nine generations, longer than the current borders of Argentina have existed,” said Swire.There would be no sovereignty talks with Argentina in line with the islanders’ own wishes, he added.6. SOVEREIGN DEFAULT AND DEBT RESTRUCTURING: WAS ARGENTINA’S ‘HAIRCUT’ EXCESSIVE? (VOX CEPR’s Policy Portal)By Sebastian Edwards04 March 2015Sebastian Edwards: Henry Ford II Professor of International Economics at the University of California, Los AngelesBetween 1997 and 2013 there were 24 sovereign bond defaults and debt restructurings in the global economy. According to Moody’s (2013: 6):“[T]he losses imposed on creditors in sovereign restructurings have frequently been very large… Further, the variation around the average sovereign loss has been extremely high – losses have varied from as low as 5% to as high as 95%.”What explains these large differences in ‘haircuts’? Why, for example, did investors in Uruguayan bonds suffer a 7% haircut in 2003, while those that had invested in neighbouring Argentina had losses in excess of 75% in 2005?In a recent paper (Edwards 2015) I use data on 180 debt restructurings – for both sovereign bonds and sovereign syndicated bank loans – to analyse the determinants of recovery rates and haircuts. I use the results from the empirical analysis to evaluate whether some well-known episodes resulted in ‘excessively high’ losses. In particular, I focus on the Argentine restructuring of 2005, an episode that has generated controversy and that resulted in a US Supreme Court decision that is changing the way in which foreign debt contracts are written.The analysis is in the spirit of the ‘excusable default’ model developed by Grossman and Van Huyck (1988). According to this work, sovereign debt is never repudiated. It is restructured when the debtor faces (very) bad states of the world. In this setting, investors may lose some of their money, but (almost) never all of it. The extent of losses, and the size of the haircut, depends on the severity of external shocks that hit the sovereign debtor.BackgroundOn 23 December 2001, Argentina defaulted on its debt. Two weeks later the peso was devalued by 30%, and a ten-year experiment with a currency board and a fixed exchange rate ended. In September 2003 the Argentine government made an offer to investors to exchange defaulted bonds for new ones. This proposal became known as the ‘Dubai guidelines’, and implied an average reduction of the face value of the debt of approximately 75%. Investors balked at the stiff losses, and asked for better conditions. Negotiations ensued, and a new offer, very similar to the original one, was formally made in June 2004 under the moniker of ‘Dubai plus’.When the exchange window closed on 28 February 2005, 76.2% of bondholders had tendered their defaulted bonds and had accepted new bonds in exchange. In 2010, Argentina reopened the bond exchange and offered identical terms as in 2005 to those that had not presented their defaulted securities. An additional group of investors decided to exchange their bonds. But not everyone came into the fold – bondholders representing approximately 7% of the original debt decided to hold on to the old securities and to press for better terms. On 16 June 2014 the US Supreme Court decided to leave in place a lower court ruling mandating Argentina to make a payment to the ‘holdouts’. After this ruling, frantic negotiations between the holdouts and the Argentine government began. By 30 July 2014, the deadline imposed by the Court, no agreement had been reached, and on 1 August 2014 the International Swaps and Derivatives Association declared Argentina to be in default.Using a ‘net present value’ approach, Cruces and Trebesch (2013) estimated that the average losses (across different bonds) incurred by investors that participated in Argentina’s 2005 exchange amounted to 76.8%. In Edwards (2015) I adjusted this figure to take into account the value of a GDP-linked warrant that was offered with the new bonds. My calculation results in a haircut of 74.8%.International comparisonsIn Table 1 I provide summary statistics on haircuts for the complete sample (180 episodes) and for a number of subsamples. I also include the estimate for the Argentina 2005 haircut. As may be seen, Argentine losses were significantly higher than the mean and median across all episodes (37% and 32% respectively), as well as across any of the subsamples.Table 1. Summary statistics for haircuts, 1978–2010
Mean Median Standard deviation All episodes 37.0% 32.1% 27.3% Bank loans 37.1% 37.6% 21.6% Bond exchanges 36.9% 31.7% 27.9% Africa 46.5% 39.5% 29.4% Asia 32.6% 34.0% 17.9% Europe 30.0% 19.7% 26.4%In Figure 1 I present a histogram for the 180 haircuts. The value of the Argentine 2005 haircut (74.8%) is shown with a vertical black line. An analysis of Figure 1 and of the data behind it indicates that the distribution is ‘bimodal’, suggesting that the data may come from two different populations.Figure 1. Haircuts histogram, all episodesExplaining haircutsIn Edwards (2015) I use an empirical model in the spirit of Grossman and Van Huyck (1988) to explain the variation of ‘haircuts’ across restructuring episodes. The following covariates were included:(a) An index of ‘bad states of the world’ computed as the sum of four shocks – wars and coups d’état, output collapses, massive terms of trade declines, and currency crises;(b) The ratio of debt restructured to GDP;(c) Whether the country is poor;(d) A number of global economy variables at the time of the debt exchange (recession, Treasury yields);(e) Binary variables that capture the nature of the restructuring; and(f) Regional dummy variables.The regression results are satisfactory and are broadly in agreement with the ‘excusable default’ model. They indicate that countries that have suffered very severe shocks – including wars, armed conflicts, coups d’état, output collapses, and major declines in the terms of trade – end up having larger haircuts than countries that have not faced these major disturbances. Very poor countries and nations with larger debt burdens also have larger haircuts. The results are robust to variables’ definitions, periods considered, specifications, and estimation methods (White-corrected least squares or instrumental variables). The fit is quite adequate with the R-squared hovering around 0.6.Was Argentina’s 2005 haircut excessive? A residuals analysisThese estimates may be used to inquire whether haircuts in particular episodes conformed to the predictions of the model, or if, on the contrary, they were excessively high or excessively low. This is what I do in this section for the Argentine exchange of 2005.A good starting point is the analysis of fitted values obtained in the regression analysis. For Argentina’s 2005 exchange, the fitted values go from a minimum of 36.0% to a maximum of 60.1%. This range doesn’t include the actual haircut of 74.8%. The mean for fitted values from 20 regressions with different specifications is 47.1%, and the median is 45.7%; the standard deviation is 7.3%. Although these numbers are quite high – indeed, significantly higher than the mean and median for all episodes reported in Table 1 (37% and 32%) – they are still much smaller than the actual haircut imposed by Argentina on investors in the 2005 and 2010 debt exchanges.I rely on two ‘influence statistics’ to investigate formally whether Argentina 2005 is an outlier in the empirical analysis: I use the R-student standardised test and the DFFITS test. In order to provide some context I also analyse the residuals from debt restructuring episodes in two of Argentina’s neighbours: Chile in 1984–1990 and Uruguay in 2003. In addition, I discuss briefly, and in light of these results, the Greek restructuring of 2012.I computed 26 ‘influence statistics’ for the Argentine 2005 episode. The results obtained from this analysis are quite revealing. In 21 out of the 26 tests the Argentine 2005 debt restructuring is a statistical outlier. In Figure 2 I present, as an illustration, the two residual tests – including the critical 95% bands – for a particular regression; see Edwards(2015) for details. According to the R-student standardised test, only three episodes are outliers: Argentina 2005, Bosnia and Herzegovina 1997, and the Ukraine 1998. Only the latter has negative residuals and, thus, an ‘unusually low’ haircut. The DFFIT test, on the other hand, identifies four outliers: Argentina 2005, Bosnia and Herzegovina 1997, Cote d’Ivoire 1998, and Iraq 2006. As may be seen, Argentina appears in both lists, indicating that the haircut imposed on investors in in 2005 was ‘excessively high’ from a comparative perspective.Figure 2. Influence statistics and outliers
The residuals analysis shows that the haircuts in Chile’s (1984–1990) restructurings were ‘appropriate’, in the sense that the fitted values are very close to the actual haircuts. This is also the case for Uruguay’s debt exchange of 2003. In addition, an out-of-sample forecast suggests that for Greece in 2012, a haircut of 63% was consistent with the historical evidence and with the empirical model; this figure is very similar to the actual ‘haircut’ of 64% calculated for Greece by Zettelmeyer et al. (2013).References at: http://www.voxeu.org/article/argentina-s-haircut-outlierBy Pascal-Emmanuel GobryMarch 4, 2015You may have heard that Argentina is in the grip of an all-consuming political affair that sounds more like something out of a paperback thriller than real life.Let’s wind back. An Argentine special prosecutor named Alberto Nisman had claimed that he had evidence that the country’s government — including President Cristina Fernandez de Kirchner and Foreign Minister Hector Timerman — had covered up evidence related to the 1994 Jewish Community Center bombing which killed 85 and injured hundreds. According to Nisman, Iran had ordered the bombing and had it carried out by Hezbollah after Argentina canceled a nuclear technology transfer, and the Argentine government later agreed to cover it up in exchange for oil. Nisman was found dead with a bullet to the head on the morning that he was set to present his evidence to Argentina’s Congress.This happened in January, and I argued at the time that international attention to the case was important because Argentina’s often erratic political institutions might not be able to bring justice to this sordid matter on its own.What has happened since then?Unfortunately, it seems that I was right in predicting that the Argentine political process would not cover itself in glory.The Nisman Affair has been thoroughly politicized. A funeral rally that was supposed to honor Nisman was so co-opted by political opposition figures that some members his family refused to attend. Supporters of the government, bizarrely, later staged a counter-rally. (Counter to what, exactly? Justice and truth?)President Kirchner, who already had a history of erratic behavior and of blaming setbacks on conspiracy theories, seems to have taken it to 11. She has at various times speculated that Nisman might have been killed by himself, or an aide, or Israel, or Iran, or her political opponents, or rogue intelligence operatives.The most depressing part of the whole affair is that seemingly nobody in Argentina ever expects light to be shined on either Nisman’s death or the Jewish Community Center bombing — and with some good reason.It is widely assumed that the Argentine justice system is thoroughly politicized — the only question is who owns it. A judge has thrown out Nisman’s evidence in a decision peppered with strange laudatory remarks about President Kirchner’s political record. It is sure to be appealed. Whatever judicial resolution is eventually announced will be seen as political, rather than the truth, and evidence only of who was lucky enough to control the judiciary at the time.All in all, it is a depressing pattern. Argentina is a wonderful country, with tremendous resources not only natural but cultural thanks to successive waves of immigration, that has been beset by terrible governing institutions. To this Frenchman, the Latin mix of conspiracy theorizing, politicized judiciary, lack of accountability, and even the whiff of anti-semitism is depressingly familiar. It was not long ago at all that my country had maybe-suicides-maybe-murders, the truth of which we’ll never uncover, and shadowy political-judicial dirty tricks. And yet, despite all its problems, France is still a liberal democracy with a reasonable rule of law, better today than it was decades ago. It’s worth remembering that Argentina has had four military coups within living memory — perhaps the fact that only one shot has been fired so far in the whole affair is something to be grateful for.Not that we should give up on hope completely. Uncovering the truth about Nisman is not yet impossible — nor is it impossible that whatever light is shed on the affair could also provoke some sustainable and badly needed changes to Argentina’s political culture.