If the world wakes up on Wednesday and Argentina has not come to agreement over how it will pay a group of hedge fund managers — known collectively as NML Capital — over $US1.3 billion in debt, the country will be in “default.”
But what does that actually mean for investors?
Most immediately, it means that anyone holding the same debt as NML — bonds maturing in 2033 — can ask for acceleration of payment which could cost The Republic about $US29 billion in claims, according to Bloomberg.
We’re talking about bondholders who, unlike NML, took a haircut on Argentine debt when they had the chance back in 2005 and 2010 — exchange bondholders.
NML refused to take a haircut, which is why Argentina refused to pay them up until the Supreme Court left them no other option this June.
Now Argentina refuses to negotiate with NML unless a stay is put on a payment to all bondholders due Wednesday, but Judge Thomas Griesa has, so far, denied Argentina the stay.
So default is highly likely unless some eleventh hour agreement is reached.
“Exchange bondholders can file suit for the full amount of indebtedness once the country goes into default,” said Washington Legal Foundation chief counsel Rich Samp. “My understanding also is that there are other bonds other than the exchange bonds that have acceleration clauses.”
In other words, exchange bondholders can tell Argentina they want their roughly $US29 billion immediately. Like, right now. Worse yet, that total is basically everything The Republic has sitting in its Central Bank.
Argentina would argue that it’s not in default because the money it owes exchange bondholders is sitting in a Bank of New York Mellon branch in Buenos Aires, waiting to be sent to them. Unfortunately, sending that money violates Judge Thomas Griesa’s ruling that the country cannot pay some bondholders and not others. So when The Republic tried to send it out earlier this month, the Judge ordered that it be sent back.
In its defence, Argentina would say it’s the Judge, in this case, who is depriving exchange bondholders of their returns.
“As a matter of optics, it’s better for Argentina if it can say the money is with Bank of New York Mellon,” said Samp.
But it doesn’t actually matter. Argentina’s bond agreement says that investors are not paid until they have the money in their hot hands. It doesn’t matter if the cash is out of The Republic’s bank account.
What’s weird about all this, is that Argentina has been arguing that it doesn’t want to pay NML because that payment would trigger something called the RUFO Clause — the Rights Under Future Offerings clause.
Basically, RUFO states that if Argentina voluntarily gives some bondholders better terms, every bondholder has a right to those terms.
The RUFO payout, if triggered, would cost about $US15 billion, and Argentina has been adamant about the fact that $US15 billion is too much.
So why risk having to pay out $US29 billion if an acceleration clause can be triggered with default?
Besides: “I don’t think there is really any good faith argument that the RUFO clause could be invoked by exchange bondholders,” said Samp. “”I don’t think it is realistic to say that any payments at this point would be deemed voluntary within the meaning of the RUFO clause.”
As for what would happen in Argentina immediately, it’s hard to say. This default isn’t like its last one in 2001. The country isn’t defaulting because it’s broke — as it was then — so it can keep the economy going for a while.
That said, studies show that going in to default can drive down a country’s growth by 1%-2%, and drive up interest rates by 4 points in the first year. Argentina’s economy is already weak after a currency devaluation earlier this year and persistently high inflation — the 2nd highest in South America after Venezuela — so this isn’t exactly the best time to put the country’s economy under more stress.
But is there ever really a good time to default?
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