S.&P. Says Argentina Has Defaulted | Hacker News Reader

S.&P. Says Argentina Has Defaulted

dealbook.nytimes.com

134 pointsAshan188 comments

Brazil and Argentina had very similar economic plans to get out of hyperinflation from the 80's - both created a new currency whose value was attached to the USD.

There was a subtle difference: Brazil forbade domestic contracts in dollar (with a few exceptions, mainly leasing contracts for imported vehicles). So when the market forces kicked in and Brazil was forced to devalue its artificially priced new currency, the impact was not that big.

In Argentina, most contracts were underwritten in dollars, so the government delayed devaluation as much as possible. As the result, when it finally adjusted the exchange rate to more realistic values, the guy who bought one home was bound to pay 3 or 4. The government solution was the first default (by passing a law saying you could pay these contracts with a huge discount). This is why they are in this mess, some creditors are fighting to receive the full value.

Also, Brazilian Real was born to be around 1:1 with USD, but the exchange rate was never fixed, it floated from day one. Argentinian coin (don't remember the name) was 1:1 by force, which made the delay even more catastrophic.

> Argentinian coin

Argentinian Peso. Before that it was Austral.

and before austral it was peso

It was fixed from 1994 to 1998 if I remember correctly, it became floating after the Asiatic crisis.

> Brazil forbade domestic contracts in dollar (with a few exceptions, mainly leasing contracts for imported vehicles).

This is an interesting and often overlooked aspect of monetary policy in the US.

In the US, we are used to the dollar being the single currency domestically for virtually all domestic transactions, and even used to it being used abroad (which extends our purchasing power greatly) as well as in most black market transactions (which essentially acts as a free loan to the government).

It makes monetary policy changes that much more effective, because there is no other currency to compete with directly (not by fiat, as in Argentina, but by custom).

If alternative currencies like Bitcoin take off, the US government will have a very strong incentive to regulate them directly or manipulate them indirectly, because their very presence and widespread use would weaken the ability of the government to use monetary policy as an economic tool.

Can you (or someone) explain how black market transactions in USD act as a free loan to the US government? This isn't intuitive to me.

Anytime a dollar is printed, the person who receives the physical dollar bill is a creditor to the US government. The government is in debt to the holder of the bill, just as they would be in debt to a purchaser of a government bond.

This is why counterfeit money is so bad - it's literally forging a debt of the government that never existed (essentially forging the government's name on a contract that says "I promise to pay the holder of this note $1" when they never did).

Anytime a dollar bill is inadvertently destroyed, this is equivalent to the creditor forgiving the government's debt. This is a form of seigniorage[0][1].

The USD is the currency of choice for many black market transactions across the world. These transactions are usually conducted in cash, and the cash is oftentimes stockpiled (kept in cash instead of deposited into banks) or used for other black market transactions. In many cases, very little (if any) makes its way back into the domestic legal market.

"Free loan" is a little hyperbolic, but it's a way of saying that the US has a number of overseas creditors who are unlikely to either demand that the US make good on its debt or sell that debt to someone who will. It increases the demand for USD internationally, which allows the US to print more USD[2] without any (or most) of the normal consequences of issuing debt.

There's a body of academic literature that goes into the impact of black market transactions on monetary policy. I'm running out the door so I can't look for it, but if you're interested it should be easy to find (though a lot of it may be paywalled by JSTOR and the like).

[0] https://en.wikipedia.org/wiki/Seignorage

[2] Sidenote, but this is why protests in which people burn dollar bills (OccupyWallStreet was one, though there are others) are so ironic - they're simply giving free money to the government, which is someties the exact opposite of what they are trying to convey with the protest.

[2] Here I use the term "print" both figuratively and literally, unlike before

Thanks to both of you for your explanations. I think I'm beginning to understand it, though it I find it far more comprehensible when considered in the context of a gold-backed dollar than fiat.

Right, it makes more sense in the world of a 'backed dollar'.

As it is, it is a debt to repay $1 for each $1 bill. You might well ask, $1 of what? Since the government doesn't produce anything, it is a strange kind of debt.

$1 of tax-forgiveness is one answer. $1 of whatever our citizens produce is another answer. This 2nd answer is the reason why the demise of the dollar as the world currency (aka wealth reserve function) could lead to hyperinflation in the USA as all those foreign-held dollars come flooding back, looking for something domestic to buy.

As long as the dollar is legal tender within the USA, foreign "creditors" (in the sense used in the above comments) can always get something back (however debased in value).

If like Brazil and Argentina, the USA defaults and creates a new currency (it'll never happen, right?) then good luck to all the drug-dealers of the world trying to cash in their old greenbacks.

<edit: phrasing!>

In many ways cash dollars behave like US government bonds with zero coupon - their effects on the money supply are similar. The government can print dollars in place of issuing bonds or vice versa, and the economic constraints that cause it not to print an infinite number of dollars are the same constraints that cause it not to issue an infinite amount of bonds (modulo silly political things like the debt ceiling). So when you accept a dollar in return for valuable goods you're in some sense making a free loan to the USG (probably via several intermediaries) - you gave up something valuable, and got a promise for future repayment.

Well, I'm not convinced a Bitcoin lending facility could really scale into any kind of inter-bank system that handles a fraction of the volume of our current system (since monetary policy works on lending channels).

This is badly wrong.

Brazil's plan wasn't to create "a currency with value attached to dollar", nor it was Argentina's plan.

Argentina made a currency board, a regime in which the central bank could only emit 1 peso more if 1 dollar more entered the country (and reached the central bank's vault).

In Brazil, Argentina's plan was called "dolarization" and was dropped by André Lara Resende, Persio Arida and Edmar Bacha when they were thinking about the brazilian plan, Plano Real.

In fact, what Brazil did was only to control government costs, stop printing money and stop the indexation of prices and contracts by creating a virtual currency whose value changed every day in the rate of inflation (so all things could be priced in this virtual currency, whose nominal value was fixed). After that, that virtual currency became real, was printed and called the Real, becoming the new brazilian currency.

The Real had no need of dollar indexation to succeed, and its price in dollars wasn't fixed at all, the brazilian central bank only made a promise to keep its price in parity, with open-market operations, for some time, to boost confidence, then it would let the price fluctuate. This was stated and clear from the beggining of the plan's implementation.

It was way oversimplified, but I was not trying to write a PHD dissertation on economics. :-)

Both plans were perceived by the laymen as a new currency worth 1 dollar and that helped stopping the inertial indexation of their economies (there! somebody from a stable economy will hardly understand what indexation was like).

To understand background and potential implication, I found http://dealbook.nytimes.com/2014/07/30/q-a-whats-behind-the-... helpful.

> Argentina issued bonds under New York law.

Until I read this, I assumed that international bonds were issued under international law, with the World Bank as the arbitrator. With the US as both lender and arbitrator, it seems to give them a lot of power.

Yeah, that's very much not what the World Bank is about.

Well, I hadn't given it much thought. I just assumed that some international body (WTO, IMF, UN) would resolve disputes like this.

You're both partly right: http://en.wikipedia.org/wiki/International_Centre_for_Settle...

The World Bank itself gives loans, advice, and research. But there are a large number of semi-associated agencies, under their own treaties, that do other things, such as settling investment disputes. But it's important to note, as rayiner said elsewhere, that contracts are private law, and you get to choose how to settle disputes unless some public policy decides otherwise.

I am not a lawyer.

My understanding of this type of clause is not that it makes New York the arbitrator, but rather clarifies for whoever does arbitrate that New York laws should be used. This seems important when working across national (or state) boundries do prevent ambiguity as to what set of laws is being used.

I suspect that it is simmilar to copying the relevent laws into a contract and signing that, which is to say that local laws still apply.

>My understanding of this type of clause is not that it makes New York the arbitrator, but rather clarifies for whoever does arbitrate that New York laws should be used.

I agree, but it would make sense, then that since the New York legal system is the final interpreter of New York law, then that would be where lawsuits would go.

Not necessarily. It just means that whatever court does hear the case will apply New York law to it, because those are the rules the contracting parties have agreed to use, whether that court be in New York, California, or Scotland.

Having the case actually heard in NY simplifies the application of NY law, but it's probably more for convenience: the parties know that if they have to litigate, they don't need to find new attorney's at some random location.

I'm not sure but I bet that a country can issue bonds under any law it wants. It's just more likely to get people to buy bonds if they are under New York law (as opposed to say Argentinian law, where foreign bondholders would hold no sway).

In a transaction like this one, the parties get to choose the law that applies. Indeed, they are free to choose privately-formulated law and have the disputes resolved by private arbitration organizations (there are several examples of each). That said, it is quite popular to choose New York law to govern international transactions, and litigate issues in New York courts, even when the transactions have nothing to do with New York. That's because New York law is well understood, there is a deep body of precedent involving sophisticated financial transactions, and the courts have a lot of experience resolving financial disputes.

Likely, the bonds cost a little bit less if they're in a jurisdiction where it's going to be relatively easy, straightforward and fair to sort things out in the event things go wrong.

It's more like, if you keep defaulting on bonds by saying you don't have to pay them because you changed the rules, eventually no on will buy them unless you let someone else set the rules.

That's what it would be like if this were anything but a holdup. The US government is intervening in the market and preventing bondholders who have agreed on a change in rules from receiving their bond payments, rather than letting the market set the prices. That's the opposite of what you describe here.

edit: What I'm saying is only crazy within the bubble of this thread. It's also the opinion of the US government and the American Bankers Association.

http://www.bloomberg.com/news/2013-01-04/bankers-group-suppo...

"'Permitting injunctions against these trustees that preclude them fulfilling their pre-existing obligations whenever expedient to enforce a judgment against the debtor will have significantly adverse consequences for the financial system,' the ABA said in its brief."

http://www.reuters.com/article/2012/12/13/argentina-debt-usa...

"U.S. government lawyers reiterated their position that the court's interpretation of the 'equal treatment' clause in Argentina's defaulted bonds 'may adversely affect future voluntary sovereign debt restructurings, the stability of international financial markets, and the repayment of loans extended by international financial institutions.'"

I can see both sides here. What surprised me is not that a judge has decided, but that a US judge has decided. It looks like an American judge decided in an American corporation's favour, and against a poorer country, to hell with the damage it will do the world's economy.

On the other hand, if the US doesn't uphold the law, then the world economy would be damaged because lending would become more unpredictable.

As it stands, though, it's easy to portray this as the US bullying Argentina in the interests of a small group of rich American citizens who behave like loan sharks. It just seems like it would be better to have an international body of law under which all international lending takes place, and when there is a dispute, a judge is chosen from an independent third party. Is there any serious effort to make that happen? I have no idea.

I just edited my comment to double down due to downvotes, but this ruling will ultimately damage the US more than Argentina. If we establish that it will be impossible to restructure debt if you issue your bonds in the US, we've established that there's no reason to issue your bonds in the US.

edit: it's important to keep in mind that 93% of bondholders have agreed to the restructuring. The courts look like they're saying that the decision must be unanimous. That's completely unworkable.

I actually downvoted you because the world `holdup` made it sound a bit inflammatory. Having read the links, I see where you're coming from, and changed to an upvote. This is certainly one of those topics that sensationalists will try to reduce to easy answers, when it's clear there aren't any.

http://www.cepr.net/index.php/blogs/the-americas-blog/argent...

Here's another link.

edit: and another - http://www.forbes.com/sites/realspin/2013/12/19/the-real-fac...

> Having read the links, I see where you're coming from, and changed to an upvote.

How do you change a vote on HN? Any time I upvote or downvote, both arrows disappear, so I always assumed they were permanent.

Good point. I thought I did - perhaps I'm thinking I'm on StackOverflow. I thought I clicked 'back' so the arrows were there. I don't remember. Even if I haven't actually changed it to an upvote, then it deserves it.

It doesn't matter:) I've got plenty of internet points; I just appreciate your thoughtful replies.

It's a difficult situation because a lot of these bonds have been resold at a steep discount. Someone who paid ten cents on the dollar for a bond has much different financial incentives than I may have as an original buyer... should the fact that there are more of them mean they can screw me over?

Why should the price I paid for the bond give me different incentives? It's only the future cash flows scenarios which are relevant to my decision-making. What I paid is a sunk cost, and doesn't affect my possible actions or payoffs in the future.

(I'm assuming that I wasn't bankrupted due to the price I paid, and that I am a professional investor rather than an emotional gambler)

Well, not passing judgement for or against, but these holdouts _also_ bought the bonds at less than face value.

There _is_ reason to issue your bonds in the US (e.g. governed by New York law). Investors trust that the bond contract will be honoured because, if not, it's likely to be enforced by the courts.

Well no, if we estabilish what you say, then we've only found out that US jurisdiction is friendly to creditors and less friendly to debtors, and nothing else.

It doesn't mean that there's no reason to issue your bonds in the US, on the contrary - it means that if you have a debt-reputation problem but feel safe in your ability to repay, then you'll want to issue your bonds in US to 'put your money where your mouth is' and get a better price. Or, in cases like Argentina, the potential investors will say 'either US jurisdiction or no deal'.

Judge Griesa decision shouldn't be solomonic. He decides based on a contract. His role is not to favour one part or the other.The percentage of bondholder that accepted the restructuring is irrelevant. Also, something that is not usually mentioned is that an appeals court upheld the judge's decision.

>I just edited my comment to double down due to downvotes, but this ruling will ultimately damage the US more than Argentina. If we establish that it will be impossible to restructure debt if you issue your bonds in the US, we've established that there's no reason to issue your bonds in the US.

Every country in the world knows that it is going to be easier to restructure if you issue bonds under local law. No one selects New York law for its bonds out of some naive inertia. Argentina specifically went out of its way to select New York law and deliberately put in a pari passu clause because it had a history of defaulting on debt, and it thought it wouldn't be able to raise money, or at least not at the same rate, if it issued bonds under local law.

I can't think of any possible reason to relieve a country of obligations that were deliberately and knowingly undertaken to tie its own hands in order to make its debt more credible.

If you want collective action on restructured debt put in a collective action clause. If you want a sweetheart interpretation of your debt clauses issue it under local law. Every country that is issuing debt knows these things, they aren't rocket science. The reason they sometimes choose not to is because they want to pay a lower coupon and/or be sure that the whole issue will be purchased.

A portion of the bondholders who had renegotiated their debts are from the US too, and are now wondering what's going to happen.

I'm wondering along with them. Is there any question that this will nullify their agreements and force Argentina to pay them in full also, or were the restructuring agreements written well enough to prevent that?

I have no idea - I wish I knew more about the details.

edit: it's conceivable that Argentina could blink and pay the vultures off, but if they're then liable for all of the debt (which they can't pay) that means that this is going to be a full default, and nobody's getting a dime, right?

So is there any way that, if Argentina completely defaults, the 93% who have agreed the restructured payments can sue the 7% who haven't? Can S&P's opinion just be ignored while Argentina renegotiates with 100% of them? Can this still end up in international arbitration?

I don't see any grounds for what "93% who have agreed the restructured payments can sue the 7% who haven't" - what claim do you see there?

The 7% don't seem to have done anything illegal (obtaining and enforcing a court judgment usually isn't), nor they have any agreements or liabilities towards the 93%, they're not obligated to act in the interests of those 93% when negotiating - even if they'd say "ahh we just did it out of spite to screw you guys, trololol" then it's within their rights to do so.

I doubt also that S&P opinion would be ignored - there are overdue payments that aren't being paid, they're simply acknowledging that fact.

> I don't see any grounds for what "93% who have agreed the restructured payments can sue the 7% who haven't" - what claim do you see there?

I don't know whether I see a claim, but I wondered whether a clever lawyer would. Reading around, I'm positing ideas for what might happen next.

Thanks for the links, btw - interesting to see the complexity involved here.

They can not like it all they want, the judge enforced the law. Since there was no clause to force restructuring in the original bonds and there was a clause to prevent any bond holders from getting a better deal then the restructured bonds, Argentina was left with no option but to pay the original debt. The issue is entirely one of their making.

The judge didn't enforce the law, the judge interpreted the law, and could have just as easily interpreted it in a way that you didn't agree with.

It turns out that is what judges do. When there is a disagreement about the terms of a contract a judge or jury has to decide what to do.

These restructured bonds (on which the judge is preventing payment) weren't 'pre-existing agreements' as claimed by the statement you quoted. They were agreements made _after_ the original bonds had been issued and after the government had defaulted on those bonds.

The equal treatment thing being enforced by the court is something Argentina specifically put into the bond contracts, no? Why should we expect the court not to enforce this condition? (I haven't read the contracts, so am only going from memory of what I've read elsewhere.)

Also see

http://dealbook.nytimes.com/2014/07/30/in-hedge-fund-argenti...

"The hedge fund firm of billionaire Paul E. Singer has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, into a position where it now has to contemplate a humbling surrender."

"Argentina on Wednesday failed to make scheduled payments on its government bonds. The country has the money to pay the bonds. But a federal court in Manhattan has ruled that unless Argentina settles its debt dispute with Mr. Singer’s firm, Elliott Management, it is barred from paying its main bondholders." (...)

"“We’ve had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system,” said Joseph E. Stiglitz, the economist and professor at Columbia University. “We don’t know how big the explosion will be — and it’s not just about Argentina.”" (...)

"It is legally challenging for American investors to sue foreign governments in United States courts. But in 2012, Elliott achieved a stunning breakthrough in the Federal District Court in Manhattan. Judge Thomas P. Griesa ruled that whenever Argentina paid the exchange bonds, it also had to pay the holdouts. Argentina could not ignore the ruling and pay the exchange bondholders because Judge Griesa also ruled that any financial firm that distributed payments to the bondholders would be in contempt. Argentina placed $539 million with the Bank of New York Mellon in June to pay its bondholders, but the bank did not transfer it."

With all due respect, these arguments belie the law.

If this were a case of leders screwing over the people by having governments re-write laws (see: student loans) perhaps more sympathy would be in order.

This is a case where the borrowers have tried to disregard US law, in its entirety.

In that respect, I'm not sure there is anything bad to imply about the hedge funds who simply made bets on the integrity of US Law.

The president of Argentina obviously has her own view and interest at stake, as well.

You're wrong. Elliott didn't give Argentina anything that it wants returned. The company just waited for the moment to buy bonds for almost nothing from the real creditors with the bet "if we get it on court, we win big, if we lose, we lose a little."

From the same article:

"Legal filings indicate that the face value of its Argentine government bonds was around $170 million, but the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than $1.5 billion, which includes years of unpaid interest."

Elliott just blackmails Argentina to extract many times more than it would otherwise be reasonable (without the blackmail condition).

Everybody involved in the 2001 default knew this was going to happen. And it can even be said that Argentina didn’t plan to pay what they promised from the beginning, although I cannot attest to it.

One detail I want to add to the discussion is that in the past few years the global panorama changed for Argentina, they sit on top of the second largest shale gas reserve in the world, and plan to extract it. They need money to start working and suddenly felt the urge to settle this issue.

Known fact: There is the Argentinean way of doing things, not straightforward, which is why talking about the bondholders like victims sounds naïve. They saw they might get their money now, and with Argentina’s shell gas urge probably felt the call to make more.

To me there is a larger scope, take a look at tech companies like Google and Facebook, they placed their head regional offices in Argentina. Both companies knew well in advance that the political and judicial system in Argentina is completely corrupt but still decided to direct their regional efforts from Buenos Aires. Why would anyone place offices in Argentina, when there is Chile, Perú or Colombia, countries that have greater political, social and economic stability, extremely better infrastructure, better weather and even tastier food.

I could be going paranoid but I believe it is simple; it looks like the big guys like to get in bed with the naughty ones, rather than the honest and better-behaved gals around the corner. This makes sense to me, after all, the bigger the risk the greater the possible reward.

The country is extremely wealthy, but that wealth is not getting to everyone (not that uncommon), and maybe that’s why the demonization of the international monetary funds has so much appeal locally. The certainty is that by the end of this story, it will be the Argentinean people who will be paying for this.

Colombia is in what could be called a civil war without exaggerating too much, it's not like a FARC like organization controls large swath of Argentina. Why do you call Colombia more stable?

You are right, things have changed in Colombia, but might be too early to say it is more stable

Chile is more stable, Colombia has better weather and Perú has tastier food.

Chile also has better weather, though I agree that Perú has tastier food.

I enjoyed summer weather in Chile and it is fantastic, but right now it is winter, and I've heard winter is something my Colombian skin could not survive.

Summer depends how far south you go. e.g. Chiloe is cold in January.

This is how much money has been spent lobbying US officials in order to make this happen.

http://www.opensecrets.org/lobby/clientsum.php?id=D000047065...

edit: I summed the years and got $5.3 million since 2007. The UI doesn't seem to help you sum at all.

edit2: http://www.cepr.net/index.php/blogs/the-americas-blog/nnfarm...

excerpt from WSJ article included:

"Mr. Matlack is president of American Agriculture Movement, a farmers' advocacy group that was listed among about 40 members of American Task Force Argentina, whose stated mission is to help investors recoup money from Argentina's 2001 bond default and subsequent restructuring.

"But Mr. Matlack and some leaders of other groups representing ranchers, teachers and farmers, are baffled about why the task force listed their organizations as members 'united for a just and fair reconciliation' of Argentina's default.

"Reached while he was planting wheat on his farm, Mr. Matlack said he had never heard of American Task Force Argentina. 'We don't have anything to do with Argentina's debt,' he said.

"Also perplexed are leaders of the Colorado conference of the American Association of University Professors, which was listed under members and supporters. 'This is absolutely foreign to me,' says Ray Hogler, legislative director of the academic group.

"Both groups were dropped from the list after the Wall Street Journal alerted the task force to the discrepancies."

Is there a group representing the 93% who accepted the restructuring?

In the context of a sovereign debt default, this is trivial.

The worst thing about living in Uruguay is being right next to Them. Now this happens, and we're going to get the fallout.

And here we thought you were going to say that the worst thing about living in Uruguay was the rampant nationalism between Uruguayans and Argentinians..

Maybe Messi can chip in, i hear he has some dollars stashed for a rainy day: http://www.bbc.com/news/world-europe-22877408

I don't see how this adds to the conversation. Also, Argentina and Uruguay have similar racial composition & as far as I can tell see themselves as the same people of the Rio Plata.

I've visited Uruguay, and on one trip when I told my hosts I planned to go over to Buenos Aires for a day, they said I shouldn't go because "the people there are on crack" and I would get kidnapped. I'm pretty sure there's a significant nationalism (you're right, not racism) problem, which the capitalization of "Them" in the post I replied to felt evocative of.

Not to bring too many facts into the discussion, but Uruguay and Argentina dont have similar racial composition:

http://www.indexmundi.com/uruguay/demographics_profile.html http://www.indexmundi.com/argentina/demographics_profile.htm...

Uruguay have 12% non-white, Argentina only 3%

That's not what I would call "similar".

Sorry, I should have been clearer: they are predominantly white. When I was last in each country, I didn't get any real sense of deep hatred of each other. Though there was some seemingly good natured ribbing about who was better at e.g. asado.

right on.. i grew up in Argentina. and yes there's a rivalry, predominantly friendly, among things like asado, futbol, mate, etc. :) and yes, between arg/uru/bra people are very friendly with each other as long as it doesn't involve futbol ;-)

It's so friendly that Uruguayans and Argentines don't identify the other as foreign. Uruguayans didn't want to be their own country when their started their independence war, it was an attempt to not be part of Spain or Brazil and to be joined with what would become Argentina. It was the British who decided Uruguay would be an independent country. Since then in the last 200 years, they've developed somewhat distinct institutions and cultures. It's similar to the relationship between the US and Canada.

You can also use this link if you want to see how the countries compare side by side: http://www.indexmundi.com/factbook/compare/argentina.uruguay...

I think it's a matter of definitions. Demographically the countries are actually more similar, there is just differences in how people identify. The biggest difference between the two countries and cultures is Uruguayans are secular both in personal culture and with regard to the state. Where as Argentines are Catholic. There's also a big difference in political culture, structures of political parties and faith in institutions. Uruguay has much less corruption.

Guys, don't fight here.

Also, everybody knows the best thing from Argentina is Uruguay (or "how to piss off argentinians and uruguayans in one sentence").

I don't know why this is being down voted, take a look at what happened in the year 2001, we're terribly dependent on them (thought we're trying not to), this news scares the hell out of me since I don't want it to happen again, last crisis was terrible for us too.

Uruguay is completely dependent on Argentina, in both good times and bad times.

Well, Chile is being in the left, and does not have any problem. Your argument is not very strong.

In true, Uruguay has it owns problems.

Chile is separated from Argentina by 'the Great Wall of Chile' - the Andes mountains - and unlike Uruguay, has an economy dominated by mineral resource extraction to China and the United States, not agricultural exports to its immediate neighbors.

It's not the same situation at all; context matters.

I don't understand why S&Ps rating matters, except for in the cases of US state or federal investments where some of the ratings agencies have been written into statute. Everybody is as familiar with the Argentinian situation and how it has developed as S&P is, and they have the ability to make their own judgements about whether they want to buy Argentinean bonds.

The danger to Argentina is that the US government has declared that they're holding hostage the bond payments that Argentina has agreed to and wishes to make.

> I don't understand why S&Ps rating matters

Because it's part of many private contracts and financial products. (E.g. 'in case the S&P rating of entity X drops below Z, then [...]').

Thanks. Is this generally something that's written in to qualify for doing business with the state, or something that private investors look for?

Both. A lot of large institutional investors (like pension funds) have statutory limits on the percentage of the portfolio that can be allocated to riskier investments. Risk is sometimes defined by the S&P rating.

The background behind the rating agencies is that there are thousands or even millions of investment portfolios out there, with many of them fulfilling very important risk management functions. Pension funds, health insurance, all other forms of insurance, Banks, even many big companies who aren't technically in the finance industry.

Most of them need some form of "low yield safe investment". But it is hard to define what is safe. That's where rating agencies come in. An insurance can promise to abide by such an agency, and that removes a lot of oportunity for bad judgement on the part of individual fund managers.

You may argue whether these agencies are doing a good job at this, but most proposals to get to a better system involve some way of increasing the power of governments or individual fund managers.

I didn't realize how common that was outside of government. Thanks.

>You may argue whether these agencies are doing a good job at this, but most proposals to get to a better system involve some way of increasing the power of governments or individual fund managers.

Ratings agencies are unaccountable private entities. Every time they are challenged they invoke the 1st amendment - i.e. their right to lie. Yet the law enshrines their privilege through regulation of investments (which are forced to rely upon their opinions).

There's absolutely no way the government would be any worse. They are at least accountable to their citizens via voting. Ratings agencies are accountable to nobody.

They've also used their weight to bully, too. S&P downgraded the US even though it made absolutely no sense because there were moves made to prosecute them for mis-rating CDOs before the credit crisis.

I wonder what highly esteemed economics expert Paul Krugman thinks about this.

http://krugman.blogs.nytimes.com/2012/05/03/down-argentina-w...

I don't usually upvote sarcasm, and I'm not even sure if that is sarcasm, but regardless, I don't understand this statement.

> But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged? Actually, we know why — but it doesn’t speak well for the state of economics reporting.

What is it that we know? Why is, in Krugman's mind, Argentina always being disparaged?

Because they already defaulted in 2001 and got into a spat with the IMF and various investors from western nations who tried to capitalize on their misfortune.

In Krugman's mind, Argentina is disparaged because they don't really want to be part of the western "system" of investment in the national resources of South American nations by developed powers.

I know conservatives don't like Krugman, but the man didn't win a Nobel for nothing, and linking a two year old article is simply misleading.

So in the coming days we'll be hearing a lot more about 'Las Malvinas' and how Britain is an evil colonial power and stole the islands?

That usually seems to be what happens when Argentina has internal problems that need to be distracted from.

Rather off topic - I watched the World Cup Final in a large crowd at a German owned resort in Turkey, with a lot of Germans, English, Turks and a handful of Scots (us).

Everyone supported Germany apart from the English who supported Argentina - which rather surprised me :-)

Probably has more to do with how Brits feel about Germany than Argentina

Argentina should never have handled the bonds under NY law and without control of the bondholder's list. That mistake is costing them dearly.

The only reason they can't pay everyone but the holdouts [e.g. selective default] is because of the fact they handled them under NY law after the 2001 default. :/

With their economic history, they would have had a much harder time issuing the bonds elsewhere.

Yes but at this point they are still being screwed over because of a decision made in 2001 and so they are getting hit multiple times with the "untrustworthy borrower bat" instead of just once. For a single incident.

If they hadn't ceded the legal control to NY law, then they either wouldn't have gotten the money they wanted, or at the very least had a much higher interest for it.

That's the whole point - if you're a trustworthy borrower, then you can get money on decent terms; but if you're like Argentina then every lender needs all the protection they can get, to try to prevent cases like this one.

The point is, they are getting hit multiple times with the "untrustworthy borrower bat" for a single incident in 2001 and are now being forced to screw all of their borrowers and not just the ones who refused to play ball in 2001. Because NY law.

That is like saying "Oh, you can pay none of your debts until you pay the ones you defaulted on already in 2001."

Nope.jpg.

That is f'ed up.

They defaulted in 2001. You don't get to come back and say "Oh, but you have to pay us anyway or we will not let you pay the debts since then either."

EDIT: I'm amused by the downvotes given that is how bankruptcy law works most places. You default one time. The zombie borrowers don't get to come back later and demand money later, enforced by the courts.

The reason that they can demand money is that those bonds have a requirement that Argentina will pay all bondholders equally - even if they pay x% of it, then they have to pay every bondholder x%, instead of paying some bondholders more and some less or nothing.

Now Argentina is paying money to some of those old bondholders according to the restructured debt that Argentina itself agreed to. However, all other bondholders - including some that Argentina dislikes and doesn't want to pay - have a valid claim on that money, according to that initial rule. That's it.

Argentina can pay noone (as per a default). Argentina can pay all the bondholders equally. But it's not allowed to choose which bonds to pay and which not to pay.

> However, all other bondholders - including some that Argentina dislikes and doesn't want to pay - have a valid claim on that money, according to that initial rule. That's it.

That isn't it. Those "bondholders Argetina dislikes" are asking for more money than the rest and are demanding the full value for bonds that all the other bondholders agreed to take a haircut on in 2001.

You don't get to go back and demand full value on debt that was restructured for everyone else. That is like if I declared bankruptcy and one of my credit card companies held out for full payment on the debt when all the others had already signed off on X% of the debt.

That credit card company wouldn't be able to do it but these bondholders can because they found the right judge.

Argentina issued the bonds on explicit terms that it will be okay to hold out on a haircut - Argentina agreed that even if 93% agree on restructuring, then it's not binding to others and they can demand full value.

Argentina issued the bonds on explicit terms that it will pay everyone equally - even if they agree or refuse some future deal. Argentina dislikes them from not agreeing to it, but that's it - only a dislike that doesn't give any rights to pay them differently than others; they didn't have to agree to the haircut, so it's within their rights to demand to be paid whenever the others get paid.

For your CC example - yes, it would likely be different in personal bankruptcy, but that's not relevant because personal bankruptcy intentionally gives much more protection than sovereign bonds, the rules are quite different there. And sovereign defaults don't wipe you as clean like a personal bankruptcy does in many western countries - and there are jurisdictions where you don't get personal bankruptcy, and you keep the debts until you die. And in some places, even after that - the debt transfers to the heirs.

I think the issue is, I disagree with the morality of the bondholder's cause and the negative impact it creates on other bondholders.

You don't seem to realize that is why I'm complaining. >.>

Yes, yes can, especially when the bond says you can. A bond is a legal contract binding the debtor and the creditor.

That credit card company wouldn't be able to do it but these bondholders can because they found the right judge.

It has nothing to do with the right judge and everything to do with Argentina seriously fucking up on the original bond issuance. One of the terms of the original bond was that minority bondholders could not be forced to accept renegotiated terms *even if the majority of bondholders had accepted new terms. One of the other terms of the original bond was that all bondholders would be paid back equally. It's the combination of the two terms which got Argentina in this mess. You generally don't see either of these terms in bonds, let alone both of them together, for precisely this reason--it restricts the debtor's ability to restructure the debt if things go south.

Debtors couldn't rely in the completely corrupt Argentinian judicial system.

And now none of the bondholders can be paid because a hedge fund shopped it around to the right judge. That is so much better.

What do you mean, "shopped it around to the right judge"?

Argentina agreed that any disputes would be according to the NY/USA law, and the matter went to those exact courts, appealed up to USA Supreme Court.

To what judge should the dispute have gone, in your opinion? Is there some important part of this dispute that I'm missing here?

Don't worry about it, the majority doesn't agree with me and arguing about it further is pointless.

A decent article on the mechanics of why these holdouts were able to force Argentina's hand: https://mises.org/daily/6825/Understanding-Argentinas-Coming...

Well, the recent Greek default seems to have been handled quite gracefully... (but of course, Greece is part of the EU zone, so there was a lot of help available)

http://www.economist.com/node/21550271

This is the second default in 13 years, with (as you mention) no strong regional bank to support them, and (most likely) in a country without the political willpower to push through reforms to prevent this kind of thing happening again.

From another article linked in the HN comments, it seems that this is really a finalization of the 2001 default. Argentina is not able to pay the (current) bond holders only because the courts won't let it do so.

Argentina is able to pay the current bondholders, it's simply choosing not to pay them because part of that money will go also to those bondholders Argentina dislikes.

In the story they said Argentina has transferred $500MM to pay bond holders, but the bank refuses to transfer it because the court ruled they could not selectively pay and any cooperating banks would be in contempt. Is there another layer to the story I'm missing?

That's the exact thing - they have the money to pay, but they have to give a proportion of that money to the holdout bondholders (the "not selective" part), and they refused to do that, despite all the negotiations.

Courts didn't rule that they can't pay, courts ruled that they can't ignore the other bondholders when paying.

[edit] A car analogy - if a court says you can't drive until you pay your parking fines, then it doesn't mean that you're maliciously completely prevented from driving, it simply means that you're compelled to pay the fine at last.

that makes sense

I'm very sorry for Argentinians - I've been there last year, visiting relatives (I'm from Italy, and my grand aunt moved to Argentina in the 50s - she was a bit over 20 - to escape an arranged marriage in Italy, and came back only in the 80s).

Argentina is a beautiful country, with problems that are very similar to the ones that we have in Italy - but different scenarios, and different economies.

I see this as an opportunity to consider adopting Bitcoin as a national currency, and stop being hostage of 1) banks, and 2) corrupt government officials. I don't know if it would work... But I hope so.

How would that work though? Would the government hand out smart phones to everyone, and offer classes on how to prevent accidentally deleting your life savings?

Correct me if I'm wrong, but Bitcoin requires you to go arround with a cellphone and internet 24/7 in order to make payments. That might be a thing in Buenos Aires but definitively not in the rest of the country.

Bitcoin as national currency might work 10 years from now in Sweden or Germany, but definitively not here.

Um. Ever heard of paper-wallets[0]?

[0]: https://en.bitcoin.it/wiki/Paper_wallet

Bitcoin would make these problems worse. The whole reason they got into this mess in the first place was by pegging their currency to the dollar, which meant they couldn't devalue the peso when they should have done for a long time; when the eventual reckoning came it was brutal. With bitcoin it would be much much worse, because you can't ever do that decoupling, and you wouldn't even get the US government doing writedowns like QE (which at least mean that in any global financial disaster, you've got a government doing approximately the appropriate things).

Then you just change the price in bitcoins: this was 0.005 bitcoins yesterday? well, today it will be 0.007.

Why does Argentina struggle so with these sorts of problems?

It seems like a country with enormous potential. Lots of resources, limited security threat, amazing climate.

Horrible judgement in political leadership seems to be one major problem.

Disclaimer: I'm from Argentina.

One batch of politicians and lobbyists sells the country for short-term gain. Later politicians inherit the problem, and maybe compound it with their own batch of mistakes. The "problem" in this particular case is a tiny group of foreign speculative capital creditors holding the whole country hostage. It has little to do with the country's potential.

Note these so-called "vulture funds" are doing what they do: acquire debt at low prices while a country's economy is down, then attempt to recoup it at disproportionate interest rates when the country's economy recovers. That they are attempting this now, if anything, is a sign Argentina's economy isn't in such a bad shape. The vulture funds aren't run by fools; they wouldn't attempt to extract money where there is none.

That they are attempting this now might also be a sign that they expect Argentina's economy to take a nose dive.

To the more knowledgeable people around: can this trigger a credit default swaps crisis? Are all the Argentina CDS bought in the last decade really known to the public?

Not really -- it's an event that has been expected for a while. CDS dominoes usually start falling when a significant AND unexpected event happens ('black swan'). Argentina in default is moderately significant but not unexpected.

In other words, sudden changes in valuations cause a problem. Their government bond valuations have slowly approached zero therefore there's no sudden jump. The value of the CDSs does not change suddenly when Argentina is formally considered default if everybody has expected that outcome.

Let's hope this doesn't precipitate that favoured bread and circuses smokescreen of Argentine politics, viz idiotic sabre-rattling over the Falklands.

This comment is naive. Our "sabre-rattling" over the Malvinas Islands was done during our vicious, murderous military dictatorship in the 70s/early 80s. We now have a democracy. Any dispute about the islands is done via diplomatic means (regardless of whether you believe the claim has merit, diplomacy is the only legitimate way to resolve it).

No sabre-rattling is possible. Don't confuse democratic Argentina with past dictatorship-ruled Argentina.

>Our "sabre-rattling" over the Malvinas Islands was done during our vicious, murderous military dictatorship in the 70s/early 80s.

http://www.theguardian.com/world/2014/jan/12/argentina-falkl...

http://www.theguardian.com/uk/2013/feb/05/falklands-under-ou...

That's absurd. "Sabre-rattling" means attempting to intimidate by displays of military power (or implied military power). See: http://dictionary.reference.com/browse/sabre-rattling?s=t&pa...

Both links you cited specifically rule out military intervention. Allow me to quote from your first link:

Quotes from your first link:

----

"Argentina will seek legal punishment, including prison sentences, for anyone who drills for oil in the Falklands and the surrounding waters it claims as its territories, the country's newly created Malvinas secretary has told the Guardian. [...] In his first interview with the international media since taking the post on Monday, Daniel Filmus also warned that companies involved in exploration of the disputed areas will be disqualified from potentially more lucrative work in Vaca Muerta (the giant shale oil deposit in Argentina's Patagonia region) and offshore areas.

"We will go to the international courts. It must be known that Argentina will defend its claim," Filmus told the Guardian at his office in the ministry of foreign affairs. "Whoever doesn't obtain authorisation will not only face administrative consequences but will also face prison sentences.""

----

You may or may not like Argentina's policies and position on the matter of the Malvinas, but all this is:

a- Not military posturing. b- Within legal bounds. See mentions of legal action, prison sentences, international courts. I don't see any threats of military aggression, do you?

So we can rule out sabre-rattling from your first link. Let's go on with your second link.

First sentence after the heading of second link:

----

"Argentinian foreign minister rules out military solution but says 'not one single country' supports UK right to govern islands"

----

So a military solution is ruled out then? I rest my case.

> Our "sabre-rattling" over the Malvinas Islands was done during our vicious, murderous military dictatorship in the 70s/early 80s.

No, it has continued as recently as this year (actually, its been on a notable upswing in the last couple of years, and a similar upswing happened, IIRC, in the early-to-mid-1990s.) Its true that it reached a fever pitch and an actual brief war with the UK in the time you describe, but the sabre rattling didn't end there.

By definition sabre-rattling means aggressive displays of power.

Argentina in democracy has continued to assert their sovereign rights over the Malvinas Islands via diplomatic means. You are fully entitled to believe the claim is invalid or wrong, but this that not make it sabre-rattling. Sabre-rattling is making veiled threats of invasion, suspicious missile tests, flybys by military aircraft, and in general any display of military power.

If by sabre-rattling you merely mean "Argentina continues to complain about the issue using strong language and tries to bring it to international courts", then that's a pretty misleading wording.

> By definition sabre-rattling means aggressive displays of power.

Which Argentina, particularly by way of its Navy, has been engaging throughout the 2010s over the Falkland Islands.

> Argentina in democracy has continued to assert their sovereign rights over the Malvinas Islands via diplomatic means.

Among other things, enforcing a de facto blockade using naval forces to prevent innocent passage of civilian vessels is -- as well as arguably a violation of the UN Convention on the Law of the Sea -- clear saber rattling, not "diplomatic means".

> You are fully entitled to believe the claim is invalid or wrong, but this that not make it sabre-rattling.

You are fully entitled to believe that the claim is valid or right, but that doesn't change the fact that the Kirchener government has been, for years, engaging in, alongside diplomatic efforts, saber rattling in regards to the Falkland Islands.

Wow ! Just one investor can bring a country to its knees !

These funds are like the patent trolls. The difference is that with patent trolls you are trapped in a inneficient patent system while in this case Argentina has a big part of the responsability in the way the government reestructured 93% of the debt.

Not exactly the same... patent trolls don't do anything, and more often than not their patents aren't really novel inventions.

These funds, however, lent Argentina money, while the country promised to pay back all of it, plus interest. I wouldn't like to get back less than I was promised, or even less than I lent in the first place.

As I understand this funds didn't lent Argentina anything, they bought the bonds in the open market at a huge discount.

Which is how debt collectors work.

The hedge fund guys are just debt sharks. They're contributing nothing of value to anyone - possibly not even to themselves, because it's not so unlikely there will be international fallout that massively damages their other holdings.

They're contributing nothing of value to anyone...

Except if they didn't exist, then bonds like those sold by the Argentine government would require higher interest rates, because the original buyer would have to assume the entire risk of default, rather than having the option to transfer part of that risk in the future. That'd be bad for national governments trying to raise funds at low cost.

Minor flaw in your point - it's even harder for governments to budget rationally when some shark buys up all their old debt on the cheap and tries to bankrupt them, because money.

I'm not sure what you're suggesting. I pointed out the problems with making debt non-transferrable. If it is transferrable, it can be transferred to "sharks". What would you suggest instead?

I'd suggest you become acquainted a few heterodox economists - Keynes, Steve Keene, and some of the other names who haven't been corrupted by Chicagoism - and then perhaps you'll see why transferability is not the problem.

The point remains - giving vulture speculators the ability to hold entire populations hostage is political special pleading, not sound growth-based economics.

If you're not interested in actually making an argument rather than disparagingly hand-waving, I suggest you find another forum.

It's not that simple. If you lend me money and I don't repay, the open market allows you to recover some of it by selling the debt to someone else. However, if there was no hope of getting the money back there would have been no buyer. So if it wasn't for the evil hedge fund willing to shoulder the risk, the people/organizations who actually did lent Argentina the money would have been a lot worse off (being unable to sell the bonds).

I don't agree. As much I know, they lent Argentina no money. They bought bonds (I think that's the correct term) that already lost nearly all of their value since the land was already in trouble then, for pennies and now they want the full money back, that they never spent. As much I remember the profit would have been 16x the money spent. So, they lent no money to the country .... the papers already lost their value since the risk was high of total loss or a haircut.

I guess, even with the haircut settlement, even then they would have earning a lot of money -- but they where very greedy.

Our financial system should not foster poor greed!

The funds did not lend Argentina any money because they are not the original creditors. They picked debt at an extremely low value, and now want to collect extremely high interests.

Vulture funds give nothing to society. They are definitely not a force of good. The comparison to patent trolls is apt.

Wouldn't it be more fair to say endemic corruption and decades of misguided plans that swung too hard to socialist, then capitalist and then again socialist policies created this?

The idea that the root cause of this is that a group of investors come along, buy debt on the open market and then expect that debt to be paid seems overly simplistic.

Defaulting is error on both sides, the borrower failed in risk analysis just like the debtor.

The problem is that sovereign nations don't have clear bankrupt procedure and these hedge funds are holding country as hostage for their past mistakes despite the fact that majority of borrowers accepted debt restructuring that was arranged and accepted haircuts.

If the debt and its interest grows past what country gdp can ever grow, they can never pay back and they either became debt slaves forever or keep defaulting. This is attempt at debt slavery in national level. (if person can't pay his debt ever, should he and his family lineage be responsible for that debt forever?)

I think it's reasonable to expect that in these cases banks should accept haircuts and settle like wast majority of investors did. Upholding business deal is ethically less important than country of millions being able to continue their life. The logical cost of country not being able to pay for their dept should be higher interest rates in future, not shutting country down.

I see it similar. That is also the reason, that countries with high risk are paying much higher interest rates. Those rates are always defined as "payment" for the risk of loss. So it is a little weird, when funds now find a way to get out of the risk and earn 16x the money they spent, just because of their good arguing before some courts.

Nice reply! I love HN sometimes.

What impact does this have on contracts in general?

When I give my word, I keep it. When I sign a contract, I honor it. There's a social contract that assures me that the counter party will too. There's a court system setup to ensure they do. There is force behind that if it is taken even further.

If I should instead shape every contract with a 20% hedge that assumes the counter party will not keep their word, doesn't that introduce a significant amount of inefficiency in the entire system.

Isn't it long term better and in fact just that those who give their word, spend all of their money and then run out take the consequences of it?

For systemic risk to be properly moderated, the individuals or even individual counties must suffer the consequences of their actions. You can opt to not allow this, but you ultimately suffer as a whole when you do.

I see no better way through. Do you?

Umm, that's the entire reason the financial and insurance systems exist. Credits are assigned an interest rate depending on the probability of the receiving party's risk. Credit default swaps protect lenders from defaults.

Elliot Capital's position is basically that of a broker buying junk bonds and then chasing after money through the courts when the company inevitably goes under. Sure, it could go your way, but they were well aware of the risks, and honestly the strategy of buying junk bonds on a defaulting country and expecting compensation through courts is not something that seems to be in "good faith".

So there's currently an interesting case going on with Caesar's bonds because someone accidentally put "and" in a contract where they meant "or".[1] If you have to spend lots of time having a group of expert lawyers and grammaticians going through your contracts before you sign them and checking for every possible edge case, that's a significant inefficiency and cost in the system as well.

The 2001 restructuring was reasonable; most of the bondholders agreed with it, and got a fair price for their bonds. The holdouts knew this when they bought the same bonds.

Imagine a court system that applies common sense and equitable principles and tries to interpret contracts in a way that's as fair as possible to everyone involved, rather than going by the strict letter of every contract document. This removes the ability to rip someone off when you spot a hole in their contract, which makes some things less efficient, but I can see it working better overall.

[1] So it's something like: there's a provision in the contract that says that certain guarantees are invalidated if this subsidiary is reabsorbed into its parent corporation and it's sold to a different company, and some other conditions. Which is obviously nonsense because there's no way those things would both happen. But it's also what the contract says.

> a way that's as fair as possible to everyone involved, rather than going by the strict letter of every contract document.

Presumably, this is in place to keep colluding with judges who will interpret your claim "fairly", for a fee, to a minimum, as well as mitigate the hedge against those who defend contract discrepancies with "Well, that's what we meant", when in fact, that was neither what was meant or ever said.

The Halbig decision bears on this matter. There's a law, which is effectively a contract, and the IRS attempted to interpret it how they needed to to make the ACA work. What this means now is, right or wrong, that we have a group of Senators and Representatives who voted on a law to be enacted as it was written, and when that was no longer viable, they simply 'interpreted' the text of the law to mean something new so that it could work.

Ignoring who's right or who is wrong, some additional lawyering up front would have prevented this, but that was not done because it would not have been politically expedient. Contracts are a way of keeping people fair. If the contract is written in a way that isn't fair, then it would be unenforceable regardless of how well it was written, so that 'fairness' is built in to contract law already.

>If I should instead shape every contract with a 20% hedge that assumes the counter party will not keep their word, doesn't that introduce a significant amount of inefficiency in the entire system.

Of course it does and it should, because there is real risks involved. Banks make their money by evaluating risks correctly.

>For systemic risk to be properly moderated, the individuals or even individual counties must suffer the consequences of their actions. You can opt to not allow this, but you ultimately suffer as a whole when you do.

This would only work if the parties involved would be fully rational. As long as you have imperfect actors with limited information that have limited ability to learn lessons, optimum way to limit the risk for borrower is by bankruptcy laws and procedures so that everyone involved knows the risks.

There was solid international effort to deal with the situation during the Argentine Great Depression and IMF was involved in making the deal. Because there is no bankruptcy law for countries, it was impossible to negotiate bankruptcy deal for Argentine that would bind everyone. These hedge funds are exploiting this. Going forward, we should make example of them. If majority of debtors agree, better to take the deal. This would generate de facto bankruptcy procedure.

It's not reasonable to expect that the holdouts should settle like the others - it was an option to put this requirement (to go with the majority) in the bond contract as it is often done; however for these bonds Argentina didn't do that. If you agree to not-X, then you can't say afterwards that X would be reasonable and demand X. Leaving out this requirement made the bonds more valuable, but it has a price - this one.

Argentina is capable of paying their debt right now - however, it would involve also paying those holdouts in full, and they're simply intentionally choosing to pay some debts but not others, despite having an agreement that those debts will have a priority - why shouldn't they be punished for that?

If someone pays back people they like, but doesn't pay those they dislike, that's not fair nor excusable - that's a default. This is not a fight about inability to pay as such, this is a fight about which creditors get their money first. And this is agreed by the courts now. Argentina is quite free and capable to pay the rest of their debts, but they won't have a veto to unfairly leave some creditors out, those creditors will be able to take their share of any payments made.

It may be reasonable that they should settle, but they are not required to. This particular fund has a group that specializes in litigating against countries to exploit an issue with debt structure.

For me this comes down to whether the law is being enforced. And in this case it appears that the law is being followed.

> Wouldn't it be more fair to say endemic corruption and decades of misguided plans that swung too hard to socialist, then capitalist and then again socialist policies created this?

It would be fair to say that those caused the 2001 default. Which was a real default, but not a catastrophe; defaults happen sometimes, Argentina negotiated a settlement with (most of) its creditors (who had known all along that their investments carried a certain risk), and life went on.

What we have now is a tragedy where the overwhelming majority of Argentina's creditors were reasonable, accepted the settlement, and want to get paid, and Argentina has the money and wants to pay them. But the "vultures" are using a legal technicality to stop that payment from going through, in the hopes of extorting more money from Argentina. And sadly the US legal system is abetting this.

You might say that it is a "technicality", but it is the contract the government of Argentina agreed to. The only thing you have with a financial arrangement of this magnitude is the contract.

It is perfectly reasonable for the creditors to do all they can to get paid. It isn't a failure of their risk management, because they probably figured this was risky all along.

If Argentina didn't want the bonds to be subject to the US legal system, they shouldn't have issued them governed by NY state law.

They could also have included clauses preventing holdouts, but they didn't. In hindsight, they clearly made mistakes issuing the debt, but that doesn't mean they should get off without paying for the consequences of those mistakes.

I think even with a financial arrangement of this magnitude there's a place for considering what's fair and equitable. Maybe there were mistakes in the contracts, but the overwhelming majority of bondholders are willing to be reasonable - it's the few holdouts who are wrecking it for everyone.

At this magnitude there aren't "mistakes in the contracts" - every provision, by including or excluding it, meaningfully affects the price of that bond.

Just like in insurance contracts - if you buy a policy for $123 that covers A, B and C but excludes D and E, then you don't get to argue if C should be fairly excluded or D should be fairly included - if the contract would've been different, then the price would've been different, and you got the price that matched the exact terms as written, not some other terms.

Bondholders may reasonably have conflicting interests - for example, if some bondholders have significant other investments in that country, then they have motivations to settle cheaply that would conflict with other bondholders, and it's not fair if those other bondholders get less of their debt back.

If you sell a bond whose terms that includes specific protection against that (the lack of provision that minorities would have to agree if majority restructures), then it's not reasonable to withdraw that protection afterward; a bond with slightly different terms is a completely different bond, even if the amounts match.

In serious contracts, expecting "take-backsies" isn't reasonable; either term X is in the contract or it isn't - that's what the exact agreement was, and not the other way.

Investor is too kind a term. They did not exactly buy those papers at nominal value.

Well, given all this hassle, the papers weren't worth nearly their nominal value - and they actually gave money to the original lender, while Argentina didn't; so on that regard they're more fair than Argentina's government at least.

Argentina did give money (or rather, replacement bonds) to the original lender. Not 100%, but an amount they agreed to (which could equally well describe the holdouts' purchases). And Argentina has kept up the interest payments to the original lenders, right up until the holdouts got this court injunction to stop them.

No, Argentina didn't give money, nor replacement bonds to the original lender - they're the holdout's we're talking about.

They didn't agree to the restructuring amount, and kept the original bonds until selling them to the current bondholder; and as far as I understand, Argentina has not kept up the payments to those who refused the restructuring, that's the whole start of those court proceedings.

> "Not 100%, but an amount they agreed to"

They are holdouts precisely because they didn't agree to a haircut. Argentina declined to write a collective action clause into their bonds so that they could sell them for a higher premium. This is the price associated with accepting that risk.

So what? They're getting a discount for taking on the risk that they won't be able to collect from Argentina at all, and for the fact that they will have to file a lawsuit in order to collect. It's more efficient for everybody if a hedge fund buys up a bunch of bonds and tries to collect on them in a single lawsuit, instead of individual investors suing to collect the money piecemeal.

Well, Argentina could've paid their debt to that investor yesterday, and it wouldn't be defaulting now. It was their intentional choice, they had an ability to pay but didn't want to pay to them.

TLDR;

When restructuring defaulted bonds, Argentina agree to borrow in US dollars. They further agreed:

- to pay all bond holders equally.

- to be governed by New York state law.

- to NOT include a collective action clause in the bond agreement which would have forced minority recalcitrant bondholders to enter a restructuring agreement, if a super majority of the bondholders agreed.

A small minority (2.5-3%) refused to accept the 70-75% haircut the Argentina government was forcing on the bondholders (fyi: previously the largest haircut in sovereign debt was 30%)

(from one of the dealbook article's comments)

Small corrections: - Holdouts are 7.6% - Haircut was around 75% nominal, but in practice was more around 40% since there were some GDP growth incentives and better interest rates

Additionaly, the hedge funds weren't among the original creditors. They bought the defaulted bonds on the cheap, just to pursue legal battle. There are other creditors holding defaulted bonds, but these funds are the only ones that got a favorable ruling.

Time to reinforce the Falkland's garrison

Sigh. Argentina is currently a democracy and has been one since the early 80s after our last military dictatorship. We are not a warlike country. Any issue with the Malvinas Islands is being handled via diplomacy. Please stop spreading mindless FUD.

We really should have evolved by now to using a monetary system that doesn't revolve around debt.

Which is impossible, because any economic activity that takes some time to come to fruition is already a sort of debt. If you can't use a currency to increase the "money" supply, other forms of credit and investment emerge, and you get the same problems.

Right, because there isn't numerous examples throughout history where debt-free fiat currency flourished. We have been conditioned by neoclassical economics and have refused to confront the pyramid scheme.

Can you name one such debt-free currency? Preferably one that works in a modern economy? Don't forget: A lot of our risk-management and wealth today depends on derivatives and a well running financial market.

To say that a completely different but unproven system works better is a very tough point to defend.

Well let me preface with this: I'm not an economist and of course harbor my own bias(just like everybody else), but I'm educated enough to recognize when systems and people are being gamed.

Why can't our government(or any government for that matter) print their own money and issue it to its people, which is then freed from the private central bank's interest? Instead, we allow the banking industry to self-regulate and it in turn does what's in its self-interest.

I've heard historians and anti-neoclassic-economists refer back to the success of Tally Sticks(1100 - 1854), Colonial Script(1764 –– 1776), and Roman currency before they switched to a gold standard. But, I'm not an authority on this and sincerely would appreciate any literature that contradicts it.

The only modern example would be cyprtocurrency, and the verdict is still out on that. Hell, even if more states and nations moved to North Dakota's banking approach we'd be better off.

I don't have all the answers, but I know humans can do better and it starts with the average-person continually investing time to educate themselves about monetary policies and the history of currencies.

The current monetary system has feed global wars, imperialism and possibly the worst financial inequality in mankind's history. Unless you're a banker or in the financial industry, I don't understand why you wouldn't want to try something new?

Obviously you are not an economist or historian (I'm neither). "Why can't our government print their own money?" pretty much gives away that you haven't put in any effort to learn how banking, money or a central bank works.

All the examples you mention don't hold up. Not even in their own time, much less in a modern time where we need private finance.

"Cryptocurrency" is a new kind of knee-jerk reaction to "everything perceived to be wrong with money". There's a reason why conspiracy nuts flock to cryptocurrencies in droves. Turns out that ordinary people get screwed over with bitcoins far more easily than with the "evil" fiat currencies. Also there is no reason why you can't have a sort of reserve-banking, or even monetary expansion in a bitcoin-based economy. They just don't do it yet, because Bitcoins at the present moment have negligible impact on the real economy (which might change).

If only they had won the world cup, this whole mess might have been avoided.

I don't mean to sound like an evangelist but i've been waiting for a currency to fail to see how/if crypto-currencies have the ability to get the country up and running again. In theory the tools are there if they can wrestle value out of their slumping traditional currency.

The peso has been all but failed for some years now, due to the falsification of inflation figures by the central bank, and the divergence between the real/market exchange rate and the "offical" exchange rate. The result has been fairly simple: people use USD.

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