4. ARGENTINA’S DEBT: AT LAST (The Economist)


4 March 2016

TODAY’S LESSON in responsible democratic leadership comes to us from, of all places, Argentina. For most of the 21st century – and the 20th, for that matter – Buenos Aires has been the setting for serial populist misadventures, most recently under President Cristina Fernà¡ndez de Kirchner, who brought her country double-digit inflation, spectacular public corruption and costly strife with the democratic West during two four-year terms that mercifully ended in December. Her successor, Mauricio Macri, is showing himself to be made of more pragmatic stuff, most recently by reaching a settlement with Argentina’s foreign creditors as per his campaign promises.

Those creditors are hardly sympathetic figures. They consist in large part of U.S. hedge funds that bought up distressed Argentine bonds left out of the country’s two previous restructurings of $100 billion in debt (on which it defaulted in 2001), betting U.S. courts would force Ms. Kirchner to honor them at face value and deliver a windfall. Despite a monumental propaganda campaign by Buenos Aires against these “vulture funds,” they did, indeed, have the law on their side, as a New York federal judge repeatedly found. Ms. Kirchner’s efforts to resist payment anyway merely prolonged Argentina’s exclusion from international financial markets and, accordingly, her country’s economic instability.

In agreeing to buy out the hedgies for approximately $4.7 billion, or about 75 percent of their maximum claim, Mr. Macri effectively declared that Argentina will put its tangible long-term economic interests over the crowd-pleasing abstractions, such as “dignity,” upon which Ms. Kirchner invited her people to feast. He faces a challenge in getting the settlement approved by Argentina’s National Congress, where Ms. Kirchner’s Peronist party and its allies still enjoy considerable power. But an increasing number of opposition lawmakers seem to realize that the burden on those who vote “no” would be heavy, given the strong personal mandate Mr. Macri won in December and the prospect he offers of finally ending this losing battle and moving on.

After years in which their leaders have bombarded them with rhetoric to the effect that they need never make any such hard choices, what Mr. Macri is essentially asking Argentines to do is accept an imperfect, even bitter, reality and to make the best of it. Sometimes, this is a leader’s duty, and Mr. Macri deserves credit for taking it on. And if Argentina’s chronically erratic democracy can indeed sober up, cut its losses and follow the rule of law, while restoring prosperity, then its example may inspire similar change across the hemisphere, from Caracas to Havana.

Come to think of it, we know of some North American politicians who could learn from such an example, too.

March 2, 2016

BUENOS AIRES, Argentina — In a sign of growing discontent over a visit by President Barack Obama, a former Argentine Nobel Prize winner says the U.S. leader should skip his planned March 24 visit to the country because it’s the 40th anniversary of a coup that installed a military government that had U.S. backing.

Adolfo Perez Esquivel, who won the prize in 1980 for his defense of human rights during Argentina’s 1976-1983 dictatorship, told The Associated Press that he plans to publish an open letter this week. Esquivel and Obama know each other through the Nobel Prize; Obama won it in 2009. Esquivel said the two had communicated before over human rights issues, including the indefinite detentions of prisoners at the U.S. naval base Guantanamo Bay.

Esquivel said he welcomes Obama, and thinks it’s great that an American president wants to better get to know people in Latin America. However, he should not visit on March 24, Esquivel said. On that day in 1976, the military staged a coup. Human rights groups estimate that 30,000 people were killed or disappeared during the 1976 to 1983 military government.

“I’m a survivor of that era, of the flights of death, of the torture, of the prisons, of the exiles,” said Esquivel, sitting in his office. “And when you analyze the situation in depth, the United States was responsible for the coups in Latin America.”

Obama, after visiting Cuba, plans to arrive in Buenos Aires on March 23, and be in the country on March 24. Since the visit was announced several weeks ago, many human rights groups have voiced opposition to an American president being in Argentina on that day.

They argue that military governments across the region flourished thanks to backing by the U.S. during the Cold War with the Soviet Union. They point to declassified U.S. State Department documents that indicate Henry Kissinger, America’s former secretary of state, gave his approval to the generals to implement “dirty war” tactics for the sake of civil order.

Argentine President Mauricio Macri, a conservative who ran on promises to improve relations with other nations, particularly the United States, has tried to dampen the controversy. He has met with human rights groups and argued that the visit won’t take away from commemorative events. But activists have not been swayed.

Obama “is the false face of the Nobel Prize and we believe there are many things he should pay for,” said Hebe de Bonafini, president of iconic human rights group Mothers of Plaza the Mayo. “We don’t want him here.”

The U.S. ambassador to Argentina, Noah Mamet, told the Clarin newspaper that Obama had to come on those days because they wanted to combine the visit with the trip to Cuba on March 21-22.

“The United States government shares with Argentina the defense of human rights as a universal principal,” Mamet told the paper.

The U.S. Embassy did not respond to requests for more comment.

“I think it’s great (for Obama to come),” said Esquivel. “The question is when and how.”

By Julie Wernau
3 March 2016

How did Elliott Management Corp. manage to make 10 to 15 times what they paid for some Argentine debt?

Simple: They bought at a steep discount millions of dollars in bonds that earned 101% interest per year. (No, that’s not a typo).

Here’s why:

Usually, when bonds default, back payments are calculated at a bond’s coupon rate, plus a statutory penalty of 9% per year on unpaid interest after the bonds mature.

These bonds, the brainchild of Morgan Stanley , were unusual. Called floating rate accrual notes (FRANs) the coupon rates adjusted according to Argentina’s creditworthiness.

“This structure arguably provided an incentive for those who were familiar with Argentina’s troubled financial history and, as result, concerned about a potential default nevertheless to invest in the FRANs, ” the U.S. Court of Appeals for the 2nd Circuit later wrote in a decision upholding the absurdly high interest rates.

Until Argentina’s default in 2001, these bonds (which had a maturity date of 2005), paid investors a different amount every six months calculated by the yield that Argentina’s 2006 and 2027 benchmark bonds were trading at in the secondary market.

Interest rates rose from between 9% and 14.4% per year prior to October 2001 and payments were made accordingly.

Then everything changed. On December 20, 2001, Argentina announced that it would no longer service its approximately $80 billion in external debt, including both the FRANs and the 2006 and 2027 bonds whose yields to maturity were used to calculate the FRANs coupon rates.

The yield on the benchmark bonds rose to 101%. Elliott successfully argued in court that after Argentina stopped paying (and therefore calculating interest), the back payments it was owed were also accruing at 101%.

The net result: In a deal reached this week, Elliott stands to gain $1.2 billion on $132 million in principal on those bonds – although analysts agree that they likely paid much less than the full value of those bonds, about 20 cents on the dollar. With all penalties included, according to court documents, the return amounts to 905% based on the original principal, but analysts say it is likely 10 to 15 times what the hedge fund actually paid for the debt.

4. ARGENTINA’S DEBT: AT LAST (The Economist)
5 March 2016

A deal with holdout bondholders is expensive, but worth it

FOR more than a decade Elliott Management, the hedge fund led by Paul Singer, was the pantomime villain in Argentina’s dispute with its bondholders. Rather than accepting a big write-down of debt on which the country had defaulted, as other creditors did in 2005 and 2010, Elliott, along with several other “holdouts”, pursued full payment through the New York courts. That led to a fresh default in 2014.

Now the drama is entering its final act. On February 29th Daniel Pollack, the court-appointed mediator, announced that Argentina had reached an agreement in principle with four of the largest creditors, led by Elliott. Argentina’s payment of $4.65 billion will be 25% less than they were demanding. Even so, it is a big pay-off for investors who bought the debt at a fraction of its face value. With this agreement, Argentina has settled with creditors who hold 85% of the disputed debt.

It is a coup for Mauricio Macri, Argentina’s recently elected president and will help end the country’s long isolation from the international credit markets. Together with other steps Mr Macri has taken since assuming office in December, including relaxing exchange controls and removing taxes on some exports, the credit deal helps restore normality to an economy that had been distorted by populist controls during 12 years of rule by his two Peronist predecessors, Cristina Fernández de Kirchner and her late husband, Néstor Kirchner. Addressing Congress, which began its new session on March 1st, Mr Macri blamed his predecessors for Argentina’s weak economy and high inflation. Isolation from credit markets, he declared, had cost the country $100 billion and 2m jobs.

Argentina’s negotiators paved the way back by reaching deals with smaller groups of holdouts. On February 2nd Argentina agreed to pay a group of Italian bondholders $1.35 billion; two weeks later it settled for $1.1 billion with two of the six largest holdouts, Montreux Partners and EM Ltd. But Mr Singer’s Elliott Management led the most intransigent group; an agreement with them is the real prize.

Thomas Griesa, the judge overseeing the case, had contributed greatly to Argentina’s predicament in 2012 when he ruled that the country could not pay bondholders who had agreed to a restructuring, or issue new debt, unless it settled with the holdouts. That precipitated Argentina’s default. On February 19th this year the judge in effect switched sides, saying that Mr Macri’s election had “changed everything”. He said he would lift the injunction barring Argentina from paying other creditors from March 1st under certain conditions. That was a severe blow to the holdouts, who had used the injunction to press Argentina for full payment. “The message to non-settling plaintiffs, many of whom have had no opportunity to negotiate with anyone, is unmistakable: settle by February 29th, or else,” wrote their lawyers.

The deal is not quite sealed. The injunction will not be lifted until Argentina repeals two laws that block agreements with the holdouts. The Ley Cerrojo (Padlock Law), enacted in 2005 during the first round of debt restructuring, was intended to prevent Argentina from offering holdouts a better deal than that accepted by holders of restructured bonds. The Ley de Pago Soberano (Sovereign Payment Law) of 2014 was a failed attempt to circumvent Mr Griesa’s injunction by re-routing payments to bondholders who had accepted a deal through Argentina or France.

Opening the lock

The government is confident that it can secure the votes in Congress to repeal the laws. In early February, 13 deputies from the Front for Victory (FPV), Ms Fernández’s party, broke away to form a more moderate “Justicialist Bloc”. The move deprived the FPV of its position as the largest grouping in the lower house. The defectors have said they are willing to work with the new government to repeal the laws. In the upper house the government plans to enlist the support of Peronist governors, who are also keen to tap international credit markets. They are likely to persuade the senators over whom they have influence to support the repeal of the legislation.

Once the laws have been scrapped, the government hopes to raise up to $15 billion through a bond issue, which it will use to pay the creditors. Some analysts doubt that the market can absorb such a large sum. But Argentina’s finance secretary, Luis Caputo, is bullish. “All the banks we’ve spoken with are confident that we can raise the money we need in the market,” he said.

The government then plans to return to the market in an effort to finance its budget deficit, which was a daunting 5.8% of GDP last year. Under Ms Fernández’s administration the central bank financed the deficit by printing money, pushing up inflation. The bond issue will help the central bank to end that harmful practice, but the relief from high inflation will not come immediately. Propelled by the devaluation of the peso, the annual inflation rate, already high, has risen to around 30%; the government had hoped inflation this year would be 20-25%. It is trying to persuade trade unions not to demand excessive wage rises, which would drive inflation even higher. The unions are unwilling to make sacrifices, however. On February 25th teachers extracted an agreement from the government for a 30% salary increase; other unions are demanding pay rises at least as big.

Mr Macri has so far taken a cautious approach to bringing down the budget deficit. Energy subsidies have been cut, but the president is reluctant to slash other spending, which would further rile Argentines already angry about inflation and, he fears, would weaken growth and employment. But until the government brings the deficit substantially down, the central bank will struggle to regain credibility. A return to the bond markets is not enough.

Nevertheless, the debt deal should boost the government’s confidence. It has until April 14th to repeal the legislation and pay Elliott and its fellow litigators. It must also settle with the holders of the remaining 15% of the debt. But the exhausted negotiators are allowing themselves a moment of satisfaction. “It seemed like a thousand years to me,” Mr Pollack said of the seemingly interminable talks. Mr Macri hopes not to take up much more of his time.

By Silvio Canto, Jr.
March 4, 2016

Argentina has been in the news a lot. The Pope was born there and recently returned home. And they had an important election in early December. It put in office a center-right president who is already paying off dividends with sound policies and a recognition that Argentina’s populism hurt its international reputation.

Over the last few weeks, people in Argentina are wondering about something rather different. Some are asking: Is the end of the world coming?

This is from news reports:

A beetle invasion of biblical proportions has hit beaches in Argentinian seaside resorts — causing some to suggest it could mean the end of the world.

Locals reacted with horror after seeing millions of the bugs swarm onto beaches in the resorts of Mar de Ajo, 31 miles away from the capital Buenos Aires.

In scenes akin to a horror film, images posted on social media show the beaches turned black by the plague of beetles as they cover miles of coastline.

Although no one is exactly sure what is behind the phenomenon, social media has gone into meltdown with theories.

Some believe it is a portent of the end of the world with commentators claiming the influx of beetles is an “ominous warning of impending doom” and “the end of times is near… they can sense it.”

Others suggested an earthquake had hit the area before the beetle invasion.

It may be that true there is doom ahead for Argentina, as many are saying. It is more likely that this is a freak act of nature. Nevertheless, reaction to the beetles have a lot of people talking about the state of the country.

I checked with a social friend in Argentina about the story. And this is sort of what he said: “We love “futbol” and we got eliminated in the World Cup, our tango is getting mixed with pop music and most of us feel cursed that Argentina has underachieved for a century.”

And then the beetles in biblical proportions show up? My friend from Argentina may have a point about doom ahead!

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