Argentina only has itself to blame for debt, says banking and finance law professor

World Finance speaks to Rodrigo Olivares-Caminal, Professor in Banking and Finance Law at Queen Mary University, about how Argentina will disentangle itself from economic chaos

August 1, 2014

The Argentine sovereign debt saga came to a head yesterday when the country defaulted on it in last minute talks in New York. With a colossal $1.3bn to pay back to bond-holders, the country’s economic forecast looks bleak. World Finance speaks to Rodrigo Olivares-Caminal, Professor in Banking and Finance Law at Queen Mary University in London, to discuss what the situation means for Latin America’s third largest economy.

World Finance: Well Rodrigo, Argentina is no stranger to debt, and this is the second time it’s defaulted in a century. So now the dust has settled somewhat; where does this leave the country?

Rodrigo Olivares-Caminal: It leaves the country where it was almost 10 years ago.
Argentina has a history of defaulting more or less in cycles of 10 years. It happened in 1982, 1992, December 2001… then restructuring was open until 2005, and now we’re in 2014, almost 2015, finishing another cycle.

Argentina is playing
with fire

World Finance: Well what are the consequences of this particular default?

Rodrigo Olivares-Caminal: Still to be seen, because as you know there have been lots of complications.

Basically Argentina claims that it has made payment to its creditors, which is not accurate. So basically the 30 day grace period expired. Argentina has been given a golden opportunity by the judge entertaining the claim, appointing a special negotiator to settle any differences. Argentina came back to the table only 48 hours before the deadline, and on top of that, with the same proposal that was already rejected three times by the distress investors!

Today, at 11am New York time, there will be a meeting to determine whether there has been a trigger on the CDS. And the problem is, Argentina is playing with fire. They’re claiming it would be difficult to enforce anything, because the bonds need to be accelerated by 25 percent of the bond holders. But the reality is you do not know which other debt instruments are out there with cross-default clauses. And basically when we talk about cross-defaults, sometimes things get confused between cross-defaults and cross-accelerations. There might be some differences there.

World Finance: How did Argentina get into this situation?

Rodrigo Olivares-Caminal: Argentina has been labelled in international forums as a serial defaulter. Basically there’s no reputational cost, and sometimes it’s cheaper for Argentina to default rather than honour its debts. It’s a situation that is recurrent, and it’s put off many investors.

Basically Argentina has been nationalising companies, defaulting, not engaging in negotiations, incurring big amounts of debt, that then someone else would be in office to face the problem.

World Finance: So what happens now? What choices does Argentina have?
Rodrigo Olivares-Caminal: There’s only one: sit at the table and negotiate with the creditors.

There’s a District Court ruling, there’s a Court of Appeal ruling, there’s even a Supreme Court ruling. Basically the District Court has passed an order whereby nobody can engage in helping Argentina, because it will be aiding and abetting. So basically Argentina has to sit down to the table and negotiate. There’s no other way out.

World Finance: The country is still solvent, so how is this situation likely to impact its economy?

Rodrigo Olivares-Caminal: The central bank reserves of Argentina have been decreasing lately. Argentina is not in a very comfortable position. That’s why Argentina has been forced to settle with YPF. And also Argentina reached an agreement with Paris Club. Because Argentina was paving the route to come back to the capital markets.

Argentina needs to obtain international financing to be able to pay some of their obligations. It’s very rich, has many resources, but they need to get access to finance.

World Finance: Well since the default, Argentina has called the US mediator “incompetent”, and has actually blamed the US for its default. Is this fair?

Rodrigo Olivares-Caminal: Of course it’s not fair. And not only them, but now they are blaming the whole universe! ‘There’s a plot against Argentina, there’s a conspiracy…’ Basically yesterday they were blaming absolutely everyone: Standard & Poors, Fitch, District Court, three judges in the Court of Appeal and the Supreme Court…

They’re wrong. It’s completely wrong. It’s only Argentina’s fault, because they are regularly breaching the rule of law.

So basically Argentina has to sit down to the table and negotiate

If you ask me, the story of Argentina, and again if we look backwards, every now and then we have one of these episodes. And of course it’s simpler to blame someone else than assume its own responsibilities. Mainly at the political level.

World Finance: Well looking at vulture funds now, and according to reports, US hedge funds stood to gain 1600 percent in profits in just six years. Now the Argentine president Christina Fernandez has called this extortion, but surely they knew what they were getting into?

Rodrigo Olivares-Caminal: Definitely. And Jenny if I may, I would prefer to refer not to vulture funds, but to distress investors. Because essentially what they are doing is taking a risk, like anyone else.

These individuals assume a huge amount of risk. And you know the basics of finance: the higher the risk, the higher the returns that you would expect.

Many people claim that this practice should be prohibited, but basically as long as there’s an offer and an acceptance, that’s it!

You go to an antique market, you buy a cheap painting, then you go to an auction house and discover it’s a Monet, a Van Gogh? Are you going to sell it for the discount price you bought it for? Or do you wish to get the highest hammer price?

World Finance: Well the hedge fund manager Paul Singer is very much seen as the villain of this piece, but surely he’s just an incredibly shred businessman?

Rodrigo Olivares-Caminal: Definitely. And to a certain extent, he’s pushing the boundaries, he’s making all of us who are in distress investments or debt issues, try to oversee the whole system: how it interplays, and where our judgements are needed.

World Finance: Well previously I spoke to Jubilee USA, which said that these hedge funds would set a precedent for sovereign debt recovery. What do you make of this?

Rodrigo Olivares-Caminal: I don’t think that this is an issue, because I personally think that Argentina is a one-off. Argentina is unique in many aspects.

First and foremost, Argentina has been very aggressive from day one. Second, Argentina has not been willing to engage in meaningful discussions.

Third, the reason why we ended up with these rulings from the US courts is mainly because Argentina passed a law subordinating some of the creditors. One group of creditors had been subordinated vis-a-vis the other. And basically this has been the breach of the pari passu clause.

[T]hey are blaming the whole universe!

What I’m trying to tell you is that in reality, if Argentina had not subordinated, we would not be here.

World Finance: So how is defaulted sovereign debt dealt with? Because a country can’t go bankrupt, or be forced to pay, can it?

Rodrigo Olivares-Caminal: A sovereign cannot go bankrupt because there are usually two definitions. One: when you cannot meet your obligations when they fall due, and the other: when the value of your liabilities exceeds the value of your assets.

This second one does not apply to sovereigns. So at the end of the day, if they do not meet their obligations when they fall due, it’s because they don’t want to.

The reality is the sovereign is solvent. They can increase taxes. And eventually – it’s not a 21st century concept, but – if they want, they can sell a piece of land.

After the payment plan, there have been a few restructurings. Last time there were 37 or 38. All of these have been successful, all of them with a percentage rate of about 90 percent, which is a very high percentage for a restructuring where there is no insolvency court, or no insolvency law that combined or ground down dissenting creditors.

So I think they have been very successful. I think there have been only two litigious episodes, one of them being Argentina.

World Finance: Rodrigo, thank you.

Rodrigo Olivares-Caminal: My pleasure.