3. ARGENTINA ECONOMY: AN AUGEAN STABLE (Economist Intelligence Unit – ViewsWire)




7. RENATIONALIZATION IN ARGENTINA, 2005-2013 (Latin American Politics and Society)


By Benedict Mander and Robin Wigglesworth
13 February 2016

One of Argentina’s hedge fund nemeses has criticised the country’s attempts to put an end to a financial blockade, which received a sympathetic hearing from a US judge this week.

Argentina requested on Thursday the removal of an injunction that prevents it from paying its creditors without also paying the “holdouts” who refused debt restructurings following its 2001 default, if its Congress overturns laws blocking payment of the funds, and pays those who settle by the end of the month.

New York judge Thomas Griesa subsequently signed an order requiring the holdouts to justify why the injunction should remain in place by next Thursday, in what was seen as a significant win for Argentina after a string of courtroom defeats over the past decade.

Argentina’s filing on Thursday follows its offer last week to pay about $6.5bn in cash to the holdouts, implying a haircut of roughly 25 per cent on claims of around $9bn. Argentina’s offer was accepted by two of the six biggest holdouts, Montreux Partners and Dart Management, which represent about 14 per cent of the holdout claims in New York.

“This is a baffling continuation of the failed strategy of the past,” said Mark Brodsky, chairman of Aurelius Capital Management. “Given the choice between accepting the substantial haircut we have offered, continuing negotiations, and litigating, Argentina chose to litigate.”

Mr Brodsky argued that Dart and Montreux would receive more than 100 per cent of what they were owed. “For most other claims, Argentina proposes to pay not even 70 per cent of the claim, but 70 per cent of a substantially reduced claim – a double haircut. Holders of less than 5 per cent of the claims have accepted that haircut,” added Mr Brodsky, a former senior trader at US billionaire Paul Singer’s Elliott Management, the leading holdout hedge fund.

Elliott declined to comment on the latest developments in the long-running legal dispute . The holdouts won a victory in 2012 when Judge Griesa ruled that Argentina could not pay the holders of its restructured debt before paying the holdouts in full. That prompted Argentina’s second debt default this century in 2014.

Observers agree that this is a significant turnround for Argentina, which has long been at loggerheads with Judge Griesa.

He was a target of withering criticism by the previous leftist government of Cristina Fernández, which refused to negotiate with what it lambasted as “vultures” and “financial terrorists”.

But the new government of Mauricio Macri, the centre-right former mayor of Buenos Aires, has made reaching an agreement with the holdouts a priority , as he seeks to put an end to Argentina’s status as an international financial pariah.

By Reed Johnson and Rogerio Jelmayer
15 February 2016

Health officials suspend use of mosquito larvacide that an Argentine doctors’ group blamed for the surge in microcephaly cases among newborns

SÃO PAULO—Brazil’s southernmost state halted the use of a mosquito larvicide that an Argentine doctors’ group warns could be behind the recent surge of babies born with microcephaly.

The ban was imposed despite assertions by the federal government and U.S. health authorities that there is no scientific basis linking use of the chemical to the birth defect.

Health officials in Rio Grande do Sul over the weekend suspended the use of the larvicide Pyriproxyfen to destroy mosquito eggs and larvae in the state’s drinking water supplies, in what they called a “preventive measure.”

The decision came just days after the Argentine group Red Universitária de Ambiente y Salud (University Network of Environment and Health), released a report that links the pesticide to the huge increase in Brazil in recent months of suspected cases of microcephaly, in which infants are born with shrunken heads and underdeveloped brains.

Medardo Ávila Vazquez, a pediatrician and neonatal development specialist at the Universidad de Córdoba who belongs to the group, acknowledged that the group hasn’t done any lab studies or epidemiological research to support its assertions, but it argues that using larvicides may cause human deformities.

The Argentine group’s assertions were quickly rejected by Brazilian and U.S. health authorities, and run contrary to the beliefs of many health authorities in Brazil and internationally that the more likely cause of the rise in suspected microcephaly cases is the mosquito-borne Zika virus that is rapidly spreading across the Americas.

Mr. Ávila Vazquez said the group is calling on Brazil and other governments in the region to be extremely cautious about drawing fast conclusions about the relationship between Zika and microcephaly, and it warns that fumigating, especially by airplanes, is dangerous and won’t solve the mosquito problem. The group comprises about two dozen people in Argentina, mostly doctors, who are concerned about the use of insecticides and other agrochemicals and their impact on human health.

“We think it is likely that Pyriproxyfen is the problem,” Mr. Ávila Vazquez said.

The Argentine doctors’ report is the latest twist in the mounting global battle to decipher the Zika virus and its potential health effects and halt its spread. The World Health Organization earlier this month declared the Zika virus a global public-health emergency because of its possible links to microcephaly and Guillian-Barré, a rare disorder in which the body’s immune system attacks nerve cells. The agency called for more research to determine whether there is a causal link between microcephaly and Zika.

That uncertainty has allowed room for a slew of new theories on the cause of the outbreak, put forward with wildly varying degrees of evidence, to proliferate on social media.

Brazil’s Health Ministry issued a statement that there is no evidence linking larvicide to microcephaly. “Unlike the relationship between the Zika virus and microcephaly, which has had its confirmation attested in tests that indicated the presence of the virus in samples of blood, tissue and amniotic fluid, The association between the use of Pyriproxyfen and microcephaly has no scientific basis.” the ministry said.

Dr. Francis Collins, director of the U.S. National Institutes of Health, called the Argentine assertions “sketchy.”

“Let me advise caution in offering credence for this larvicide theory…unless and until there is more data to support it,” he said. “The situation in Brazil and elsewhere will not be assisted by attaching unwarranted credibility to this interesting but speculative theory.”

Dr. Anthony S. Fauci, director of the NIH’s National Institute of Allergy and Infectious Diseases, said that while no theory should be rejected out of hand at this stage, and a causal link between Zika and microcephaly hasn’t been proven, the discovery of Zika in the brains of miscarried fetuses and babies who died soon after birth “strongly suggests direct involvement of the virus.”

Another group, the Brazilian Association of Collective Health, which advocates against the widespread use of pesticides, and is cited in the Argentine physicians group’s report, also denounced the assertion of any link between microcephaly and pesticide use. It cautioned against “spreading untruths and content without any (or enough) scientific basis.”

Tokyo-based Sumitomo Chemical Co. Ltd., which manufactures Pyriproxyfen, issued a statement rejecting any connection between microcephaly and the use of the larvicide. The company said the product has been used in other countries including France, Denmark, Spain, Turkey, the Dominican Republic and Colombia. The company that Pyriproxyfen has been approved by the WHO to combat mosquitoes and that extensive testing has shown that it isn’t carcinogenic and doesn’t cause nervous system damage or affect reproductive ability.

Nationwide, Brazil has 41 confirmed cases of Zika-related microcephaly, plus an additional 421 confirmed cases of microcephaly whose cause hasn’t yet been determined, according to the most recent figures from the health ministry. Another 3,852 suspected cases still are under investigation.

Rio Grande do Sul, along the Argentine border, is among the Brazilian states least affected by the microcephaly outbreak, with just one confirmed case since the beginning of 2015, according to Brazil’s Health Ministry.

The state’s health secretary, João Gabbardo Dos Reis, said that Pyriproxyfen isn’t necessary because the state’s water supplies are clean.

“Although we have no indication that the larvicide has a link with microcephaly cases, it is also true that we do not have any strong evidence that it has no links,” he said.

But in one of the hardest hit regions, the northeastern state of Bahia, officials said they would continue to use larvicide.

“If we did not use [Pyriproxyfen] we would have more cases yet,” said Bahia Health Secretary Fábio Vilas-Boas.

3. ARGENTINA ECONOMY: AN AUGEAN STABLE (Economist Intelligence Unit – ViewsWire)
13 February 2016

Economic data in Argentina: An Augean stable

The government is rebuilding its discredited statistics institute

GOVERNMENT bean-counters do not, in most countries, have a reputation for derring-do. But in Argentina some have proved to be martyrs and heroes. Statisticians whose findings displeased Cristina Fernández de Kirchner, the country’s president from 2007 to 2015, were sacked and then prosecuted for their effrontery. “Teams were decimated,” says Jorge Todesca, who has been appointed by the new president, Mauricio Macri, to clean up and repair the government’s statistics institute (INDEC). If they were not fired, independent-minded statisticians “just resigned and left”, or were banished to back rooms without equipment. In 2011 Mr Todesca’s economic-consulting firm was fined 500,000 pesos ($123,000) for publishing an inflation index that contradicted the one put out by INDEC.

It is not the only Augean stable Mr Macri discovered when he succeeded Ms Fernández in December. In addition to an economy in disarray, she and her late husband, Néstor Kirchner, who governed before her, left a state apparatus bloated by patronage and weakened by fiscal incontinence. Some 5-7% of public-sector employees do not bother to show up to work but collect roughly 20 billion pesos ($1.4 billion) in wages, estimates KPMG, an auditing firm. Even Tango 01, a 23-year-old Boeing 757 that serves as the presidential jet, is in disrepair. To get to Davos for the World Economic Forum last month, Mr Macri flew Air France.

The mess at INDEC is one of the worst. That is because Ms Fernández took great pains to hide the consequences of her economic policies. The political appointees who oversaw INDEC leaned on statisticians to manipulate their results, especially the inflation rate. Graciela Bevacqua, a 24-year INDEC veteran, reckoned that consumer prices in January 2007 rose 2.1%. Her superiors demanded a number between 1.2% and 1.5%. They told her to take a holiday, and sacked her when she returned.

INDEC appeared to respond to criticism by devising a new index, the IPCNu, which monitored prices nationally rather than just in Buenos Aires and its suburbs, as the earlier index had done (see chart). But it, too, swerved from reality, reporting inflation rates 50% lower than independent estimates. The Economist stopped publishing INDEC’s data in 2012. A year later Argentina became the first country to be censured by the IMF for misreporting GDP and prices. With poverty rising, in part because of high inflation, INDEC simply stopped reporting the poverty rate in 2014.

Mr Todesca, who appealed successfully against his fine, arrived to find the institute denuded and demoralised. Just 25% of its staff hold university degrees, he says. The team that gathered data on inflation was “destroyed”. On December 30th Mr Macri declared a “national statistical emergency”, a decree that gives Mr Todesca a free hand to appoint new directors and allows INDEC to suspend publication of data on GDP, inflation, poverty and unemployment until the end of 2016. Mr Todesca has rehired boffins who were ousted by the old regime, including Cynthia Pok, who will resume responsibility for poverty and employment data, and Ms Bevacqua, who is overseeing the construction of a new consumer-price index.

By May Ms Pok intends to put together a “basic food basket” and publish its price, a step towards calculating the level of extreme poverty. She will also create a broader measure of poverty, using a bigger basket of goods and services, including transport. And she hopes to have a “multidimensional poverty index”, which is likely to include such things as access to health care and education, by early 2017.

Putting together a new consumer-price index is expected to take until September, even though it will probably be based on the widely-used methodology of the International Labour Organisation and, much like the series used until 2014, on prices just in Buenos Aires and its suburbs. The national samples used in the IPCNu may not be reliable enough. Ms Bevacqua says she needs the time to rebuild the teams that collect and analyse the data. Until a new consumer-price index comes out, INDEC advises Argentines to consult two in which it has some confidence: those published by the city of Buenos Aires and by the province of San Luis. Data on GDP and employment will take longer.

This will complicate the government’s efforts to steady the economy. Its early reforms, including a devaluation of the peso and a reduction in electricity subsidies, are pushing up inflation. To contain it, the government hopes to strike a deal on pay with trade unions. In the absence of reliable inflation data, it is “going into the negotiations blind”, says Juan Luis Bour, chief economist of FIEL, a think-tank. Union leaders want pay rises of at least 30%, their forecast of inflation this year. The government hopes to hold the rate to below 25% but may be forced to offer more.

In the medium term, the statistical overhaul will help to normalise the economy. On February 5th Argentina took a step towards normalisation when the government made an offer to pay foreign bondholders who rejected a debt restructuring proposed by Ms Fernández’s government, which prompted the country to default in 2014. The government plans to submit to economic monitoring by the IMF; that is normal for members of the fund, but Argentina has refused it since 2006. Mr Todesca hopes the IMF will soon lift its statistical censure. “Argentina was once a pioneer in Latin America” in publishing data, he points out. Now, just being one of the crowd would be an achievement.

15 February 2016

Argentine President Mauricio Macri eliminated a 5% tax imposed by the previous administration on mining exports, as he continues to liberalize the country’s economy.

“We have an enormous opportunity and it is up to us for these resources to be reinvested and create quality jobs,” Macri said at an event Friday announcing the changes, a release said.

The measure is expected to result in US$220mn in lost tax revenue a year, the Buenos Aires Herald reported.

Analysts had expected that in a post-Kirchner Argentina the tax would be among the first levies to be axed. Between 2003 and 2015 the country was ruled by the late Néstor Kirchner, and subsequently, his wife Cristina Fernández de Kirchner.

Daniel Dasso, a partner with EY Argentina, told BNamericas last year that the tax was seen as something of an oddity in the region, and it had been left in place despite having been announced as a temporary measure.

Another decision made recently by the Macri administration was to lift FX controls, which had been affecting the local mining industry also.

In Argentina there is around US$14.5bn in mining projects pending and the changes Macri is implementing could see investment start to flow as the business environment improves for miners, according to BNamericas’ recent analysis of the local mining sector.

Macri said he will work with provincial governors to execute the projects and take into account their impact on the environment.

The mining industry has lauded the government’s recent moves to open up the economy. Rob McEwen, CEO of McEwen Mining told BNamericas last month that the Macri administration “appears to be very pro-business and has expressed support for the mining industry.”

By Charles Newbery
15 February 2016

Buenos Aires (Platts)–15Feb2016/1126 am EST/1626 GMT Argentina is considering increasing diesel and gasoline pump prices for a second time this year in March, Energy Minister Juan Jose Aranguren said Monday.

The increase “is being evaluated in terms of the impact of rising oil prices and the dollar,” Aranguren said on Buenos Aires radio broadcaster La Red. “We are analyzing the impact of the devaluation.”

In January, the government authorized a 6% rise in pump prices to help refiners contend with the impact of a 40% currency devaluation in December. This cut revenue in dollar terms for refiners, hitting their profit margins as they pay for crude in dollars.

Since then, the peso has depreciated to 50% less than the December 16 devaluation, according to central bank data.

At the time of the first price hike in January, the government said another 6% increase could be made in March.

Aranguren said that there’s room to raise pump prices, saying they “are still cheap” compared with other raw materials in Argentina.

In another bid to help refiners, the government cut domestic crude prices 10% in January to $67.5/b for light crude and $54.9/b for heavier crude. By comparison, West Texas Intermediate, a global reference price followed in Argentina, is about $30/b.

The government also has begun authorizing imports of Nigerian Bonny Light this year to help refiners sustain profitability, given that the plunge in global oil prices has made importing a cheap alternative to make up for any shortfalls in domestic crude supplies. Argentina imported 1.8 million barrels of crude in 2015, down from 3.7 million in 2014, according to the Energy Ministry.

By Charles Newbery
15 February 2016

Buenos Aires (Platts)–15Feb2016/1117 am EST/1617 GMT Argentina awarded the first of several rights to import crude supplies this year, turning to cheaper foreign product to try to keep a lid on pump prices, according to a news report Monday.

Shell won the first tender to import 1 million barrels of Bonny Light crude from Nigeria to arrive February 25, Buenos Aires newspaper Perfil reported.

Shell, which operates a 100,000 b/d refinery outside Buenos Aires, bid for the authorization against Oil Combustibles, a Buenos Aires-based refiner, the paper reported, without saying where it got the information.

A press manager at Shell Argentina declined immediate comment on the report, and the Energy Ministry could not immediately provide confirmation.

By importing crude supplies, the new conservative government of Mauricio Macri wants to take advantage of low global prices to keep a lid on pump prices, helping to stem inflation now running at nearly 30% annually.

The Macri government authorized a 6% increase in diesel and gasoline prices in January and plans to allow them to rise another 6% in March to help refiners sustain profit margins after a nearly 50% depreciation of the peso against the dollar since December 16. Refiners pay for crude in dollars.

Buying crude locally is more expensive than importing, given that the government is allowing producers to sell light crude at $67.5/b and heavier crude at $54.9/b as an incentive to sustain production. By comparison, West Texas Intermediate, a global reference price followed in Argentina, is about $30/b. Add in shipping costs, and the final price is $40, Perfil estimated.

The government plans to awarded more crude import contracts this year, the newspaper reported.

Argentina imported 1.8 million barrels of crude in 2015, down from 3.7 million in 2014, according to the Energy Ministry.

7. RENATIONALIZATION IN ARGENTINA, 2005-2013 (Latin American Politics and Society)
By Luigi Manzetti
1 April 2016

Since 2002, government nationalizations and contractual breaches in general around the world have surged. South America has witnessed a wave of nationalizations of private enterprises, mostly foreign. Some analysts contend that this trend is shaped by the left-wing ideological orientation of the governments, whereas others argue that a more robust explanation is the combination of economic pressure and constraint factors. This article contributes to the debate by using a nuanced institutional analytical framework based on the concept of company versus government opportunism, applied to the recent nationalization of previously privatized companies. It examines Argentina, a country that in the last two decades has seen radical policy reversals, from sweeping privatization of state-owned enterprises in the 1990s to a renationalization effort with some of the same companies in the early 2000s. [Request full text to the IRC]

By Melanie Umbaugh
February 15, 2016

Time moves differently in Buenos Aires, and I’m learning to adjust. The pace is more relaxed and more leisure-like. This is good for my frequent state of total stress, but bad for my perpetual lateness.

People here know how to enjoy their lives: They can move from one minute to the next with ease and they can take their time with it. I’m in the habit of rushing from one thing to the next in a haze of tardiness and confusion. Despite Buenos Aires being a city of three million people, when my other U.S friends and I hurry to leave a restaurant, people take notice. Such a go-go-go attitude stands out.

When it comes to my dual issues of stress and lateness, one exacerbates the other and the cycle continues, but I think embracing the “porteño” approach to daily life can help me. The people I pass on the street are rarely running about in a hurry to get somewhere. I haven’t seen any restaurants patrons demanding the check be delivered immediately. Nothing needs to be accomplished in the next second. Days are long and there’s so much to do, but there’s no rush to do everything.

I’ve never felt like there was enough time in the day to do all the things I need to get done, but I’m starting to learn that maybe there is. You can be purposeful and get things done without running around like a chicken with your head cut off — and it’s much more enjoyable, too. Even little things like taking a quiet walk through my neighborhood or slowly sipping a cup of coffee at a café are ways to keep me centered.

Days can be so casual and pleasant here. Stroll to meet friends at a café after school, take your time drinking espresso and chatting — there’s no rush to leave or move on to the next thing. In Buenos Aires, there is always a next thing and plenty of time to get there. As a life philosophy, the Argentine approach to time is a good one. Sure, people might be late to meet for dinner but they won’t hurry to leave either.

I’m learning to take it slow — to enjoy each moment before moving on to the next one. My routine still needs adjustments, my morning language class isn’t making the process as simple as it could be for a decided non-morning person like myself but, one step at a time, I’m learning. My time here is precious and I don’t want to waste it. Everything will happen at its time.

Melanie Umbaugh is a sophomore studying theater. Have you noticed a different pace of life in another country? Email her at .







By Steven Davidoff Solomon
Feb. 16, 2016

The battle over Argentina’s debt is at the end stage, as the hedge funds and the country enter into negotiations to resolve the dispute.

The hedge funds may claim victory, reaping billions of dollars on legal technicalities, but there are no real winners in this sorry affair.

The fight began after Argentina defaulted on about $92 billion worth of sovereign debt in December 2001.

In the past when countries defaulted, there was not much that the holders of the debt could do. Sovereigns are immune from suit in other countries and their home courts. A bondholder can’t just go into court and sue to collect his or her money, leaving the holder stuck unless the country decided at some later date to repay.

Still, hedge funds arose specializing in buying this debt at a discount and harassing governments into repaying. The funds would scour the globe trying to find a friendly jurisdiction to seize the country’s assets and sidestep the rule of sovereign immunity. Elliott Management, for example, seized a $39 million shipment of oil from the Republic of Congo to collect on debt the fund had bought for only about $2 million.

But this was small beer, and involved only tens of millions as debtor countries for the most remained safe to default.

This all changed with Argentina.

A number of hedge funds bought this debt, including Elliott and Aurelius Capital. At first the funds tried the old tricks, even briefly seizing an Argentine frigate in Ghana. Today, Argentina’s president flies in a rented plane in order to avoid the embarrassment of having a jet seized.

But Elliott has lawyers who specialize in leveraging legal rules. And with Argentina, Elliott again found a successful legal strategy.

After the default, Argentina restructured the old bonds, offering 30 cents on the dollar in new bonds. About 93 percent of holders took up this offer, thinking that this discount was better than nothing. But some hedge funds and a number of other holders refused to give in, hoping for a better offer.

The old bonds contained a legal clause that contained the seeds of the hedge funds’ victory. This pari passu clause, from the Latin meaning “on equal footing,” was historically intended to prevent a sovereign from subordinating the bonds in order of security

The hedge funds, however, argued in the United States District Court in Manhattan that this clause also prohibited the payment of the new bonds without paying the old. It was a novel claim and a clever way of getting around the legal obstacle of suing Argentina for payment.

Instead of asking for money, the funds were simply asking for the clause to be enforced so that no other Argentinian bonds could be paid unless they were as well.

This legal argument was a moonshot, but the funds got Judge Thomas P. Griesa to bite. In a series of rulings, he sided with the funds and issued an injunction stating that if Argentina paid the new bonds, it would have to pay the old ones.

The ruling was a shock to many because the clause had never been interpreted this way before. And it seemed odd to create a new precedent amid a battle between a sovereign and hedge funds.

But the judge highlighted the fact that Argentina was unusual – the country’s adamant refusal to pay on the bonds made it subject to special treatment for its inequitable conduct.

Indeed, Judge Griesa curiously phrased the battle in ethical terms, calling Argentina “immoral” for refusing to pay and even holding the country in contempt of court for refusing to repay the hedge funds and other debt holders. Why this would be a moral question was never really clear. Argentina was taking a legal position, just like the hedge funds.

This is where Argentina got stuck, however. The judge’s ruling effectively locked it out of the capital markets. And it pitted Argentina’s creditors against each other as the country could no longer pay its new bonds without fear of having the money seized by the hedge funds. Argentina now needs a settlement for the good of its people and economy.

With the election of Mauricio Macri as president last year, Argentina is trying to settle old debts. In the last few weeks it has agreed to pay $1.35 billion to individual Italian bondholders who were holdouts (Argentina and Italy have old ties, and many of the bonds were sold to Italian citizens). And Argentina has also settled with two hedge funds, Montreux Partners and Dart Management and offered $6.5 billion to settle the whole affair.

But there is still some way to go for a resolution. The negotiations are continuing before a court-appointed mediator and the remaining holdouts appear to be resisting Argentina’s offer, arguing that it favors other funds at their expense.

In part this is again because of yet another legal quirk. Some funds, instead of suing on the basis of the pari passu clause, instead sued to collect their debt directly. These funds won a judgment for the face value of their debt, hoping that they could then use it to seize assets of Argentina in other countries. Once the judgment was entered though, the bonds stopped accruing interest according to their terms and instead received court-ordered post-judgment interest at about 0.5 percent.

The other hedge funds never enforced their debt, instead suing on the pari passu issue and collecting interest on the face value of the bonds, which they claim exceeded 100 percent a year. The second set of bonds is now worth much more because they accrued more interest.

Argentina has responded with different offers. One set – those who did not sue on the pari passu clause – were offered 150 percent of their judgment.

The second set who have not sued to collect on their bonds but instead sued to enforce the pari passu clause, have been offered up to 72.5 percent of their claims.

Notice the “up to” here – we don’t know the exact amount. Still, the holdout hedge funds don’t like this offer because it doesn’t compensate them for the higher rate of interest they feel they were entitled to. But as Matt Levine of Bloomberg asked, is it fair for a hedge fund “to get paid interest at 101 percent a year on bonds issued in 1998, while Argentina has long since moved on and improved its credit profile?”

Let’s just stop here and highlight this absurdity. The hedge funds who sued on the pari passu clause but not to enforce their debt are getting more, but not enough. Merely because of the choice of legal strategy.

It all highlights how an entire country has been subject to the vicissitudes of luck and litigation strategy.

A representative of Elliott declined to comment on this matter.

With its new offer, Argentina also raised the ante. It has brought in new lawyers and made a motion in federal court before Judge Griesa arguing that now that it is willing to bargain with the hedge funds it is no longer a recalcitrant debtor and the court should lift the injunction prohibiting Argentina from paying the new bonds without paying the old bonds under the pari passu clause.

It’s hard to see a judge who so many times ruled against Argentina ruling in favor of them. But this is just part of the negotiating strategy – indeed using the hedge funds’ legal strategies against them. And the judge was once in favor of Argentina, not the hedge funds.

Indeed, it is going to be harder for these funds to say this is a moral matter when making claims of more than 100 percent interest. Nonetheless, according to a person close to the creditor hedge funds, the parties are not that far apart — possibly only as much $200 million — in their negotiations.

That’s a small sum in the scheme of things, and settlement seems so close. After over a decade of litigation, however, it appears as if the parties can’t kick their habit of going to court.

By Robin Wigglesworth in New York and Benedict Mander in Buenos Aires
February 16, 2016

An elegant three-masted Argentine clipper became an unlikely flashpoint in one of the longest, most contentious sovereign debt sagas in history when it was detained in Ghana three years ago by a litigious hedge fund stalking the government in Buenos Aires for an unpaid debt.

The ARA Libertad was eventually released when a UN tribunal ruled that the ship was protected by sovereign immunity, but the episode showed the lengths to which Elliott Management, a hedge fund founded by Republican powerbroker Paul Singer, would go to extract payment for bonds Argentina defaulted on in 2001.

After more than a decade of legal warfare, Argentina could be on the cusp of peace with its creditors. However, even if Buenos Aires does reach an accord with Elliott, experts fear the saga will leave a toxic legacy for the wider sovereign debt restructuring world that could linger for years to come.

“In many ways this stopped being about Argentina a long time ago,” says Anna Gelpern, a law professor at Georgetown University. “The legal and institutional fallout will continue to be there long after this is resolved.”

The genesis for what has been called the “trial of the century” for sovereign debt dates back to 2001, when an economic crisis forced Argentina to default on more than $80bn of bonds. Subsequent governments let creditors stew and only offered to pay back about 30 cents on the dollar in 2005 (an offer reopened in 2010).

Many resignedly accepted the punitive terms, but a significant minority felt aggrieved enough at the take-it-or-leave-it offer that they decided to litigate instead.

Suing countries is difficult, as most of their overseas assets enjoy sovereign immunity and domestic judges tend to side with their governments. Yet Argentina’s “holdouts” including Elliott, which has a fearsome reputation for wringing money out of recalcitrant countries, has deployed a brilliant but controversial strategy against Argentina.

All bonds have clauses that stipulate what borrowers can or cannot do. One is called pari passu, Latin for on equal footing. When companies go bankrupt, pari passu creditors rank equally in the queue when their assets are sold and proceeds divvied up. The clause has also traditionally featured in government bonds even though lawyers consider it an irrelevance as countries cannot be liquidated.

However, Elliott and its co-plaintiff Aurelius Capital — founded by former senior Elliott trader Mark Brodsky — argued that the pari passu clause in Argentina’s debt should mean that the country could not continue to pay bondholders that accepted the 2005 and 2010 restructuring without paying them in full as well.

Sensationally, US District Court Judge Thomas Griesa not only agreed with Elliott’s interpretation but weaponised his ruling by slapping an injunction against anyone helping Argentina avoid his order to pay the “pari passu holdouts”.

In practice this prohibited banks from processing Argentina’s payments to its restructured bond markets and forced the government, at the time led by Cristina Fernández de Kirchner, to choose between paying the holdouts or defaulting again. Unwilling to strike an agreement with creditors she lambasted as “vultures” and “financial terrorists”, Argentina in 2014 defaulted for the eighth time in its history.

But a new reformist government led by Mauricio Macri took power last year, and Argentina struck a deal with the Italian retail bondholders and two hedge funds earlier this month. Judge Griesa last week ramped up pressure on the remaining four — including Elliott — to compromise by raising the prospect of lifting his injunction. Hurdles remain, but a solution is expected soon.

However, Elliott’s pari passu gambit is now legal precedent, potentially turning a sleepy Latin phrase into sovereign bond dynamite and showing that countries can be successfully sued, upsetting the dynamics of state bankruptcies.

All sovereign restructurings have some holdouts, but they are typically so minimal that they can be paid out in full without upsetting the overall deal. But if enough creditors think they can hold out for full repayment, knowing they could use the pari passu clause to sabotage a future deal, then it could upset this equilibrium and make government bond defaults even harder to resolve.

Some experts point out that Argentina’s clause was particularly problematically worded, and question whether other creditors have Elliott’s stomach for a decade-long, expensive legal crusade. Many bonds also have so-called “collective action clauses” embedded that bind all creditors to a restructuring deal agreed by a supermajority,

Nonetheless, the potential implications have rattled the sovereign debt restructuring industry into remedial action. Countries are beginning to issue bonds with tweaked pari passu clauses and strengthened CACs to neutralise the threat of holdouts.

This only affects new bonds issued, however. There are hundreds of billions of dollars worth of already-issued debt that could in theory be vulnerable to Argentina-style litigation. Venezuela, for example, is expected to default this year and lawyers say its bonds could lead to a similarly messy legal battle.

“We will eventually find out how big an impact this will have,” says professor Gelpern. “Let’s hope we don’t find out too soon.”

By Nate Raymond
Feb 16, 2016

Argentina has reached a deal with lawyers pursuing a U.S. class action lawsuit over defaulted debt to resolve the case, as part of the country’s efforts to settle long-running litigation over its 2002 default, a court-appointed mediator said Tuesday.

Daniel Pollack, a New York lawyer overseeing the settlement talks, said the agreement in principle “fit within the numerics” of Argentina’s proposed offer earlier this month to resolve various lawsuits by holders of defaulted bonds.

Exactly how many bondholders are covered by the class action settl
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