Fact Check: Argentina

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Argentina’s “House Bank,” Deutsche Bank, Issued Massive Fines by U.S., U.K. Regulators

U.S. and U.K. banking regulators announced late Wednesday that Deutsche Bank, Germany’s largest lender, is being fined a whopping $2.5 billion and is being forced to fire seven of its employees as a result of “widespread manipulation of the benchmark London Interbank Offered Bank (LIBOR) and other rates by the world’s largest banks.”

But that’s not all: Bloomberg reported that the U.K.’s FCA cited Deutsche Bank’s “false, inaccurate and misleading statements” as reason for U.K. regulators almost doubling the fine.  From the article:

“Deutsche Bank AG managed to almost double the record fine the U.K. regulator handed down for rigging Libor through its foot-dragging and evasions, the Financial Conduct Authority said.

“‘Deutsche Bank’s unacceptably slow and ineffective response’ to questions and repeated ‘false, inaccurate or misleading’ statements were cited as reasons for the FCA to tack on an additional 101 million pounds ($152 million) to bring the settlement to 227 million pounds, the FCA said Thursday.”

Unfortunately, none of this behavior surprised us, because it parallels Deutsche Bank’s recent decision to help Argentina evade U.S. judgment holders.  Just yesterday, it was reported that the bank had a significant hand in facilitating Argentina’s auction of new bonds – a debt issuance designed to perpetuate Argentina’s refusal to negotiate a resolution with creditors, an instruction repeated numerous times by a U.S. court.  It also means that Argentina intends to remain in contempt of court (the contempt citation was issued almost seven months ago) for an extended period of time. Deutsche Bank doesn’t do this as charity work and presumably generated a profit by sitting as the middle man for a scofflaw’s offering.

The manner in which Deutsche Bank helped Argentina was highly unusual and secretive, raising questions about whether it skirted the rules of the road in the same week that it was hit with record-shattering fines. Apparently no one at Deutsche Bank cares that its name is rapidly becoming synonymous with feckless corner-cutting in an industry that is already sensitive to perceptions of lawlessness.

Bonar 2024: Kicillof’s Gross Mismanagement of Argentina’s Finances

On Tuesday, we reported on Argentina’s decision to issue $1.4 billion in new bonds.  It is an extravagant fleecing of the Argentine taxpayer, given the staggeringly high interest rate yield of the offering.

We see several take-aways for our readers:

- Argentina remains very much isolated from global capital markets.  Kicillof had to “pay off” foreign investors with a gift of hundreds of millions of dollars. Kicillof essentially sold a bond worth 107 for only 103. That is not prudent economic management. If Argentina was more like its neighboring countries, such large kickbacks would not be necessary.

- More specifically, the 9.0% yearly yield offered by Argentina is exactly 5% over the average market value for the region, and represents an egregious waste of roughly $630 Million.  Or, as the Wall Street Journal dubbed it, a “steep cost.”

 – Argentina’s desperate hunt for dollars makes clear that the current administration intends to remain in contempt of court, has no interest in negotiating with its creditors, and plans to leave this festering debt mess for the next administration to clean up;

Kicillof’s actions as Economy Minister have unfortunately and consistently produced misery, further misery, ridicule, isolation, and even greater isolation.

The charts below feature the most recent sovereign comparables analysis utilizing 2014 GDP figures.  The reality is that the issuance of the Bonar 2024s is very “off market,” given the relative health of the Argentine economy.

Bonar Chart 1

Bonar Chart 2

As you can see above, Kicillof sold the Bonar 2024s at a 9.0% yield, versus the 4.0% average of similar bonds by Argentina’s neighbors.  In addition, the interpolated spread on the new Bonars is more than 700 basis points, versus roughly 200 basis points for comparable issuances.  Which means they are roughly 3.5x more expensive.

There is no excuse for Argentina’s leaders choosing to offer debt at yields this costly.  The dynamics which have led it to do so are self-imposed and immediately solvable.  All Argentina’s leaders need to do is simply meet with creditors, and negotiate a resolution to this long-standing debt dispute.

Kicillof’s “Win” is a Lose for Argentina

Argentina has just announced—with much misguided excitement–that it has sold Bonar 2024 Bonds. Economy Minister Axel Kicillof has hailed the deal as some type of victory for the country, when in reality it is a waste of hundreds of millions of dollars given the egregious price at which the debt was issued.

To put this issuance into context, the majority of Argentina’s peers have yields between 3.1% and 4.2%.

Brazil issues debt at a yield of 4.2%.

Chile issues debt at a yield of 2.2%.

Uruguay issues debt at a yield of 3.3%.

The only country whose yields surpass those of Argentina is Venezuela. Needless to say, it’s never good when your economy is being compared to Venezuela’s…

An economist quoted in La Nacion this evening reiterated this point, stating “The value of the bonds is high…an interest rate of 8.75% was very attractive to the market as that is above what is paid in the region.”

Unfortunately, Kicillof and the Argentine government are so desperate for funding after being isolated from the international capital markets that they are willing to take any price.

By issuing the BONARs at 9%, with the excess cost of 5% per year, Minister Kicillof has wasted roughly $630 million.

Issuing this type of over-priced debt is a lose-lose for Argentina. Argentina could be borrowing at the rates of its peers, saving the country hundreds of millions of dollars. There is no reason Argentina should be offering debt at yields this high while its peers issue debt at such lower prices. The only obstacle standing in the way is Argentina’s refusal to sit down with its creditors and negotiate a resolution to its long-standing debt dispute.

Today’s actions demolish whatever was left of Argentina’s credibility regarding the claim that it wants to solve this dispute.  Rather than taking actions to begin a dialogue with creditors – the only path to a solution – Argentina has defiantly issued new bonds that are very likely subject to the pari passu clause in its defaulted bonds from 2001. The only reason the current Argentine government would take such a costly, short-term step is if it had no intention of sitting down with creditors, and simply wished to pass this large and growing problem to the next administration.

As usual, Minister Kicillof’s “win” is Argentina’s loss.

In Embarrassing Interview, Argentina’s Ambassador to the United States Proves That Argentina Refuses to Negotiate with Creditors

Fact Check Argentina’s primary focus is to set the record straight and provide clarity for observers of Argentina’s debt dispute. Fact Check encourages dialogue between Argentina and its creditors with the goal of ending the Republic’s 2001 default.

We read a recent interview that demonstrates the importance of forums like Fact Check to cut through the fog. In a rare open conversation, Argentina’s ambassador to the U.S., Cecilia Nahón, sat down with financial writer Felix Salmon to discuss her country’s defaulted debt situation.

The wide-ranging interview is stunning on several levels. Nahon refuses to even acknowledge that Argentina is in default. She admits that the country is willingly violating U.S. court orders (this admission likely won’t go over well with U.S. judges) even though Argentina contractually agreed to observe the rulings of U.S. courts.

On the all-important issue of settlement with creditors, Nahon ties herself up in knots. Nahon claims that “what we want to do is to reach a solution with 100% of our bond holders, that’s our main goal now.” But she can’t reference even one thing that Argentina has done since the RUFO clause expired in December 2014 to engage with creditors on a settlement.

Recall that throughout 2014, Argentina claimed that the infamous RUFO clause prohibited Argentina from negotiating with creditors. And yet the only supposed “efforts” that Nahon can cite are meetings that occurred during Argentina’s 2014 self-imposed RUFO-induced moratorium on negotiating. Claiming that reaching a solution with “100% of our bondholders” is Argentina’s “main goal now,” as Nahon does in the interview, is an insult to basic intelligence. Instead of making any attempt to constructively reconcile with creditors, Argentina’s Economy Minister spends his time in the U.S. ranting against bondholders at the IMF and World Bank.

Nahon also attempts to characterize holdouts as “inflexible,” but how could Argentina know whether bondholders are inflexible if the Republic refuses to have post-RUFO negotiations. And Nahon refuses to acknowledge that creditors have publicly offered to accept bonds as compensation, which would strip the veneer off her claim that compliance with the order is “impossible.”

The contradictions are transparent and they go on and on.

But at least Nahon has helped show the world that Argentina’s claims of supposedly wanting to resolve the 2001 and 2014 defaults are simply talk. Argentine officials are actually doing nothing to solve a problem that has placed a significant constraint on the Argentine economy, leading to unemployment, higher inflation and recession. If anything, Argentina is seeking to extend the dispute with even more litigation – by suing Citibank in Argentina and by allowing over $5 billion in new pari passu claims to be filed in the last month.

It is noteworthy that in the interview, Nahon, and by extension the Kirchner administration, take no responsibility for the Republic’s failure to close the 2001 default or to resolve the 2014 default. Instead, blame is cast widely on judges, bondholders, banks, banking intermediaries, etc. – e.g., everyone but themselves.

Below we expand on some of Nahon’s revealing blunders.


Ambassador Nahon: “We’re not in default.”

Argentina’s leaders continue to peddle the absurd contention that the Republic is not in default. First of all, Argentina has been in default for over 13 years. Until the debts from the 2001 default are resolved, Argentina will remain in default.

And with respect to its Exchange Bonds, no serious observer believes that in July 2014 Argentina did not default on over $25 billion. The bond contracts require that Argentina do more than just attempt to make a payment (or stash it away in a bank). Of course, as Argentina has continually demonstrated, it doesn’t really care what its bond contracts say.

The more subtle, but more stunning, aspect of this answer is that it demonstrates the disdainful attitude that Argentina has taken towards Exchange Bondholders. Nahon is saying that Argentina does not care if its bondholders actually collect the interest payment. Argentina has seemingly wiped its hands clean of any responsibility to see that payment actually gets to bondholders. It is entirely within Argentina’s control to see that payment is made, it just chooses to not exercise that ability.

In his very blunt highlighted annotations to the interview transcript, Mr. Salmon* actually says this, stating: “This is an extremely aggressive position to take. Ask anybody outside the Argentine government whether Argentina is in default, and they will say yes, it is. Certainly credit default swaps on Argentina’s bonds paid out as though Argentina defaulted. And certainly Argentina’s bondholders have not been paid. Basically, Argentina is saying ‘we put the check in the mail, which means we’ve paid our rent, whether our landlord received the check or not.’”


Ambassador Nahon: “We have kept paying our bondholders and we will continue to do that.”

First, Argentina is only paying (or attempting to pay) some bondholders. Nahon conveniently forgets that Argentina has made no payment to certain bondholders in over 13 years. The Republic is picking and choosing who it decides to pay regardless of bondholders’ rights.

Second, her statement about “paying” is a blatant admission that Argentina is violating a U.S. federal court order – by attempting to pay certain creditors and not others. Even worse, she is admitting that Argentina will “continue” to violate the order. Thumbing her nose at the courts only reinforces Argentina’s reputation for failing to observe the rule of law.


Ambassador Nahon: “These funds [Argentina’s creditors] have been litigating against Argentina, rejecting every deal, not wanting to negotiate, to try to make these exorbitant profits…”

The reality is that investment funds, along with other individual Argentine creditors, have only rejected the take-it-or-leave-it deals Argentina made in 2005 and 2010 – the same restructuring that Moody’s deemed to be “unique in its unilateral and coercive approach.” And the same haircut to claim which Sebastian Edwards in a recent working paper concluded was “excessively high.”

For over a decade, Argentina’s creditors have offered to negotiate without pre-conditions. Argentina can’t credibly blame creditors for litigating when Argentina refuses to even engage in settlement talks.

Again, in his annotations, Mr. Salmon cuts through the noise and explains that “This isn’t really true. They’ve [the bondholders] been very consistent about rejecting the same deal that was offered to everybody else. But they have been perfectly willing to negotiate, and they’ve only rejected one deal. Argentina has not given any indication that it is willing to offer a penny more than the same deal that has been on the table since 2005, so in a sense it’s Argentina which is refusing to negotiate.”


Ambassador Nahon: “We put them [the bondholders] an offer last year…that will give them a 300% profit.” “They are looking for a 1600% profit.”

Ambassador Nahon has no verification of what many bondholders paid for their claims. So she cannot know what “profit” they may make. Her figures are conjecture.

And many of the unresolved bonds were purchased at par value before the default – even at full claim, a payment would be a tiny fraction of 1600%. Furthermore, since Argentina refuses to negotiate, it can’t possibly know what price and what supposed “profit” creditors would receive.

In any event the supposed 300% profit “offer” was merely a reiteration of the same coercive 2005 offer. Argentina only proves its intransigence by suggesting that its only offer is the one that creditors have for years deemed unacceptable, and which the courts have repeatedly found that creditors were within their rights to reject.


Ambassador Nahon: “If Argentina accepted the claim of NML and Judge Griesa’s proposal to all the holdouts, we will be facing a total amount…that’s impossible for Argentina to pay. It’s 2/3 of our foreign reserves. And they have not been offering us any reasonable solution, any reasonable way to get out of this.”

We’ll defer to Mr. Salmon on this one. His annotation to Nahon’s statement says it all. He writes, “but it would not have to be paid in cash: the funds have said that they would be OK being paid in bonds. What’s more, by normalizing relations with its creditors, Argentina might actually see an inflow of funds, rather than an outflow.”

In the interview, Nahon brags that Argentina’s ratio of debt in foreign currency-to-GDP is only 9%, which is the envy of many other nations. Even if the total outstanding 2001 claims are $20 billion – a figure for which Nahon provides no justification – new bonds would increase this debt-to-GDP figure by a couple of percentage points. Simple, sustainable, manageable solutions are staring Argentina in the face. But instead of resolution, Argentina appears to only want to create a fake political fight with bond holders.

We’re glad Mr. Salmon realizes that Argentina is just finding excuses to not deal resolve the situation, and that more people are starting to recognize that Argentina could benefit enormously from a resolution to this issue. We’ve written about these issues extensively but, to reiterate, a settlement would lower the country’s borrowing costs and attract the foreign investment the country so desperately needs.


Ambassador Nahon: “Judge Griesa’s ruling not only violates the Foreign Sovereign Immunity Act, the law that we accepted when we decided to issue bonds here in New York, but it also violates the contracts.”

This is entirely incorrect. In the U.S. appellate court ruling on the injunction, the court explicitly stated on page 4, “we conclude that the injunctions do not violate the Foreign Sovereign Immunities Act.” As to whether it violates the contracts, the appellate court was also clear in stating on page 20 of its ruling, “we have little difficulty concluding that Argentina breached the Pari Passu Clause of the FAA [the bond contract].”

Furthermore, Argentina chose New York law to govern the bond contract. And in the contract, Argentina waived its sovereign immunity, submitted itself to the jurisdiction of the courts and promised to follow the courts orders – whether Argentina wins or loses.

Mr. Salmon, in his annotations states Argentina “is saying that it’s not acting in violation of the law, because even though the settled New York law is now clear, the settled New York law is illegal.” Makes perfect sense, right?


Ambassador Nahon: “This ruling is functional to a very small group of very powerful people”

Holders of bonds that have been unpaid since 2001 include numerous institutions and thousands of individuals, many of whom bought the securities in order to have the protection of New York law. Argentina distorts this reality by focusing exclusively on a handful of creditors and attempting to demonize them.


Ambassador Nahon: “I think that Argentina is a model in terms of debt restructurings…Argentina is a country that has shown very clearly our will and our capacity to negotiate and solve our problems.”

Orwellian. The most fundamental principle of sovereign debt restructurings is that the debtor engage in open and constructive dialogue with its creditors in order to reach a consensual solution. No one outside of the Argentine government can claim with a straight face that Argentina followed this principle. Instead, as the IMF has noted, “no constructive dialogue was observed and the [Argentine] authorities presented a non-negotiated offer.”

Given the weakness of the Argentine economy, the country’s increasing isolation from the world stage, and its exclusion from international capital markets, observers might have expected sober and nuanced positions from the nation’s top diplomat. Those observers will be shocked by Nahon’s tone and her transparent contradictions.

In commenting on the interview, Mr. Salmon concludes with this thought: “Nahón might not be as much of a fire-breather as Argentina’s president, Cristina Fernández de Kirchner, or its finance minister, Axel Kicillof. But in her own way, she’s just as intransigent. Argentina, she says, has done nothing wrong. Which says to me that the current stalemate is going to persist at least until January, when a new government gets sworn in.”

Of course, it doesn’t have to be this way. If Argentina really wanted to solve this problem, negotiations could begin tomorrow.

* One issue to note while reading the transcript is that the interviewer has historically been critical of holdout creditors and court decisions related to the dispute, which makes his interview with Ambassador Nahon (and his subsequent annotations) all the more compelling.

Kicillof’s Attack on Citibank: Another Desperate Attempt to Distract

Economy Minister Axel Kicillof gave a speech this morning to further harass Citibank merely because the bank reached an accord with holders of Argentina’s defaulted debts.  Three weeks ago a New York court confirmed that Argentina is enjoined from making payments on certain internationally traded Argentine law U.S. dollar bonds unless the Republic fulfilled its contractual obligations to make payment to certain bondholders who have not been paid since the Republic’s 2001 default.  The court told Citibank that if Argentina violated the order by making a payment on March 31, then Citi could not pass along the illegal payment.  When Citi said that it would comply with the U.S. court, Kicillof initiated an extensive intimidation campaign against Citi. To avoid further harassment, Citi negotiated a resolution with the bondholders which allowed Citi to process a payment – should Argentina violate the order on March 31 – while Citi exited its custody business in Argentina.

Kicillof must have been quite embarrassed that Citi was able to reach an agreement with Argentina’s creditors because the Minister has wasted so much energy in the past year attempting to falsely paint creditors as intransigent. Here’s the facts:  Argentina’s creditors have made clear they would like to negotiate a mutually beneficial resolution with Argentina.  The immediate and long-term economic benefits of resolving this dispute are well-documented.  But Kicillof refuses to even sit down. Instead, Kicillof would rather have more litigation (now he wants to sue Citi!) and give speeches demonizing creditors and anyone who decides to negotiate with creditors. If Kicillof is upset with Citi, it’s because they destroyed his false narrative about creditors.

Attacking holders of Argentina’s 2001 defaulted bonds (of which there are several thousand) and Citibank is also an attempt by Kicillof to distract the Argentine public from his poor record as Economy Minister.  Instead of taking the necessary measures to clean up Argentina’s 2001 and 2014 defaults, curb spiraling inflation, lower the cost of credit to local businesses, attract investment into the country, manage the erosion of foreign exchange and bring greater prosperity to all Argentine people, Kicillof gives lectures and bullies law-abiding local companies.

By making baseless accusations against creditors and Argentine companies, Kicillof shows the world that Argentina is not a friendly place for investment or business. This only harms the Argentine economy and hampers the prosperity of its people. Kicillof can continue to rant about creditors, but that does nothing to end the dispute with creditors.

ATFA urges Argentina to engage in dialogue to end the 2001 default.

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