Fact Check: Argentina

937 days, 15 hours, 37 minutes ago

SINCE RUFO EXPIRED

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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.