In early 2002, Argentina defaulted on its debt, which totaled over $100 billion. This development prevented them to access capital from foreign markets. Current Argentine President Cristina Fernandez de Kirchner has been reluctant to resolve debt claims of Elliott Associates, a New York-based hedge fund. Even though she has struck an agreement with other creditors, this group has rejected the offer which was far below market value. In order to gain relief, they decided to pursue their repayment through the U.S. District Court for the Southern District of New York. While they won the original case, it has been appealed. The appeals court is expected to release their ruling soon and the implications can be enormous.
While Argentina was able to restructure 92% of their debt by exchanging the old bonds with new bonds that are worth about 2/3 less, the remaining 8% is still in question. If the U.S. courts rule that Argentina cannot repay their new exchange bonds without paying the holdouts, then that might invalidate their agreement. Structuring a new agreement that would force them to pay back the bonds at full value would be extremely costly and slow their recovery. If they decide to not repay all bondholders, then they would be frozen out in accessing foreign capital.
Argentina’s obstinacy in settling is based on its own country law that prohibits giving holdouts better deals than those that have settled. If the ruling goes against them, the fear is that no one will be repaid. There is concern that this scenario will make it harder for debt-stricken countries to strike deals in the future. If this occurs, then global anti-poverty groups are concerned that the lack of access to foreign capital will make it difficult for those countries to make needed infrastructure and educational investments that are needed to lift people out of poverty.
On the other hand, U.S. investors are concerned that an outcome where the holdouts are not paid will negatively affect their well-being. Other countries could be emboldened by Argentina’s approach and refuse to settle their debts with bondholders. This will make them leery about investing in poor countries.
In order to compete in the new economy, gaining access to foreign capital is necessary to make strategic investments in order to boost productivity rates. Argentina and other debt-laden countries will anxiously await this important ruling.
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