In my latest installment to Global Risk Insights, I comment on Argentina’s dispute with U.S. creditors. This is an under-the-radar issue to most Americans, but it should matter to investors. While on one hand, the U.S. Supreme Court ruling for a New York-based hedge fund over Argentina bodes well for U.S. creditors. This is problematic for Argentina’s prime minister Christina Fernandez de Kirchner for two reasons.
First, she can abide by the ruling and pay Eliot Associates, also known as NML Capital Ltd, the principal of their U.S. bonds, which they defaulted on in 2001. However, these repayment terms might conflict with contractual terms that limited their ability to offer better terms to late holdouts. There is disagreement on the interpretation. It is Argentina’s position agreeing to this would renege their previous agreements with 93 percent of other U.S. creditors that agreed to more favorable terms. If they have to offer similar terms to these other creditors, then that could raise their repayment obligations to up to $15 billion, which is more than half of their reserves.
If they refuse to abide by the ruling and withhold payment, then they risk a technical default. That would potentially be devastating to a country that is already suffering from a weak currency, rising inflation, and sluggish growth prospects.
As of right now, the impact on emerging countries is limited. However, countries with significant debt exposure might have less flexibility in attaining more favorable repayment terms as a result.
On June 16th, 2014, the U.S. Supreme Court ruled in favor of NML Capital Ltd (NML) over the Republic of Argentina in a major debt settlement case. The ruling has implications not only for Argentina but also other debt-ridden countries throughout the world. Regardless of how Argentina responds, Prime Minister Christina Fernandez de Kirchner’s options are unattractive.
Argentina reached agreement with a majority of its creditors with only a limited number of holdouts. However, there was a small subset of U.S. creditors led by Elliot Associates, a New York-based hedge fund described as NML Capital Ltd, that were holding out for better repayment terms. They sought and received relief from the Southern District of New York, which can result in a high payoff from their purchase of cheap bonds that occurred from the 2001 default of Argentina.
With the U.S. Supreme Court siding with the creditors, Argentina’s agreement with the other bondholders…
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