As Argentina finds itself on the verge of a second default, what blame, if any, does the distressed investing community hold?
The distressed investing community holds no blame for Argentina’s risk of default.
When issuing a bond, a country makes a promise to repay its creditors on time and with interest. If Argentina is unable to do so, that’s certainly not the bondholders’ fault. The fact that the economic crisis of 1998-2002 that precipitated the original default in December 2001 stemmed from circumstances beyond Argentina’s control does not shift blame to the country’s creditors for the present crisis, nor does it create any obligation for them to agree to a massive write-down of their bond holdings.
Argentina’s economy minister blames this crisis on “vulture funds” that bought the country’s debt at a discount on the secondary market and then sued to be paid in full. Yes, it’s true that the holdout creditors, if paid in full, will receive more from Argentina than they paid originally for the bonds. But that’s precisely the point of investing in distressed opportunities: the investors purchased the bonds so that they could make a return. They didn’t do so out of charity. To blame them for the country’s inability to uphold its end of the bargain is nonsense.
Though the Supreme Court has denied review, in the U.S. courts of law it has been a question of how to interpret pari passu clauses in the bond contracts, which seek to provide that all creditors are treated equally. But it’s questionable whether those clauses should be valid in preventing payments from insolvent debtors to some creditors while others are not paid and whether the U.S. courts should have any jurisdiction to decide Argentina’s sovereign obligations—especially when those bonds are governed by non-U.S. law and payable outside of the U.S. Perhaps the time has come for a multilateral insolvency court with the power to dictate sovereign-debt restructuring, which the International Monetary Fund favors.
By pleading its case in the court of public appeal, Argentina is attempting to portray the country as a victim of a predatory distressed investing community, rather than accepting the consequences of poor fiscal decisions. It’s a classic case of brinkmanship and, at the end of this month, could become an international incident.
J. Scott Victor is a founding partner and managing director of investment banking firm SSG Capital Advisors LLC and a member of the Turnaround Management Association’s global board of trustees.
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