fi
JULY 22, 2013
Embassy of Argentina
Washington, D.C.
Ministry of
Foreign A ff airs and Worship
Argentine Republic

Embassy of Argentina
Washington, D.C.
Ministry of
Foreign A ff airs and Worship
Argentine Republic

“Congress is a very appropriate place for today’s discussion because of the multiple dimensions of
Argentina’s debt restructuring case: it is a legal issue but also an economic policy issue; it has financial implications but certainly also social and political implications; it relates to national sovereign policies but has an impact on the global financial system as well.”
“As you know, today Argentina has a very prosperous economy. We have grown steadily for the past 10 years […] and strived for social inclusion improving income distribution and creating more than 5 million jobs. A sustainable debt management strategy was put in place, which allowed the country to grow and simultaneously share these benefits with those who trusted in Argentina. Today, public debt as a percentage of GDP is 45%, with public external debt being only 14% of GDP [December 2012].”
“The situation was significantly different ten years ago. In 2002, public debt as a percentage of GDP reached 166% while unemployment levels surpassed 21%. […] Argentina’s inability to pay its sovereign debt was indisputable, and the country deferred payments on approximately US$80 billion.”
“Since then, we have undergone two highly successful debt restructuring processes. We have restructured our debt with 93% of all our creditors. At the time, the 2005 operation was the largest sovereign debt restructuring in history. The participants received new, performing debt instruments that Argentina has faithfully serviced ever since.”
“Unfortunately, 7% have rejected the terms accepted by the majority of creditors. A very small group within the 7% of holdouts is not only suing Argentina before U.S. courts but insisting that
Argentina be forced not to pay to the other 93% unless they are paid in advance in full […]
They have consistently rejected the conditions accepted by an overwhelming majority of
creditors because they seek privileged and unwarranted conditions. We estimate that one plaintiff, professional litigant NML Capital, will receive a windfall return of approximately 1,380% on defaulted bonds that it bought cheaply on the secondary market if it prevailed on its suit.”
“We hope that this presentation contributes to clarify the Argentine position, the actual facts of this case and the tactics used by the debt profiteers suing our country. Let’s not be naïve, we know that there is a lot of intentional misinformation on this matter. […]
Argentina is the target of an unrelenting negative campaign funded by a small minority with very specific interests, known around the world as vulture funds. These funds are speculators that buy distressed debt for mere pennies with the sole purpose of litigating and obtaining judgments for sums many times higher than what they paid, while harassing good-faith creditors in the process.”
“This is not just about Argentina like many may believe. Indeed this case will have an impact on all future debt restructuring processes as well as on the preeminence of the
State of New York as an international and financial center.”
“We have stated many times the will to pay the plaintiffs, but not in better terms than to the 93% of creditors who trusted Argentina.”
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“[…] sovereign financial crises have been a regular feature of modern international finance […], nor have sovereign financial crises been limited exclusively to some special set of developing countries with uniquely problematic economies, institutions or policies […] In the last fifteen years alone, significant financial crises have been experienced by a long list of widely varied countries besides Argentina.”
“[…] there is and always has been only a limited menu of policy techniques for resolving the public debt dimension of a sovereign financial crisis […] I think this is a critically important point because criticism of the resolution of a particular sovereign debt crisis, like Argentina’s, is often framed in such a way as to suggest that there is an alternative approach that might avoid imposing costs entirely and that the pain inflicted on some particular party is essentially gratuitous. However, this is almost never the case
[…]”
“Specifically, given a sovereign financial crisis, the international financial system can usually only avoid haircuts to private debt if there is an official bailout. If, on the other hand, official bailouts are limited, haircuts are usually virtually necessary. History shows that […] if private creditors, such as bondholders, do not share some of the burden by taking a loss or a haircut, this is usually directly compensated for by, first, other countries acting bilaterally, multilaterally or through international financial institutions, and the taxpayers of those other countries taking upon themselves the financial and political risks of a bailout; and secondly, the citizens of the sovereign debtor country being subjected to steeper austerity cuts, higher tax increases and often very high unemployment, which are often beneficial in the medium to long term but sometimes delay the resumption of growth and the strengthening of the capacity to reliably service debt.”
“The central point is that any responsible discussion of how best to resolve a sovereign debt problem must be up front about the fact that if one party is to be spared some of the pain, the usual result is that a greater share of the pain will fall upon one or more of the other parties. Thus, when anyone makes an argument that the losses [...] to all or some of private creditors should be limited, we should be clear that the most common alternative to that will be a larger and riskier bailout borne by other countries, including the U.S. government and its taxpayers […]”
“In a non-bailout world, there is no such thing as an unrestructurable claim. This is the deeper meaning of equal treatment, the Latin for which is “pari passu”. As much as some would like to believe it, in a sovereign debt world, acting as though any claim is unrestructurable is simply not an option. […] From the Latin American debt crisis of the ‘80s to the Mexican and Asian crisis in the ‘90s and the restructurings in the early
2000s, [the] rule is that the losses have to be shared in order to produce a sustainable debt profile and in order to resolve the sovereign financial crisis.”
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“[…] the de facto system for resolving sovereign debt crisis […] is grounded in the more fundamental idea of inter-creditor equity. It’s contrary to the history, practice and imperatives of sovereign debt crises to read the “pari passu” clause as meaning that a holdout creditor, following a restructuring agreed by an overwhelming majority of creditors, can insist on the inviolability of the full amount of […] the holdout creditor’s original claim. This would in effect elevate the holdout creditor’s claim above those of all other creditors with equal legal ranking.”
“So in effect, this reading of the “paripassu” clause [in U.S. courts] violates the principle of inter-creditor equity and violates the fundamental ideas animating the idea of equal treatment of similarly situated creditors. While it’s true that, by definition, a holdout creditor has not agreed to the restructuring that the larger group of exchange bondholders have, it is both an accident of legal history and obviously contrary to the practical realities of the real world that any sovereign bondholder would think its claim is uniquely inviolable.”
“In all other contexts, in corporate contexts, most notably, when a borrower experiences a financial crisis, there is a risk that the holder of its debt may be forced to take a loss on their debt claims. In the context of corporate borrowers, it’s the statutory domestic bankruptcy regime of the relevant country or countries that provides legal authorization for this. In the sovereign context, there obviously is no international bankruptcy regime, but to conclude from that absence that the claims held by a small minority of creditors that hold out from a broadly supported restructuring following a real financial crisis are inviolable and must be
paid in full when everyone else has accepted a haircut is logically and legally absurd.”
“The systemic implications of this are obvious. If equity between similarly situated private creditors is not honored, the existing system for resolving sovereign debt crises, premised on [the] principle of inter-creditor equity, could be threatened. No creditor wants to take a loss in the event of a sovereign financial crisis, but when there is no alternative, why would any creditor agree to take a loss if that creditor knows that another creditor might hold out and collect in full on the claim?”
“In the absence of an international bankruptcy regime, there has to be collective action. I think it is progress that this basic logic is acknowledged explicitly in collective action clauses, but collective action clauses are not the beginning of the story and they’re not the end of the story either.”
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“Effective payment capacity was the main driver [for Argentina’s debt restructuring]. If debt restructurings are done in an unsustainable fashion, further restructurings will come down the line. So the idea was to place effective payment capacity as the main bedrock for the debt swap so as […] to generate growth that could later on generate payment capacity creating a virtuous cycle between growth and debt […]”
“In the case of Argentina, what happened is that you had a big overload of debt that actually collapsed and generated the default. So, the event of having a default versus performing debt restructuring makes it, in a way, different from performing vis-à-vis performing debt restructuring in that the nature of the elements is different.”
“Argentina’s debt swap has a feature in which if you grow more than a base case, you basically share the benefit of that growth with your creditors. So, we have an instrument called GDP-linked unit, which is sometimes studied thoroughly in the financial press, which gives the creditors the right to benefit from better-than-expected growth […]”
“[…] the vulture funds represent an infinitesimally small amount of the defaulted debt.
Their aim is to be treated unequally and disrupt the flowing of payments to the grand mass of 93% who have participated in the exchanges. […] holdouts are holding on to a situation in which they’re willing to affect the free flow of payments, the functioning of the international financial architecture, and ultimately the right of the 93% to have their debt serviced.”
“Just for reference, many bondholders within the 93% who accepted the debt swap are U.S. citizens or
U.S. institutions including workers, pension or state retirement funds, employee funds or teachers’ unions […] There are many holders among that 93%, which are, in a way, more U.S. than some of the vulture funds who are often domiciled offshore to avoid paying taxes in the U.S.”
“One thing that, I think, is important is that Argentina has never repudiated debt. It has never repudiated neither the 100% nor the holders of debt on any debt. In fact, the commitment of Argentina is to treat all holders equally, including the litigants vulture funds.”
“Argentina has been very open about willing to secure the same treatment to any holder of defaulted debt, including that 7% […] including the very active vulture funds, so that they have the same treatment that everyone else has had […]”
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“We believe this ruling (NML vs Argentina case), if allowed to stay, will have negative consequences in at least three respects: for the poorest and vulnerable in countries going through debt crisis in the future, for the international financial system, this is not a minor point when the short- and medium-term prospects of the global economy are so uncertain, and for U.S. foreign policy. I worry that if it stands, such ruling would have consequences that go far beyond the particular case of Argentina.”
“A ruling that upholds that in a sovereign debt restructuring, debt holders that chose not to participate in the deal have a right to recover the full amount plus interest of the debt would make it very hard for debtors going through similar problems in the future to
restructure their sovereign debt in successful, timely and orderly fashion. It is already extraordinarily difficult for any country facing a debt crisis to achieve a restructuring of debt in conditions that allow such a country to normalize the economy and restart growth.”
“The impacts that we also worry about are the negative consequences for the fluid functioning of the international financial system and sovereign debt markets that this decision would have. This is something we cannot risk at a moment like the present when the global economy is still so shaky. With debt levels in advanced countries at their highest peak in peacetime and several emerging markets also showing worrying signs of growing debt levels, we cannot rule out that more countries will find themselves in a situation of debt distress. Given the lack of incentives for creditors to support debt restructuring that would come as a result of a Court decision in favor of the holdouts, the situation of chaos, uncertainty and contagion that typically accompanies a sovereign debt crisis will risk being far more prolonged, and potentially bring the global economy to a sudden stop. I know this sounds perhaps too dramatic, but just think of Greece, a relatively small economy, and what its debt difficulties did to the whole European Union, and how that affected the rest of the world. Imagine that an economy just a bit larger than Greece (and I don’t want to name any in particular) was to find itself facing severe liquidity or solvency issues, and unable to achieve a needed restructuring in timely and efficient fashion."
“[…] regardless of whether we agree or not with collective action process as a way to go
[…] it is a fact that if the 2 nd Circuit Court’s decision is allowed to stand, contractually based debt restructuring solutions such as relying on collective action process will become so impractical that current U.S. doctrine on the matter will become no longer tenable […].”
“[…] prominent economists have warned that if the 2 nd Circuit Court’s interpretation stays, this will significantly discredit the use of New York as a jurisdiction of choice for sovereign debt issuance, […] or even the denomination of debt in U.S. dollars, in order to avoid the payment having to go through the U.S. banking system at all. I doubt it will be consistent with current U.S. foreign economic policy to scare investors away from relying on U.S. jurisdictions of financial centers or reduce the use of the U.S. dollar in sovereign debt transactions.”
“If Argentina were to settle, […] what will the other bondholders say if Argentina is willing to pay 100% to a small minority? […] what sort of re-litigation could happen of claims, especially when you have a situation where there are many avenues actually open to bondholders these days?”
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fi
Embassy of Argentina
Washington, D.C.
Ministry of
Foreign A ff airs and Worship
Argentine Republic