Don’t cry for d(efault) Argentina

World Finance speaks to Eric LeCompte, Executive Director of Jubilee USA, to discuss what the implications will be of Argentina deciding to repay its debt - or default - on July 30

July 31, 2014

D-Day arrived for Argentina: when the country either had to repay its debt, or default. Both options are not particularly savoury for the economically crippled country. World Finance speaks to Eric LeCompte, Executive Director of Jubilee USA, to talk about the greater ramifications of this situation.

World Finance: Well Eric, let’s start with the day: what’s so important about July 30th for Argentina?

Eric LeCompte: July 30th essentially was the day that the grace period expired for Argentina. They were supposed to make payments to all of their restructured bondholders on June 30th, and so they had a grace period through to July 30th. And that has now expired.

World Finance: Well economically speaking, what is the situation like on the ground now in Argentina?

Eric LeCompte: The country is in a much stronger, much more stable place, that it was when it defaulted back in 2001. As the country now goes into another default, it’s a very different situation. Although there certainly are economic consequences, this is much more of a technical default that Argentina is facing.

The country is in a much stronger, much more stable place, that it was when it defaulted back in 2001

World Finance: Well you hear the word default, and it does sound dramatic. So what sort of consequences will this bring?

Eric LeCompte: They will face difficulty in accessing certain credit markets. They’ve had that difficulty since their default in 2001. But they’ll continue to have that difficulty. And right now the government is very interested in accessing new lines of credit for development within the country.

We’ve seen Argentina reaching out to Russia as well as China in order to find ways to continue to receive credit. Although they may be shut out of some of the markets.

I think there are also some positives in terms of defaulting as well. It’s very possible that the government of Argentina made a decision that it was better to default than to comply with an order from New York ordering them to pay hedge funds in full. Because now that they’ve defaulted, they’ll have the opportunity to again restructure payments to bond holders that they’re seeking to pay.

World Finance: So what are the country’s options, moving forward?

Eric LeCompte: The country will very likely want to continue payments to the 92 percent of restructured bondholders.

So the way that they’re most likely going to do that is to restructure the bonds, either under Argentine law, or go through English law: recontracting either in London, Paris or Frankfurt, since all of those financial jurisdictions do not tolerate the predatory activity that the financial jurisdiction in New York does.

World Finance: Well vulture funds have dominated the news about Argentina’s debt; how prolific are these types of funds, and how do they work exactly?

Eric LeCompte: You know, these are hedge funds that originally got their start by buying up companies that were in distress. Breaking up those companies, selling off parts in order to make a profit, and then moving on.

These vulture funds – according to the World Bank there are less than 100 firms around the world – what they do is, when a country is in financial distress, or dealing with severe financial issues because of development. Because the country is so impoverished. These groups that are popularly known as vulture funds, come into a country and buy up their debt for pennies on the dollar.

There are other investors that may want to get out of the situation, or cannot wait long enough to recoup their investment of a particular country. And so vulture funds don’t invest in a country: they buy up the debt on the secondary market, and then generally vulture funds will make upwards of 1,400 percent in profits.

So right now, in the case of Argentina, we see two particular funds: NML Capital and Aurelius, that bought up debt after the 2001 default. And right now if they were to accept the deal that the other 92 percent of bond holders accepted. Aurelius and NML Capital would make a profit of about 157 times their investment. But they want a judgment to receive payment in full, which is actually more than 1,200 times what they paid for the debt.

Part of the concern with the activity is that it disrupts debt restructuring that the majority of legitimate bond holders want to participate in, and that they target moneys that are needed by a country when they’re in recovery, or in the poorest countries of the world, they actually target the monies that countries receive from debt relief efforts.

World Finance: Now Eric, they’re not actually doing anything illegal, so isn’t this just excellent business for them? And shouldn’t the blame perhaps be laid at the feet of Argentina’s economic policymakers?

Eric LeCompte: Although the behaviour is legal, it doesn’t make the behaviour any less disruptive for the international financial system.

I think this is one of those few moments when behaviour is so extreme, you see essentially most actors that are involved in the financial system around the world, lined up on the side of Argentina.

Not because they agree with Argentina’s politics, but because they know the precedent set by this case can disrupt how the international financial system operates.

And once they default, it won’t be easy

This behaviour can disrupt economies in wealthy countries, as well as poor countries. Because at the end of the day, Argentina still caucuses with the G20. It’s not a poor country. What global actors, what our organisation is most concerned with, is the precedent that this sets. Because this precedent can actually make it difficult for legitimate investors to be able to restructure bonds. It can make it difficult for the financial system to operate. It can make it difficult for any country to be able to receive credit, to be able to lend, and be part of lending and borrowing contracts in a proper and forceful manner.

And you know, one of the most extreme aspects is that this behaviour actually hurts the poorest people in the world. Since these people in the poorest countries of the world are beneficiaries of debt relief, it’s that money that by international law is supposed to build infrastructure, hospitals, and schools. And unfortunately that’s the very money that these extreme actors are collecting.

World Finance: And do you see foreign countries in the region also being affected?

Eric LeCompte: I don’t think we have to worry about contagion in the sense of hurting other economies globally. For the most part, Argentina’s neighbours and other powerful economies in South America, like Brazil, are not necessarily connected to Argentina, and do have rather strong economies.

So I guess it’s the billion dollar question of the day, but what in your mind is the solution to Argentina’s debt problem?

It seems clear that they’re not able to pay in full the hold-out investors and the vulture funds, because according to the UN Conference on Trade and Development, that would open up Argentina to another $135bn in claims. And right now they have less than $30bn in their reserve.

So I think the Argentine government has probably made an assessment that it’s better to default than to comply with Judge Griesa’s order. And once they default, it won’t be easy, but I think they are likely to go through a process of restructuring again all of the restructured bondholders: the 92 percent can continue to receive payments, either under Argentine law, or other friendly international law.

Once that happens with Argentina, you know, with the energy reserves they have, being a G20 country, they will see a way to get beyond this current moment, and ultimately a way to not pay the holdouts and the vulture funds.

World Finance: Eric, thank you.

Eric LeCompte: Thank you.