Tag Archives: Argentina

Government Debt with State Contingent Coupons

On VoxEU, Myrvin Anthony, Narcissa Balta, Tom Best, Sanaa Nadeem, and Eriko Togo discuss the history of government debt with state contingent coupons and offer some lessons.

  • In the mid-19th century, the Confederate states issued cotton-linked bonds
  • In the late 1970s, Mexico issued oil-linked bonds
  • In the 2000s, Turkey issued revenue-indexed bonds
  • Since 2014, Uruguay issues nominal wage-issued bonds
  • Some other examples (figure taken from the column):
  • Obviously, confidence in data quality and thus, quality of institutions is important for the success of such issues.

State contingent securities also have been used in debt restructurings:

The first use of state contingent bonds in debt restructurings occurred in the Brady deals from 1989-97, which allowed commercial banks’ claims on debtor countries to be exchanged for tradable instruments, allowing the banks to clean up their balance sheets. Many of these instruments included ‘value recovery rights’, which envisaged additional debt payments in circumstances where the debtor country’s economic or terms of trade conditions improved substantially … Oil exporters generally linked the payments to oil prices, while other countries linked either to GDP or measures of the terms of trade. Many of the Brady instruments subsequently made significant ongoing upside payments (e.g. Bosnia and Venezuela), while in some cases sovereigns chose to repurchase the instruments as it became clear that upside payments would be triggered (e.g. Mexico, and Bulgaria in the mid-2000s).

More recently, ‘upside’ GDP-warrants have featured as part of the package of bonds issued to creditors in each of the three major restructurings of the past decade: Argentina (2005 and 2010), Greece (2012), and Ukraine (2015). In the case of Grenada (2015), the restructuring deal included instruments with both upside and downside features (Table 2).

Inflation linked bonds have been successful:

Inflation-linked bonds have a long history, dating back to a 1780 issuance by the State of Massachusetts … More recently, they emerged in Latin America in the 1950s and 1960s, in an environment of very high domestic inflation, and the UK became the first advanced economy to issue inflation-linked bonds in 1981. … the global stock of government inflation-linked bonds had grown to around USD 3 trillion by 2015 … Despite this recent growth, inflation-linked debt still accounts for a relatively small share of sovereign debt portfolios in most countries …

Related VoxEU column on policy implications.

Economics in Theodor Herzl’s “The Jewish State”

On his blog, Tyler Cowen summarizes the economics in Theodor Herzl’s “The Jewish State.”

Herzl favored selling European homes and businesses of departing Jews and buying land in Argentina or Palestine, at a profit, through a land acquisition company incorporated in London. Poor Jews from Romania and Russia would supply cheap labor and be rewarded by their own houses eventually. Herzl favored short working weeks, a democratic monarchy or the aristocratic republic of Renaissance Venice.

Nevada Shell Companies, Elliott and Argentina—Some Unforeseen Consequences

In an earlier post (April 2015) I wrote:

The Economist reports about Nevada shell companies. In its eternal struggle against the Republic of Argentina, Elliott Management is inquiring about several shell companies in the state. They are suspected to own funds that might have been stolen from the Republic. The hedge fund reasons that it is entitled to those funds because they belong to Argentina, and Argentina owes 2 billion dollars to Elliott according to earlier court rulings. Elliott sued in Nevada for information on the shell companies and has been partially successful.

Now, The Economist reports about some unforeseen consequences of the earlier ruling and the “Panama Papers affair”:

Until now, getting information on clients of law firms in Panama has been [difficult]. … But sleuths may soon find it a lot easier, thanks to a court ruling in, of all places, Las Vegas.

In 2014 Elliott, a fund that owned debt on which Argentina had defaulted, sued in Nevada to compel Mossack’s local affiliate to provide information on shell companies, in the hope of discovering Argentine assets to seize. The affiliate, MF Nevada, claimed—implausibly—that it was independent of Mossack. …

A judge in Las Vegas ruled in March 2015 that Mossack and MF Nevada were one and the same. That put a crack in the wall of secrecy around American shell companies. But its full significance is only now becoming apparent: it means that, under an American law about assisting with foreign legal proceedings, any investigator anywhere in the world can subpoena Mossack, through the Nevada subsidiary, for information that could be relevant to cases in any country. …

Faced with the power of American subpoenas, Mossack’s head office will find it much harder to stonewall foreign requests for information. Ignoring them could mean being found in contempt of court. That would leave it open to penalties designed to compel it to comply, including asset seizures, in other countries where it operates.


Argentina to Resolve Litigation and Return to International Capital Markets

In the FT, Daniel Politi and Pan Kwan Yuk report about an agreement between Argentina and four holdouts, yet to be implemented by Congress.

A few weeks ago, New York judge Griesa had indicated that he would lift the injunction preventing Argentina from servicing its restructured debt. This improved Argentina’s bargaining power. According to The Economist, Griesa had written: “President Macri’s election changed everything. … The Republic has shown a good-faith willingness to negotiate.”

Argentina’s Debt Negotiations

In the FT, Chris Giles, Gillian Tett, Elaine Moore and Benedict Mander report about the negotiations between Argentina and the country’s creditors that are about to start, now that the new government has taken office.

Argentina’s finance minister has announced that the country intends to honor the face value of outstanding debt but wishes to negotiate interest payments.

As a sign of support from the international community, Jack Lew, Treasury secretary, announced that the US had ended its formal opposition to the World Bank and other multilateral development banks’ lending to Argentina.

Observers expect that the IMF will soon be involved to provide technical assistance.

In an FT blog, Charles Blitzer argues that successful negotiations should start with a non-disclosure agreement. He links to the Institute of International Finance‘s Principles for Stable Capital Flows and Fair Debt Restructuring.

Major IMF-Internal Disagreement Preceded the First Greek Bailout

At the 9 May 2010 meeting at which the IMF board approved the first bailout program for Greece, not all members approved. In fact, many members, including the Executive Director representing Switzerland, challenged the proposal, suggested less optimistic scenarios and asked for modifications. The Wall Street Journal published excerpts of the minutes in October 2013, see below.

Sebastian Bräuer in the NZZ am Sonntag also reports on the issue. He points out that the Swiss Executive Director asked what would happen if the Greek government were not to implement the agreed reforms; and if IMF and European commission were to disagree. Bräuer also reports that some European banks would have been prepared to bear losses resulting from their Greek exposure, see below.

The WSJ writes:

Swiss executive director Rene Weber in a prepared statement to the board for the May 9, 2010 meeting: We have “considerable doubts about the feasibility of the program…We have doubts on the growth assumptions, which seem to be overly benign. Even a small negative deviation from the baseline growth projections would make the debt level unsustainable over the longer term…Why has debt restructuring and the involvement of the private sector in the rescue package not been considered so far?”

“The exceptionally high risks of the program were recognized by staff itself, in particular in its assessment of debt sustainability.”

“Several chairs (Argentina, Brazil, India, Russia, and Switzerland) lamented that the program has a missing element: it should have included debt restructuring and Private Sector Involvement (PSI) to avoid, according to the Brazilian ED, ‘a bailout of Greece’s private sector bondholders, mainly European financial institutions.’ The Argentine ED was very critical at the program, as it seems to replicate the mistakes (i.e., unsustainable fiscal tightening) made in the run up to the Argentina’s crisis of 2001. Much to the ‘surprise’ of the other European EDs, the Swiss ED forcefully echoed the above concerns about the lack of debt restructuring in the program, and pointed to the need for resuming the discussions on a Sovereign Debt Restructuring Mechanism.”

“The Swiss ED (supported by Australia, Brazil, Iran) noted that staff had ‘silently’ changed in the paper (i.e., without a prior approval by the board) the criterion No.2 of the exceptional access policy, by extending it to cases where there is a ‘high risk of international systemic spillover effects.’”

The NZZ writes:

[Swiss ED Weber asked:] “Wie reagiert der Fonds, wenn die Behörden die Sparmassnahmen und Strukturreformen nicht umsetzen?”

[IMF-deputy John Lipsky said:] “Es gibt keinen Plan B. Es gibt einen Plan A und die Absicht, dass Plan A erfolgreich ist.”

“Ich kann die Direktoren informieren, dass deutsche Banken Unterstützung für Griechenland erwägen”, sagte der deutsche IMF-Direktor Klaus Stein. Sein französischer Kollege Ambroise Fayolle ergänzte, auch die Banken seines Landes würden ihren Job tun.

Nevada Shell Companies, Elliott and Argentina

The Economist reports about Nevada shell companies. In its eternal struggle against the Republic of Argentina, Elliott Management is inquiring about several shell companies in the state. They are suspected to own funds that might have been stolen from the Republic. The hedge fund reasons that it is entitled to those funds because they belong to Argentina, and Argentina owes 2 billion dollars to Elliott according to earlier court rulings. Elliott sued in Nevada for information on the shell companies and has been partially successful.

Parallels between Argentina and Greece

On Project Syndicate, Raquel Fernández and Jonathan Portes offer four lessons from the Argentinian default in 2001 for Greece:

… if the economics are on your side, you can and should ignore politicians prophesying disaster. … a short period of political turmoil can cost surprisingly little compared to a long period of mindless pursuit of misconceived policies. But … Greece must acknowledge that its fundamental problems are of its own making. … Greece is unlikely to enjoy the breathing space provided by a commodity boom. If it is to place itself on the road to a sustainable recovery, it has no time to lose.

Argentina’s Costless Default

Werner Marti reports in the NZZ that in contrast to events in 2001, Argentina’s latest default has not generated significant additional costs for the typical Argentinian household. Additional, that is, to the costs that households had to bear because their country had already mostly been excluded from international capital markets at affordable rates.

Laut allen unseren Gesprächspartnern ist dieses Ereignis an den Argentiniern weitgehend folgenlos vorbeigegangen, denn das Land hatte bereits zuvor keinen Zugang zu internationalen Krediten mit zahlbaren Zinssätzen. Dies heisst natürlich nicht, dass sich mittel- und langfristig das Investitionsklima nicht weiter verschlechtern wird, falls die Präsidentin den Konflikt mit den von ihr als «Geierfonds» bezeichneten Gläubigern nicht doch noch löst.

Marti also reports about new trains that take commuters from Buenos Aires to the Tigre-Delta. They are imported from China, and financed with Chinese credit.

Pari Passu and Collective Action Clauses: The New World

An IMF staff report published in September and entitled “Strengthening the Contractual Framework to Address Collective Action Problems in Sovereign Debt Restructuring” discusses recent legal developments of relevance for sovereign debt markets and implications for the sovereign debt restructuring process.

The New York court decisions (NML Capital, Ltd v. Republic of Argentina) have rendered a holdout strategy more likely to succeed. This tends to exacerbate collective action problems and raises the risk of more protracted debt restructuring processes. Market participants, including the International Capital Markets Association (ICMA) are discussing contractual clarifications and modifications in response to this challenge. The IMF observes these discussions and supports the preliminary results.

The New York court decisions established a broader interpretation of the standard pari passu clause in sovereign debt contracts. Specifically, they extended the standard notion of “protection of a creditor from legal subordination of its claims in favor of another creditor” to the broader notion that a sovereign must pay creditors on a pro rata basis. The court decisions prohibited Argentina from making payments to holders of restructured bonds unless it paid holdout creditors on a pro rata basis, and it prevented banks from making payments on Argentina’s behalf. In this context, the decisions also interpret the U.S. Foreign Sovereign Immunities Act. The scope of the rulings is not clear, not least because the decisions also refer to Argentina’s “course of conduct.” If interpreted broadly, the court decisions change the legal framework and are likely to complicate the restructuring of New York law-governed debt contracts (while probably not affecting London law-governed contracts).

Box 1 of the report discusses in detail the history of the Argentine litigation in the U.S. The report also contains an annex on the history of pari passu clauses in New York law-governed sovereign debt contracts.

Sovereign issuers have already reacted to the court decisions, by modifying the pari passu clauses in debt contracts. Also, ICMA has proposed a new standard pari passu clause, emphasising equal ranking as opposed to pro rata payments.

Collective action clauses enable a qualified majority of bondholders (e.g., 75%) of a specific bond issuance to bind the minority to the terms of a restructuring agreement. If collective action clauses operate on a series-by-series basis rather than on the total stock of debt then a blocking minority can more easily be formed and a strategy of holding out is more likely to succeed, in particular in light of the recent New York court decisions. The possibility to aggregate claims across bond series for voting purposes works in the opposite direction. Some countries have included aggregation clauses in the debt contracts, and the ESM treaty requires standardised aggregation clauses (“Euro CACs”) in Euro area government bonds as well. These clauses feature a “two limb” voting structure, requiring a majority of bondholders in each series and across all series but a lower quorum (e.g., 66%). Currently, “single limb” procedures are being discussed. These would solely require a majority across all series. To prevent abuse, such single limb procedures would have to be accompanied by safeguards that ensure inter-creditor equity, in particular a restriction to offer all affected bondholders the same (menu of) instruments. (Offering the same (menu of) instruments would generally imply that some creditors suffer larger restructuring losses than others, depending on the type of instruments they held initially. But already today, this is common and generally accepted.)

Box 2 of the report discusses the history of collective action clauses. Box 3 of the report discusses disenfranchisement provisions. Their purpose is to limit the risk of a sovereign manipulating voting processes by influencing votes of entities under its control.

Maturity Extension as Precondition for Large-Scale IMF Financing Operations?

An IMF staff report published in May and entitled “The Fund’s Lending Framework and Sovereign Debt—Preliminary Considerations” proposes to drop an exemption related to systemic importance and to give a larger role to debt maturity extensions.

Prior to 2002, when a member state sought funds in excess of established limits, the Fund often waived these limits on the basis of “exceptional circumstances,” and did so in a discretionary manner. Growing concerns over the problems this may create (moral hazard, early exit of private creditors, delays in necessary debt reduction measures, large-scale Fund financing operations) and the Argentinian collapse of 2001 triggered a review that gave rise to the 2002 exceptional access framework.

This required as a precondition for Fund support that debt be sustainable with a high probability. Whenever debt sustainability was clearly not given or remained in doubt, the framework called for debt restructuring with the aim to render the remaining debt sustainable. In retrospect, this restructuring requirement is viewed as too inflexible since it generates restructuring costs even when it turns out ex post that a restructuring was not actually needed.

During the Euro area crises, the Fund did not judge debt sustainability of the most affected countries to be very likely and the exceptional access framework of 2002 therefore would have required a debt restructuring as a precondition for IMF funding. However, pointing to high risks of international systemic spillovers of a debt restructuring, the Fund waived in 2010 the requirement that debt had to be sustainable with a high probability. By now, this modification of the exceptional access framework is also seen as unsatisfactory because systemic exemption structurally favors large member states and does not address the problems that gave rise to the 2002 framework. Against this background, a reform proposal is put forward.

The reform proposal is guided by two objectives: To improve debt service capacity without imposing debt reduction as a prerequisite; and to avoid that private sector claims are fully honored while debt sustainability remains in doubt. According to the proposal, the IMF would require as precondition for funding that measures are taken to improve debt sustainability even if they do not necessarily restore sustainability with high probability. Chief among those measures, the proposal suggests that creditors should be asked to agree on a maturity extension (re-profiling). That is, private creditors would remain exposed to the default risk and would be forced to contribute to the refinancing.

Collective action clauses might be needed to win creditors over. For a majority of them to be voluntarily participating, they must perceive the maturity extension as likely leading to renewed market access of the sovereign. Even in the absence of a payment default, re-profiling would likely trigger a credit event if collective action clauses were activated, and a credit downgrade among rating agencies.