Argentina had a fantastic 1990s, followed by the largest sovereign bond default in history and a completely dismal 2000s. Despite its economic troubles (more on that in a moment), the nation managed to restructure most of its debt and is looking to move on from its challenging past.
But it's not going to be easy.
Holding just 8% of Argentina's defaulted debt from the late 1990s, a small group of hedge funds has managed to throw a wrench into the country's restructuring plans. Now, with other bondholders coming forward to demand higher repayment, it looks like the saga could take a turn for the worse.
The bottom line? This is an expensive crisis, and it looks like it's only going to get worse.
Where it all began
The story of Argentina's debt problems started a couple of decades ago. The short version is that the country pegged its currency to the dollar, had a super successful few years, and then became unable to manage a growing body of economic shocks. Eventually, Argentina buckled and went into a massive recession that ended with the nation unpegging the currency and rescinding the independence of the central bank.
Unfortunately, the Argentine government had issued bonds in dollars -- a lot of bonds. At the end of 2001, the government announced that it would have to default on $93 billion in debt, in the largest sovereign default in history.
In spite of what you would think was a pretty tenuous negotiating position, Argentina decided to play hardball with creditors, offering aggressive restructuring terms. It took several years, but the tactic actually paid off for the most part: over 92% of the loans have long been restructured and are happily being paid accordingly. The Argentine government has a more manageable payment, and everyone else seems to be happy just to get paid.
However, it only mostly worked.
The remaining 8% of the bonds were purchased for pennies on the dollar by hedge funds and other investors. A handful of those funds then sued the Argentine government for full repayment instead of the terms offered under the repayment plan.
The result has been a years-long legal battle in the US courts between the nation of Argentina and this tiny group of investors. It's a story that has its share of belligerence: the investors tried to get Argentina held in contempt of court, and Argentina responded that such a thing would be a violation of international law.
In other words, it hasn't been the simplest affair.
Argentina has of course argued that these investors are vultures out to turn a profit at the nation's expense. On the other hand, the bondholders have argued that what they're doing is entirely within the scope of law and reasonableness.
Either way, it looks like things are about to become even more expensive for Argentina, because another investor who holds "pre-restructuring" bonds has now also demanded full repayment. Adding to the soap opera storyline is the fact that, in addition to being an investor, he is the heir to a Styrofoam cup fortune.
The claim is notable, however, for a more important reason: the five hedge funds at the center of the legal affair only represent about 25% of the total holdouts, meaning that what was already a rather high-stakes negotiation is actually a lot more significant in terms of magnitude than most people realize.
In other words, Argentina is in between a rock and a hard place. If these other investors can convince the courts that they should be getting the same terms as the activists, any kind of settlement will be much more expensive for Argentina, both politically and economically.
After all, this negotiation is taking place in the context of ver weak economic data. The country just had its 13th straight quarter of economic contraction, and a massive payout could make it harder for Argentina to tap into the financial markets in the future.
All in, considering the strength of the negotiating position of this group of holdout investors, the prognosis is not looking good.
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