Market shock after ‘vulture fund’ win on Argentina debt

Argentina debt restructuring, and other deals elsewhere, could unravel after US court backs hedge funds' claim on defaulted bonds

PUBLISHED : Wednesday, 28 August, 2013, 12:00am
UPDATED : Wednesday, 28 August, 2013, 2:31am


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A US court's decision to back two hedge funds demanding Argentina pay for defaulted bonds has jolted the multitrillion-dollar market for sovereign debt.

The New York appeal court on Friday rejected Buenos Aires' arguments that the funds - the country brands them "vulture funds" - deserve nothing because they refused to join in a restructuring of the debt on which the country defaulted in 2001.

Rather than 'recalcitrant debtors,' we are serial payers
Argentinian President Cristina Fernandez de Kirchner

Instead, it ordered the Argentine government to pay US$1.47 billion to the funds, a decision that critics say could unravel the restructuring deal and send the country back into virtual bankruptcy.

Some also believe that the decision could upend other sovereign debt restructuring deals.

Argentinian President Cristina Fernandez de Kirchner is now proposing another debt swap: offering new bonds to be paid in dollars in Buenos Aires to anyone still holding defaulted debt.

Fernandez said the US judges were unfair to label Argentina a deadbeat. The country had made US$173 billion in debt payments since 2003 and would pay US$2 billion more on September 12.

"Rather than 'recalcitrant debtors,' we are serial payers," she said. Buenos Aires defaulted 12 years ago on nearly US$100 billion worth of bonds. In two restructurings, in 2005 and 2010, most bond holders took a 70 per cent "haircut" on the face value.

But New York hedge funds NML Capital and Aurelius Capital, which bought some of the defaulted debt at a steep discount, declined to join the restructuring. They sued to recover 100 per cent of the bonds' face value, plus accrued interest.

Argentina has petitioned the US Supreme Court to review the case. A Supreme Court endorsement of the lower court would "have serious effect on the ability to negotiate necessary debt restructuring in the future", said Mark Weisbrot of the Centre for Economic and Policy Research in Washington.

When countries cannot pay their debt, they can negotiate with creditors as a group - aiming to reduce some of the value and lengthen the time for repayment, in a way that makes the government solvent and allows the creditors to recover at least some of their investment.

Such deals depend on the large majority of bondholders agreeing to them, while holdouts are meant to get nothing.

That was the case with the largest restructuring ever, the 2012 deal between Greece and holders of some €200 billion (HK$2 trillion) worth of its bonds that wrote off half of their value.

Additional reportingby Associated Press