Fact Check: Argentina

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The mountain of evidence rumbles, and an avalanche could be coming

Despite every attempt to prevent discovery and guarantee impunity for all their misdeeds and corruption, undeniable reality is collapsing on the Kirchners

A photograph published last weekend in Perfil told the story better than anything: It was of a wall of boxes filled with tens of thousands of sheets of paper, records seized in the July 13 raid of the Kirchner family’s business empire. Police seized documents from various locations in the South and in the Federal Capital.  The pile is now being held in a Coast Guard warehouse in Buenos Aires. Given the Kirchner history of mysterious fires destroying documents, the evidence is under 24 hour video surveillance mandated by a court order. The boxes are so large and heavy that many of them are caving in on themselves.

They contain what court sources told La Nacion is a “treasure trove” of evidence showing how “business ties between the presidential family and the Patagonian businessman Lázaro Báez are much broader and deeper than was known before.”  The documents being held include receipts, invoices, contracts and cancelled checks showing millions and millions of pesos changing hands throughout the web of cronies and front men. The K Money Trail that has been reported on extensively here and in the Argentine press. Now hard evidence affirms what we all knew was true all along.

La Nacion, which along with Clarin has been at the forefront of discovering and reporting the hard evidence of the K Money Trail from the beginning, published just a sampling of the extensive and damning evidence that Judge Claudio Bonadio seized in the July 13 raids, until the Kirchners maneuvered to remove him from the investigation.  The newspaper also analyzed the central role played by a “mysterious real estate office” in Rio Gallegos. That office seems to be a front for Máximo Kirchner’s entire business and political operation, and that’s where the most incriminating evidence was seized.

What is increasingly clear is that it is now much more difficult for President Kirchner to obfuscate and to pretend that no evidence exists. So much for her claim that it is all a conspiracy contrived by her opponents.  In fact, in addition to reports in the Argentine media, a new website emerged in recent days called Tangoleaks, in provides scans of unredacted evidence of the K Money Trail – like invoices and checks between the Kirchners, Máximo’s real estate partner and Báez using Cristóbal López’s bank Finansur. Those documents are all now posted  for the world to see.  Clarin noticed one item on the site and reported on it on August 24, and one piece of paper told a very big story on its own.

No matter what mix of complex tactical maneuvering Cristina and Máximo Kirchner are planning in order to ensure impunity within the Argentine justice system, their tricks don’t work in foreign courts.  Cristina has had no luck in her attempts to evade U.S. courts. In fact, she has amassed quite a pile of rulings and orders against her government.

Some of those rulings relate to her policy mistakes – like deciding to default on external debt and refusing to negotiate with creditors. Those will be part of the legacy she leaves to her successor.  But investigations focused on corruption and criminal activities by her clan will go on.  And as those mountains of evidence make their way into U.S. court proceedings the Kirchner brand of game of sleight of hand will be laid bare.  She will not be able to fire foreign judges and prosecutors in the way she has run roughshod over Argentine investigations. As long as there is unfinished business in foreign courts, those investigations and proceedings will continue.

Moody’s Report Highlights Path for Argentina’s Next President

Last week, following news reports that President Kirchner had raided the country’s reserves to pay debt, Moody’s credit ratings service issued a new report that outlined the benefits of negotiating with the country’s creditors in stark terms.

“With US $25 billion maturing in the next two years, a failure by the new Administration to resolve the outstanding legal issues and being able to return to the market will put more pressure on the level of Central Bank reserves,” stated the report by Moody’s.

The specter of Argentina’s leaders using the nation’s reserves to pay normal debt service has increased as Argentina has remained unable to access global financial markets.  As Moody’s points out, it’s a huge problem for Argentina that will only get bigger unless the next government is willing to negotiate with creditors, something that President Kirchner and Economic Minister have refused to do.

El Cronista reported President Cristina Kirchner signed executive announcement “Decree 1503,” authorizing an official transfer of “nearly $3.6 billion with which the Treasury is paying maturities this year with multilateral organizations and member countries of the Paris Club.”

Reportedly, this is “the formalization of something that has been happening since early this year: according to official sources, the government has already paid 60% of these commitments with reserves over these eight months.”

In an interview with La Nacion, Moody’s Vice President Gabriel Torres characterized Argentina’s actions toward its creditors as having both legal and economic consequences, stating “without an agreement there will be no dollars, and part of the maturities will not be able to be paid.”

Torres went on to describe Argentina as experiencing “a crisis scenario, because the economy is not growing for four years.”  Of course, the architects of this economy, which has also been marked by a soaring blue dollar rate and an exodus of foreign investment are President Kirchner and her Economy Minister Axel Kicillof, who decided last year to plunge the nation into default rather than negotiate with creditors.

Kicillof’s recent forays into the debt markets have proven disastrous for Argentina, which now has higher borrowing rates than Iraq.  Moreover, these exchanges have yielded little in actual new funds, thus the government’s continued reliance on reserves to service its debt.

Argentina’s next president will inherit this legacy, but that president doesn’t have to continue it.

Argentina Is Already in Violation of the UN’s 9 Debt Restructuring Principles

Yesterday, Argentina’s Ambassador to the United States Cecila Nahon gave an interview to the Buenos Aires Herald in which she implored Washington to “get more involved” with the UN debate on debt restructuring.  After aggressive lobbying by Argentina to do so, the UN established an Ad Hoc Committee on Sovereign Debt Restructuring based on 9 guiding principles.

The UN debt debate is part of a broader context.  After choosing to default last year rather than negotiate with creditors, Argentina’s leaders have embarked on a global campaign aimed at multilateral institutions like the UN and the OAS to support their pseudo-moralistic defiance of U.S. Courts.  The amount of time, resources and energy that Nahon and others have devoted to this endeavor is astonishing, considering how easy and beneficial it would be to simply negotiate a deal with creditors.

We don’t know why the UN expects Argentina to abide by a new debt-restructuring regime when its track record suggests their leaders will walk away from commitments whenever it suits them.  In fact, while the UN process hasn’t even finished, Argentina is already in violation of the UN’s nine principles.

Let’s take a look at the principles:

1. A Sovereign State has the right, in the exercise of its discretion, to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures. Restructuring should be done as the last resort and preserving at the outset creditors’ rights.

Argentina is in violation of this principle.  Creditors’ rights are defined by the contracts and interpreted by the courts of jurisdiction of the sovereign state.  As a sovereign state, Argentina chose to have its borrowings governed by the courts of the United States, and it chose to waive sovereign immunity as part of its bond contracts.  U.S. courts have conclusively ruled that Argentina disregarded creditor rights by failing to make payments as promised while unilaterally subordinating the debts of some creditors and acting with contempt toward U.S. law.

2. Good faith by both the sovereign debtor and all its creditors would entail their engagement in constructive sovereign debt restructuring workout negotiations and other stages of the process with the aim of a prompt and durable reestablishment of debt sustainability and debt servicing, as well as achieving the support of a critical mass of creditors through a constructive dialogue regarding the restructuring terms.

There is widespread agreement that Argentina has refused to act in good faith.  Moody’s Investor’s Service states: “the case of Argentina was and remains unique in its unilateral and coercive approach to the debt restructuring.”  The Kirchner regime disdained prompt engagement with its creditors and utilized delay as a means to coerce investors into very large losses.  These unconstructive and polarizing tactics are the root cause of Argentina’s problem today.  To this day, Argentina still refuses to negotiate with its creditors.

3. Transparency should be promoted in order to enhance the accountability of the actors concerned, which can be achieved through the timely sharing of both data and processes related to sovereign debt workouts.

Argentina has routinely run afoul of the IMF for its inaccurate statistics and for its lack of transparency. Argentina has also been placed on the FATF’s “grey list” for its ineffective controls in combatting money laundering and terrorist financing.

4. Impartiality requires that all institutions and actors involved in sovereign debt restructuring workouts, including at the regional level, in accordance with their respective mandates, enjoy independence and refrain from exercising any undue influence over the process and other stakeholders or engaging in actions that would give rise to conflicts of interest or corruption or both.

Argentina’s secretive reopening of its debt exchange in 2010 generated huge insider profits for foreign investors close to Argentine officials in charge of the process.  These arrangements, currently under criminal investigation, will likely prove to be the most striking example of corruption and conflicts of interest relating to sovereign debt rescheduling in modern time.

5. Equitable treatment imposes on States the duty to refrain from arbitrarily discriminating among creditors, unless a different treatment is justified under the law, is reasonable, and is correlated to the characteristics of the credit, guaranteeing inter-creditor equality, discussed among all creditors. Creditors have the right to receive the same proportionate treatment in accordance with their credit and its characteristics. No creditors or creditor groups should be excluded ex ante from the sovereign debt restructuring process.

U.S. courts, at the highest level, have objectively and exhaustively found Argentina to be in violation of the equitable treatment clause of its bond contracts.

6. Sovereign immunity from jurisdiction and execution regarding sovereign debt restructurings is a right of States before foreign domestic courts and exceptions should be restrictively interpreted.

As affirmed by a 7-1 U.S. Supreme Court decision last year, Argentina voluntarily waived its sovereign immunity when it issued its bonds in the United States.  It wasn’t required to do this, but it did so in order to gain more favorable financing terms.

7. Legitimacy entails that the establishment of institutions and the operations related to sovereign debt restructuring workouts respect requirements of inclusiveness and the rule of law, at all levels. The terms and conditions of the original contracts should remain valid until such time as they are modified by a restructuring agreement.

Argentina has violated contracts, it has defied U.S. courts and it has viciously attacked U.S. judges and court officials.  It shows utter contempt for the rule of law.  None of this behavior can be called legitimate, and it is certainly not the behavior of a G-20 member state.

8. Sustainability implies that sovereign debt restructuring workouts are completed in a timely and efficient manner and lead to a stable debt situation in the debtor State, preserving at the outset creditors’ rights while promoting sustained and inclusive economic growth and sustainable development, minimizing economic and social costs, warranting the stability of the international financial system and respecting human rights.

Sustainability requires the prompt regularization of a country’s borrowing arrangements, i.e., the complete opposite of the tactics of the Kirchner regime.  Lack of access to international credit and borrowing at twice the rates of neighboring countries has imposed enormous financial and social costs on the most vulnerable segments of Argentina’s population.  No other country or regime has chosen to stand so far outside the rule of law and recognized good practice in debt management.

9. Majority restructuring implies that sovereign debt restructuring agreements that are approved by a qualified majority of the creditors of a State are not to be affected, jeopardized or otherwise impeded by other States or a non-representative minority of creditors, who must respect the decisions adopted by the majority of the creditors. States should be encouraged to include collective action clauses in their sovereign debt to be issued.

In fact, many bond contracts issued today do contain collective action clauses (CACs).  But Argentina chose to issue its bond contracts with a pari passu clause, again, to gain more favorable financial terms.  It can’t have its cake and eat it too by now declaring that pari passu is unfair after it has enjoyed the favorable financing it received in U.S. markets.

Despite the fact that Argentina is already flouting the very principles that it promotes as the centerpiece of its campaign of defiance, the UN process continues.  We’ve pointed out before that the UN “Human Rights” advisor who is driving this whole process has served as a paid consultant to Argentina.

In its “no” vote in September of 2014 on the UN debt process, the United States deputy representative explained that this new process, in addition to being unenforceable, was likely to create more, not less uncertainty and that there are more appropriate tools for restructuring.  We agree.

Máximo Kirchner’s Offices Raided in Hotesur Corruption Case

Bad News Coincides with Release of Latest Poverty Statistics

Argentine federal judge Claudio Bonadio and prosecutor Carlos Stornelli ordered a raid on the offices of Presidential son and La Cámpora leader, Máximo Kirchner, Monday, seeking accounting information as part of the ongoing Hotesur K-money laundering and corruption case.

Máximo Kirchner was not present during the raid on Idea SA (which belongs to him) and Valle Mitre; both companies are administrators of the hotels owned by President Cristina Fernández, who was traveling at the time.

All reports indicate that the Kirchner family and its associates were not expecting these developments; Clarin reports that “her [Kirchner’s] family showed signs of nervousness about the proceedings…”

For example in El Calafate, when the police arrived sent by Bonadio to the Hotel Los Sauces, city prosecutor Natalia Mercado approached. She is the daughter of Alicia Kirchner, the president’s niece, cousin of Máximo and sister to Romina Mercado, president of Hotesur. She tried to impose a gesture of authority, but federal officials explained to her that she had nothing she could do there.

It was, for certain, a precedent-setting event:

Never in the twelve years of K-power has the Federal Court come to ring the door bell at the house on Avenida Néstor Carlos Kirchner, number 496, Rio Gallegos: it is the operational center of some of the most important business of the presidential family, and its partners.

The raid itself represented the execution of Judge Bonadio’s “procedural orders” seeking information about 35 separate companies with ties to the Kirchner family and its business interests, specifically including “banks and companies” associated with K-businessman Lázaro Báez – the number one recipient of public works contracts during the Kirchner administration. Báez is a business partner of President Kirchner, and the former administrator of her largest hotel, Alto Calafate.

Argentina’s creditors have undertaken a great effort to reveal the extent of corruption by Báez and other Kirchner confidantes. Earlier this summer in Nevada, Judge Cam Ferenbach rejected a petition by Mossack Fonseca’s alter ego M.F. Corporate Services to stay discovery. In Nevada and in Bonadio’s court, the tide is turning against corruption.

Unsurprisingly, K-confidantes were quick to publicly undermine the raid, with Kirchner’s Cabinet Chief, Aníbal Fernández, calling it “inconceivable,” and then assailing the action on a semantic level, claiming, this “is not a raid, but an information inquiry.”

Presidential cronies will have an equally difficult time refuting just-released evidence that the government’s global isolation as a result of its inability to settle with its creditors is crushing the Argentine economy: the Argentine Catholic University released a report yesterday that the Argentine poverty level has increased to 28.7%. That means 11.5 million Argentines are living below the poverty level.

This is in marked contrast to the figures cited by President Kirchner last month, when she “sparked controversy” by endorsing “widely disputed government figures,” and claiming that the poverty rate was “below five percent.”

We’ve long documented the Kirchner administration’s discomfort with hard economic data (it simply stopped publishing poverty statistics in 2013), but we continue to be baffled by its recalcitrant attitude towards negotiating a solution to its debt. Relief for the Argentine people would soon follow.

New Sanctions Filing by Creditors

Argentina’s “willful disregard” of a discovery order issued by the U.S. District Court for the Southern District of New York merits sanctions, says a filing made today by creditor NML Capital.  That motion is based on orders by the District Court, the Second Circuit Court of Appeals and a U.S. Supreme Court ruling that issued in June 2014.

In the fall of 2013, the District Court ordered Argentina to produce documents regarding assets that could be used to satisfy their judgments, and inquiries that certain entities controlled by Argentina, including YPF, ENARSA and BCRA, are its alter egos.

Argentina, of course, appealed, claiming that the Foreign Sovereign Immunities Act (FSIA) grants broad immunities from discovery. This past December, the Second Circuit Court of Appeals affirmed “in all respects” the District Court’s original discovery order. (The Court of Appeals waited until the resolution of a related case in the U.S. Supreme Court, which last year confirmed that Argentina does not have immunities from discovery.)  Despite these rulings, Argentina refuses to comply with the court’s order and has not produced any documents.  In doing so, the Republic has now exposed itself to sanctions by the Court, including the requests by NML that:

– Argentina be forbidden from contesting assertions that the discovery sought to demonstrate, including that Argentina’s property in the U.S. is being used for commercial activity and that YPF, ENARSA, BCRA are not alter egos of the Argentine government.

– The court deems that Argentina has waived any privilege related to producing documents.

– Argentina and its counsel should compensate NML for the expense of bringing Argentina in compliance with the discovery.

Argentina’s behavior is nothing short of outrageous. It uses the U.S. courts’ valuable time and energy to appeal unfavorable rulings, and then when Argentina loses those appeals, it simply refuses to obey. Argentina’s lawless conduct undermines the foundation of the U.S. judicial system.

One of the sanctions sought by creditors would preclude Argentina from contesting NML’s alter ego claims and from asserting immunities. The filing says that this sanction is just because Argentina has “thwarted this inquiry by willfully withholding information that goes to the heart of the alter-ego question.”

Later, the filing lays out a series of findings as to that alter ego status:

  1. Argentina’s property in the United States is being used for commercial activity in the United States;
  2. High ranking officials of Argentina also act as high-ranking officers, directors, or employees of BCRA, ENARSA and YPF, and vice versa;
  3. BCRA, ENARSA and YPF report to Argentina and act on its behalf, and vice versa;
  4. BCRA, ENARSA and YPF use their assets for the benefit of each other and for the benefit of Argentina;
  5. BCRA, ENARSA, and YPF are responsible for the debts and obligations of Argentina, and vice versa;
  6. Argentina determines all the important policies of BCRA, ENARSA and YPF, including policies related to borrowing, repayment of debts, interest rate setting, lending guidelines, monetary policy, and the accumulation of foreign reserves; and
  7. Argentina regularly reviews, negotiates, approves guarantees, and pays the debts and obligations of BCRA, ENARSA and YPF, and vice versa.         

Presuming these facts as true and precluding Argentina from contesting them gets creditors considerably closer to attaching the assets of these entities in order to satisfy their judgments. The expropriation of YPF was a centerpiece of President Kirchner’s populist economic agenda. As the alter ego of the state, the business’ assets would be subject to seizure.

That should provide a lot for President Kirchner and her lawyers at Cleary Gottlieb to think about.  Argentina’s strategy of ignoring court orders has not been a winning gambit for the country.  Deciding to default, rather than to negotiate, has been a self-inflicted wound on Argentina’s economy, creating an unnecessary mess for the next President.

The Economist recently stated “the next president will have to deal with bondholders if the country is to borrow at reasonable interest rates.” But it’s not too late for this President of Argentina to change course and to negotiate a settlement with creditors, which would immediately put an end to all of this.

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