Charles Blitzer, an economist, former senior IMF staffer, and expert on sovereign debt management and restructuring, analyses Argentina’s recent offer to its debt holdouts — and advises a course correction for the government.
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Last week marked the first progress in years toward resolving Argentina’s long-running sovereign-debt dispute. However, talk that Argentina is on the brink of a comprehensive settlement is almost certainly premature. Further uncertainty was added to the picture on Thursday after Argentina formally asked Judge Thomas P. Griesa to vacate the famous pari passu injunction. Such coercive and unilateral tactics are unlikely to work. A course correction by Argentina is needed to get a deal done.
First, the good news: Despite Argentina’s decision not to sign a confidentiality agreement, some of Argentina’s creditors nevertheless agreed to enter into talks last week with Argentine officials under the auspices of the court-appointed Special Master, Daniel Pollack. Talks occurred all week, with a minimum of leaks and no public mudslinging.
Last Friday, however, Argentina abruptly ended the talks and issued a
public proposal to settle the claims of all its holdout creditors. The proposal offers creditors a range of options depending on the nature of their claims.
Those creditors who fall within the pari passu litigation in the United States are offered a haircut of 27.5 per cent on their total claim amount (principal and interest) if they accept the deal before February 19, after which the haircut would rise to 30 per cent.
Alternatively, they can accept a payment of 150 percent of the principal amount of their bonds. Creditors falling outside the pari passu litigation, more than half of all the bonds in default, are offered only a payment of 150 per cent of their principal.
The latter option mirrors an agreement that Argentina announced separately last week to resolve the holdout claims of a group of 50,000 Italian bondholders which had been pressing its case for many years at the World Bank’s arbitration facility, ICSID. Under this agreement, Argentina will pay about $1.35 billion, which represents 150 per cent of the face value of the Italians’ bonds. However, because the total amount of the claims including past-due interest amounts to about $2.5 billion, this deal actually represents a 46 per cent haircut.
In making its proposal public, Argentina announced that two of its creditors had already accepted the deal. It later emerged that one of these creditors, Dart Management Inc., by taking the offer to be paid 150 per cent of its principal, stands to be paid more than 100 per cent of its total claim – a negative haircut!
Hold the champagne
Mr. Pollack followed Argentina’s press release with a statement of his own, calling the proposal a “historic breakthrough.” Nevertheless, Mr. Pollack’s statement acknowledged that four of the largest creditors involved in the talks had not yet reached an agreement with Argentina and expressed his hopes that “continued negotiations” with these firms would bring about a resolution.
Many commentators and public officials have joined in Mr. Pollack’s optimism and applause. The FT
editorialised that it was a “reasonable deal” and that “the holdout creditors should accept it”. However, in my judgment, it is not yet time to pop open the champagne.
The low bar set by the previous Argentine administration has resulted in far too much misplaced confidence in the idea that the negotiations are now more or less completed and Argentina is on its way to unimpeded market access. In fact, a closer look at what Argentina is attempting reveals several large deviations from best practices in sovereign debt restructuring – deviations that could quickly derail Argentina’s hopes for a speedy resolution which will allow Argentina that unimpeded access to the international capital markets.
For starters, with a deadline of February 19 before the terms worsen, and no mention of continued talks with any creditors, Argentina’s proposal has the markings of a coercive, take-it-or-leave-it offer. Unilateralism is the approach that previous administrations took to Argentina’s highly unorthodox 2005 and 2010 restructurings. It did not work so well with these creditors back then, and it is unlikely to work now. Though Argentina clearly has made an offer, if it wants to conclude deal which will bring in the vast bulk of the holdouts, it also will have to engage in sustained good faith negotiations with its creditors.
On Thursday, Argentina doubled-down on unilateralism. It asked Judge Griesa to
enter an order vacating the pari passu injunction automatically once 1) Argentina’s Congress lifts the “Lock Law” preventing it from paying the holdouts, and 2) any holdouts that have entered into agreements with Argentina receive payment.
I find it astounding that Argentina claims the injunction could be lifted without any further negotiations with creditors and without a single additional creditor accepting. This maneuver seems to be a clear attempt to procure a judicial ultimatum and represents a stark departure from the good faith required for a successful negotiation.
Also troubling is the vast differences in the haircuts being offered to different creditors depending on which bonds they own and whether they are inside or outside the pari passu litigation. One need look no further than the disparate treatment of the Italian pensioners (who have agreed to take a 46 percent haircut) and Dart Management (which, no surprise, has agreed to accept a negative haircut) to see that Argentina’s approach is resulting in perverse outcomes.
In summary, under last week’s offer, the bulk of the pari passu creditors would have all their claims recognized – principal and interest – and then be paid this total less a haircut of 27.5-30 per cent. This group holds about one-third of defaulted bonds.
For the remaining creditors, accepting payment of 150 percent of their principal would mean accepting haircuts of anywhere from 45-75 per cent, depending on interest accrual rates which differ widely across bonds and whether and when they obtained court judgments.
While exact intercreditor equity – identical haircuts on claims – is rare in past restructurings, I believe it is safe to say the range embedded in Argentina’s proposal is without precedent.
Argentina seems to think that coercion combined with offering worse terms to some creditors and better terms to others will help it pick off enough creditors to isolate those who remain and force them to take whatever deal they’re offered. Given the continued ability of holdouts to this offer to disrupt Argentina’s access to international capital markets – the sine qua non for Argentina – I am sceptical that this strategy of wide haircut disparities will work.
It is a now common mistake to assume that the injunction resulting from the pari passu litigation is the only factor impeding market access. Argentina did not have market access before the injunction came into effect in 2014. Market access was impeded by knowledge that creditors with unpaid judgments could obtain court orders to block the proceeds of a bond sale from being delivered to Argentina until their judgments have been paid.
This was true before the injunction and would remain true if for some reason the injunction were stayed or lifted before all judgments have been cleared. Restored market access simply requires that the holdout problem be fully solved.
Almost all holdout creditors have signaled a willingness to be flexible and take a haircut on their total claims, but I predict that many will see little reason to participate in a deal they perceive as unfair relative to other creditors and to Argentina’s capacity to pay.
So what is the way forward?
First, Argentina should press for and participate in sustained and continual good-faith negotiations, until an agreement is reached with a representative group of creditors which can then attain near-unanimous support.
Second, the principle of approximate intercreditor equity should be agreed. This means that the legitimate and verified claims of all holders would be recognised.
Third, the focus of the negotiations should be on a common haircut of total claims. This will greatly facilitate and focus the discussions.
The track record of negotiations with committees following these principles has been positive for other restructurings and likely would be the most efficient way to make rapid progress. While such an approach may require a slightly smaller average haircut of claims, and a minor short-run increase in Argentina’s debt-to-GDP ratio, the gains to the country from fully restoring market access sooner rather than later would make the deal pay for itself.
The good news is that Argentina has shown a willingness to improve on the previous administration’s approach, which was consistently rejected by holdouts the world over. It has had one round of negotiations. And it doesn’t appear to have slammed any doors.
At this point, there is plenty of time to rethink this proposal and to adopt the best practices of successful restructurings. Argentina’s officials should focus exclusively on moving Argentina forward by regaining market access and forgo repeating any of the last administration’s mistakes.
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