The Vulture Funds and the Argentine Sovereign Debt Default
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Case Code: ECON052 Case Length: 21 Pages Period: - Pub Date: - Teaching Note: Available |
Price: Rs.500 Organization : - Industry : Financial Services Countries : - Themes: Sovereign Debt Default and the Problem of Holdouts |
Abstract Case Intro 1 Excerpts
Excerpts
The Beginning
The Achilles’ heel of the Argentine economic strategy had been its long reliance on fiscal largesse as a basic policy tool, covering its shortfalls by expanding money supply (Refer to Exhibit 1). This resulted in recurring bouts of high inflation and indebtedness, followed by ephemeral efforts to stabilize prices. En route to the end of the 20th century, Argentina experienced hyperinflation and brought in the new regime with the Menem-Cavallo cure for chronic inflation, the now infamous “convertibility plan .” Though the convertibility plan worked well at first, cracks began to resurface in the Argentine economic policy due to the large fiscal deficits at both the provincial and national levels. Compounded by the practice of rolling over, the sovereign debt began to grow from 1993. The Argentine Peso soon got overvalued, reducing the country’s international competitiveness. This was followed by the typical declines in public revenue to service the mounting debt...
Restructuring Saga
Hit by the financial crisis, Argentina suffered capital flight and a steep devaluation of currency, which led to a sudden evaporation of its wealth. As poverty and unemployment skyrocketed, leading to street protests and political unrest, Argentina began its sovereign debt restructuring (Refer to Exhibit 7 for a brief on sovereign debt restructuring) in 2002. It faced three significant complexities: (i) negotiating an arrangement with private creditors, (ii) rescheduling its obligations toward the Paris Club , and (iii) re-engaging the IMF. Again, the problems became compounded with Argentina choosing to engage in antagonistic, hardline, and self-destructive behavior rather than engage creditors in a negotiation, insisting on a large write-down of principal for private creditors and the postponing of action on the Paris Club and IMF debts...
The Swoop of Vulture Funds
After Argentina defaulted on its sovereign debt in 2001, a few “vulture funds” — most notoriously the hedge fund Elliott Management headed by the billionaire Paul E. Singer — saw Argentina’s travails as an opportunity to make huge profits at the expense of the Argentine people...
The Holdouts' Problem
Argentina stated that it had arrears of USD11.2 billion to the holdouts worldwide (including USD6.8 billion in principal past and coming due, and USD4.4 billion in past due interest through December 2010)...
Blurred Sovereign Rating
Argentina faced another problem of unclear sovereign ratings by the global rating agencies. The 2014 ruling by a District Court Judge Thomas Griesa that Argentina could not pay its bondholders unless it also paid the holdouts in full affected its sovereign ratings...
The Way Out
Argentina was not in a precarious position as it took several steps toward normalizing the economy and its relations with the outside world...
Exhibits
Exhibit 1: Macroeconomic Indicators
Exhibit 2: Sovereign Debt Securities – Argentina
Exhibit 3: Sovereign Debt Securities Issued by Select Countries
Exhibit 4: Sovereign Default Rates
Exhibit 5: Sovereign Debt in Default as a Share of World Public Debt and World GDP
Exhibit 6: External Sovereign defaults since 1800
Exhibit 7: Sovereign Debt Restructuring
Exhibit 8: Sovereign Bond Defaults Since 2000
Exhibit 9: A Short History of Vulture Funds
Exhibit 10: Sovereign Debt and Credit Rating of Countries
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