We know what could happen if Argentina defies a U.S. Court and does not pay a group of hedge funds, known as NML, over $US1.3 billion in debt dating back to its 2001 financial crisis — the country will default.
That means rising interest rates, money printing, inflation, and a replay of the classic Argentine nightmare.
So why would The Republic be willing to risk such a calamity? One reason the government has given time and time again is that it does not wish to trigger a clause in its bond contracts — the “Rights Upon Future Offers” or RUFO Clause.
Basically, this clause states that if Argentina “voluntarily” makes a better offer to some creditors before December 31st, 2014, other bondholders have a right to the same treatment.
Here’s how it’s written in Argentina’s bond prospectus:
Under the terms of the Pars, Discount and Quasi-pars, if following the expiration of the Offer until December 31, 2014, and except as provided below, Argentina voluntarily makes an offer to purchase or exchange or solicits consents to amend any Eligible Securities not tendered or accepted pursuant to the Offer, Argentina has agreed that it will take all steps necessary, including making any required filings, so that each holder of Pars, Discounts or Quasi-pars will have the right, for a period of at least 30 days following the announcement of such offer, to exchange any of such holder’s Pars, Discounts or Quasi-pars for (as applicable):
Now what does that mean to The Republic in terms of dollars and cents?
In a speech to the country after the Supreme Court effectively ordered that Argentina pay this debt, President Cristina Fernandez said that triggering the RUFO Clause would cost the country $US15 billion — half of what it has in its dollar reserves.
“As you can see,” said Fernandez, “it’s not only absurd, but also impossible for a country to give over 50% of the total reserves in its Central Bank in one payment to creditors.”
If that were the case, indeed that would be absurd however, analysts keep poking holes in the President’s assertion for a number of reasons.
First off, the use of the word “voluntarily” in the prospectus means everything (and may answer some of your most burning questions about Argentina’s tone/legal strategy).
Here’s how GrahamFisher analyst and debt specialist Josh Rosner put it in a note:
“In another effort to justify evasion of the U.S. courts, Argentina has stated that, because of Argentine law (specifically the “Rights Upon Future Offers” or RUFO Clause), it cannot settle with the holdouts on terms that are better than the exchange holders. Given that any resolution of this impasse would be defined as a settlement of a court order, rather than an exchange of securities, this seems to be an incorrect interpretation of their own law.”
In other words, if payment is Court ordered, it’s not voluntary. If it’s not voluntary, it’s not a violation of RUFO.
The other point that analysts have made is that once NML is paid, Argentina will no longer be a pariah of international markets. In that case, even if the RUFO Clause is triggered, it can actually raise money from creditors and replenish its Central Bank reserves. It could raise the $US15 billion.
More from Rosner:
“Argentina has ignored the reality that even if that $US15 billion number was correct and the creditors unwilling to negotiate a payment formula that was acceptable to both parties, the government would still be able to manage the increased debt burden as a per cent of GDP. Moreover, late last year, at least one Wall Street firm offered to raise the full $US15 billion that the government claims it owes. If the government chose to raise capital as a means of resolving this impasse, it would normalize its relations with the international capital markets, reduce its cost of funds going forward and immediately begin to attract the foreign investment necessary to develop key industries, including its energy sector and the broader economy.”
All this said, we have literally no idea why anyone would want to buy an Argentine after this episode — but investors are crazy, and we’re all adults here (supposedly) and if you want to buy this stuff, God speed.
It’s your money.
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