There have been moments in the decade-long legal battle between Argentina and a small group of hedge fund creditors known as NML Capital when one could only step back and think, The people running Argentina have got to be out of their minds.
One analyst note, however, suggests that Argentina may have been playing this thing the right way the whole time.
The Republic’s leaders have until Wednesday to either pay NML more than $US1.3 billion worth of debt; get a stay of payment to all bondholders holding this same debt (allowing the country more time to negotiate with NML); or face default.
For years the country has argued it should not have to pay NML 100 cents on the dollar for debt dating to its 2001 default, when over 90% of the same bondholders took a haircut.
The U.S. Supreme Court finally shut the door on that argument in June.
Despite several meetings with a special master of the court over the past few weeks, Argentina has been refusing to negotiate with NML until a stay of payment has been granted.
Now it’s really down to the wire.
So Abadi & Co. Global Markets published a note outlining all the scenarios. It includes the table below.
Now let’s walk thought the scenarios. Keep in mind that Argentina has said that it wants to pay this debt in 2015 because of something called the RUFO (Rights Upon Future Offers) clause. Basically the clause says if Argentina voluntarily negotiates better terms with some creditors before 2015, all creditors are entitled to those same improved terms.
Argentina has been saying that negotiating with NML triggers RUFO and opens it up to $US15 billion worth of claims from other creditors holding the same bonds.
So with that …
Both parties lose if Argentina goes into default. Argentina’s domestic economy will suffer as will its relationship with the rest of the world. For NML, its claim will be undermined and the country will be even more justified in arguing that it can’t pay.
NML wins if it gets paid in cash or bonds for obvious reasons, though it may not get absolutely full satisfaction of its claim if it gets paid in bonds.
Both parties win if Argentina is granted a stay and the Republic then stands by its word and negotiates with NML. NML gets paid in 2015, Argentina avoids default and doesn’t have to deal with a bunch of RUFO claims.
But there’s some stickiness there. First off, you have to trust that Argentina really means what it says and that it wants to negotiate to avoid triggering RUFO. Could be that Jan. 1, 2015, will come and go and Argentina will sill refuse to obey the court and pay NML.
Based on its previous behaviour, such a move wouldn’t be surprising. That’s why the judge, Thomas Griesa, has already refused to place a stay on payment once this month.
The other thing you have to keep in mind is that Argentina has defaulted before and survived. Plus, in this case, the government isn’t completely broke like it was in 2001. It could potentially keep the country running until 2015 when it could pay the holdouts without triggering RUFO.
So to Argentina this is the choice it’s handing hedge fund managers — we, as a nation, will be paying you in 2015. We can do it in pain and under duress, or we can do it in compliance with the Court.
But it’s 2015 or bust.
Now, this whole scenario is thrown for a loop if you don’t buy that Argentina is waiting for RUFO to expire. Some people don’t believe that argument. They think that since RUFO is only triggered if Argentina is voluntarily negotiating, being forced to negotiate by the court (i.e., what’s happening now) does not trigger the clause anyway, so this is all a charade.
GrahamFisher analyst and debt specialist Josh Rosner is one of the people who have argued this. Not only does he think the country could avoid RUFO now if it wanted to, but he also thinks that if the country paid NML — thereby entering the international financial community having resolved its major debt disputes — it could easily raise the necessary money to pay RUFO claims even if the clause was triggered.
From Rosner’s note:
“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.”
So maybe NML doesn’t want the stay because it isn’t buying this whole RUFO argument, the same way Rosner isn’t, and isn’t willing to give Argentina time to slip out of this one.
Or maybe NML just hasn’t realised that Argentina is willing to sit in extreme discomfort until 2015.
The latter may sound crazy at first glance, but, when you think about it, it’s kind of crazy like a fox.