Argentina’s debt default has been making headlines all over the world, but mostly without those reporting it actually understanding the saga’s complexity. Some pundits have translated the South American country’s travails as likely to become a problem for all Emerging Markets, South Africa included. But as Futuregrowth’s Chief Investment Officer Andrew Canter explains so eloquently in this fascinating Podcast, the smart money appreciates this is more technical than structural. And that Argentina is a long way from exhausting its own legal and political missiles. Â – AH Â Â
ALEC HOGG: Andrew Canter from Futuregrowth is with us on the line from Cape Town. Andrew, the Argentina default has many facets to it, but perhaps we can go back a little. Argentina doesn’t have a great record in repaying its debts….
ANDREW CANTER: No. In fact, many emerging markets – in particular, in South American countries – default like clockwork, for the last 200 years they’ve done so every 20 or 30 years so this isn’t new news. The interesting thing about this particular default is that it’s not really because of Argentina’s financial circumstances. It’s more of a technical and legal debate
ALEC HOGG:Â By way of a little bit of background, how did they accumulate so much debt to get themselves into a situation where they cannot repay it?
ANDREW CANTER: Well, this goes back to the real ramp-up in the late 1990’s and the banks were running around emerging markets, lending as much as they could as fast as they could, to any people who’d borrow it.
It’s a theme that’s starting to emerge in Africa now, by the way.
By 2000/2001, the Argentinians had over $100bn of debt, which they eventually just couldn’t service and they did default on that debt in 2001. They negotiated with the holders of that debt in the ensuing years, so they made some agreements in 2005 and thereafter, to cut the capital outstanding on that debt by about 70 percent. Therefore, if they owed you $1m in 2001, you (and they) would agree that they would only owe $300,000 five years later, and they would service that over time. Basically, it just cut the capital required to pay back because there was no chance that it was ever going to be paid back.
ALEC HOGG:Â Have they fulfilled those requirements?
ANDREW CANTER:Â They have. On those particular bonds, about 93 percent of the holders of that $100bn debt at the time accepted the terms and they have serviced those terms up until now. The real challenge has been the “holdouts” or the “vulture funds” who apparently bought the remaining debt in the secondary market at pennies on the Dollar, and have been suing Argentina now for going on ten years to get back 100 cents on the Dollar, rather than the 30 cents on the Dollar everybody else accepted. You’ve got this weird situation where 93 percent of the creditors agreed to a discount or a haircut if you will, and the other 7% who bought it cheap, who have refused and have pursued every legal avenue to get paid out rather extraordinary gains.
ALEC HOGG: Fast forward to today and that 7% of debt is becoming an embarrassment.
ANDREW CANTER: Well, it’s an embarrassment….it’s an interesting case because you’re not really sure. As a lender, as a bondholder, Futuregrowth would normally be ‘well, the law must prevail. They owed the money. They signed the contract. Pay it back. You didn’t make a deal with me. Pay it back’. On the other hand, here you have a couple of hedge funds and vulture funds, four guys in an office in New York using the legal system to hold a sovereign state to ransom, and there are implications. If they agree to pay back these guys, they could trigger a clawback from all the other holders of the other 93 percent – the other $100bn of debt. In the Settlement Agreement, it said that if Argentina willingly made any agreement with any creditor to pay more than the 30 cents on the dollar, they would have to pay everybody the full amount, so this thing has enormous consequences for Argentina in legal terms.
ALEC HOGG: What’s the status of the legal case right now?
ANDREW CANTER: The default now is because they had to make a coupon payment on the restructured debt that they’ve been servicing, which was due on June 30th. There was a 30-day standstill period, thereafter. If it wasn’t paid, it was in default. They deposited that money in the bank in New York, but the judge has said ‘well, you can’t pay those guys because you haven’t paid the holdouts’ and so Argentina perversely paid the money to service the debt, but it won’t be released because, basically, the Trustee can’t go against the court order not to pay it. The legal status is a standstill. They are in default on their obligations now…not on all their obligations, but on the restructured obligations. They refuse to adhere to a US court order to pay the holdouts 100 cents on the Dollar, which isn’t a huge amount in itself – it’s about $1.5bn – but it could trigger billions more in claims, and it’s at a standoff. I must say I have some sympathy for the Argentinians on this.
ALEC HOGG: It sounds terribly complicated, but as you say, easy enough to get rid of the $1.5bn but then they expose themselves to other claims as well. Isn’t there a more elegant way of addressing this?
ANDREW CANTER: Well, there probably is. If you get these guys holding the small amounts of bonds to sell their bonds for a slightly higher price rather than full face value, then you could buy them out. You could make some arrangement, for example would they restructure that debt on a different set of terms? Otherwise, there’s arrogance and ego coming into play here. The hedge fund guys have been doing this for ten years.
They’ve done everything from trying to seize the President’s airplane on the tarmac (I think, in Europe); they tried to seize an Argentinian naval vessel.
There’s a lot of ego there, and then you have the President of a country whose people on the street are angry about this and refuse to have the nation held to ransom, saying ‘don’t pay’. It could be a real standoff. It could last a long time. Argentina was in default from 2001/2 right up until 2005 and it took that long to negotiate a settlement. If that’s what it takes maybe that’s the price they’re willing to pay on the principle of the thing.
ALEC HOGG: You’ve mentioned vulture funds a couple of times. What exactly is a vulture fund?
ANDREW CANTER: If a company (or in this case, a country) goes into default, obviously the holders of that debt – many of them must sell it because it’s gone into sub-investment grade. It looks like rubbish in their portfolios, so they just dump it. They’ll dump it at 20 cents on the Dollar or ten cents on the Dollar. The hedge funds will then step in and look at the legal protections and positions of this bond and will buy them. They’ll buy them up. They’re so-called vultures. We see this in the property market. When some property markets are really clobbered and people are panic selling, people come in and buy the dead carcasses of other people’s transactions so to speak, try to rehabilitate them, and make substantial gains. In these cases, they’re hedge fund operators. They’re highly fee-incentivised. The guys out there are fighting for their bonus where the Argentinians are fighting for national pride and economic sustainability. You can hear where my bias lies.
ALEC HOGG: You can indeed, but the legal system (at this point in time, anyway) does seem to be siding with those vultures.
ANDREW CANTER: All these hearings have been held in the New York court system, which obviously is the financial capital and therefore, is probably going to take a financial view. The Argentinians have argued that the court system in New York has been inherently biased against them. Under the circumstances, they want to appeal to The Hague. They tried to take it to the US Supreme Court who wouldn’t even hear the case. They basically said ‘look, you signed the contract. Pay the money’ and that’s the reality.
Argentina’s had some shocking legal advice throughout this whole process.
There were no collective action clauses. When a company’s going to be delisted from the Stock Exchange, if 90 percent of the holders agree, the other ten percent are forced to come along. There is none of that in this case. The bonds were done at a time when there were no collectives. That has been corrected by the way, in more recent years. There are now collective action clauses.
ALEC HOGG: Looking ahead, how do you think this is all going to play out?
ANDREW CANTER: I think that in global terms, it’s a non-event. In 2001/2002, Argentina was over 20 percent of the emerging market bond index. It’s now 1.3% or something of that order of magnitude. It has had no effect on markets. I don’t think it impairs the ability of Argentinian corporates to borrow to run their businesses. It probably further reduces the Argentinian sovereign need to access global markets, but I think the smart people know it’s a technical default and they’re going to look closer at legal terms of newly issued debt. I do believe it’s something that’s recoverable from Argentina’s point of view and I think that from a global point of view, it’s entertaining, but a non-event.
ALEC HOGG: So there isn’t any implication for a sovereign like South Africa?
ANDREW CANTER: I don’t think so. South Africa, in terms of looking at how it issues debt… You mentioned earlier that this is confusing. Well, it is very confusing. Here’s Argentinian debt issued in New York under U.S. law versus Argentinian debt issued probably in multiple jurisdictions under multiple different laws with overlapping Terms & Conditions. With the South African sovereign debt issued outside of South Africa, there’s relatively little of it. It seems to be relatively simple. It seems to have some cohesion in the legal structures and it’s limited. It’s 15 percent of the total debt load of the country/of the government, so it’s very well managed. If anything, it makes South Africa look good in financial terms, relative to South America. It’s usually the case.
ALEC HOGG: Just getting back to the vulture funds, why wouldn’t they take on someone like Russia, given that they’ve also defaulted?
ANDREW CANTER: Oh, this is just legal arbitrage. They do what they can when they can, and they really have used every legal trick they could bring to bear, to get Argentina to pay. I’m assuming that the Russian bonds just aren’t as easy to negotiate against.
ALEC HOGG: Maybe you can’t negotiate that easily  in Moscow.
ANDREW CANTER:Â Maybe they’re as afraid of Putin as everyone else is….
ALEC HOGG: Probably. From the Argentinian perspective, if you were advising them, would you just tell them to let it go – ignore it?
ANDREW CANTER: No, I wouldn’t. This is really an interesting case. This is the sovereign State of Argentina versus a couple of hedge funds. I really think, in the global court of justice and an objective view of this, says that these guys pay ten cents on the Dollar. Negotiate the non-payment of ten cents on the Dollar plus a healthy interest rate and make a settlement, but 100 cents on the Dollar plus interest accrued with all the implications of that – if I were the President of Argentina, I would stand firm and I would not pay. If I were sitting in the High Court of Global Justice, I would probably exercise the Wisdom of Solomon and cut a hedge fund manager in half.
ALEC HOGG: But is there any discussion or any potential settlement between the parties at the moment?
ANDREW CANTER: Oh, I would guess that there is quite a lot of discussion going on, and the Argentinians will bring all sorts of political pressure to bear. They’ll try to claim these guys acted on inside information at various times. They’re going to mount a public relations campaign. Behind hedge funds are usually clients – often Pension Fund money – who may not want to be associated with imperilling the health and welfare of many millions of people on the streets of Argentina. There is political pressure that can be brought to bear as well as pragmatic economic pressure, so I imagine there’s an ongoing discussion and we’re likely to see something at some point in the coming months. I don’t think it’s going to be ‘the coming days’.
ALEC HOGG: Fascinating insights on the Argentinian default with Andrew Canter. He’s the Chief Investment Officer at Futuregrowth Asset Management.
