By Kevin Gandhi
Edited by Namrata Caleb , Senior Editor , The Indian Economist
Take some time to think about the Argentine default. Sooner or later, you’ll conclude that it was merely 65 words that made the Argentine Republic default for the 8th time this year in its 200-year history. However, this latest default of Argentina has been the most outlandish one in a way. The reason? A New York judge wouldn’t let Argentina pay its bondholders unless it also paid the hedge funds that were left hanging when the country defaulted back in 2001, which is quite fair to be honest.
Arguably, Argentina was in a way forced to default. How this break down of sorts came about, what exactly happened, why defaulting became necessary for the nation and more such questions will be made clear with the following facts:
- After Argentina’s default back in 2001, a deal was struck between the country and its creditors wherein the nation offered to pay them some, but not all of what was owed to them.
- Now amongst these creditors, however, were a group of hedge funds or “vulture funds” as the country calls them. This consortium refused the acceptance of the aforementioned deal, instead demanding to be paid in full. Consequently, a lawsuit followed.
- Next, according to the legal framework, there exists the Pari Passu clause, which is nothing, but an equal-treatment clause, which states that a borrower has to treat all its lenders equally. In other words, if I borrow Rs. 100 from you and another Rs. 100 from your best friends, I cannot choose to pay your best friend, and not you. I will have to treat you both as equals while paying my debts.
- Now this is where it all gets interesting. This whole issue of the hedge funds created essentially 2 kinds of creditors for the nation, the ones it continued to pay as per the aforementioned arrangement and the holdouts that didn’t accept the deal. This was a clear violation of the equal-treatment clause. After more than a year of legal battle and appeals, it all ended when on July 30th this year, Argentina failed to pay interest to the creditors who had accepted the arrangement. This acted as a trigger for Judge Thomas Griesa to eventually make it illegal for the Argentine Republic to pay its dues without also paying the holdouts.
- Considering all of this, a question arises with regards to why a United States Judge was holding authority over the decision to be taken towards another country altogether. The reason was that back in the 90s, Argentina gave in to U.S. jurisdiction over some of its exchange bonds.
Now this left the Republic with 2 choices – Either pay all the holdouts or default on the exchange bonds that it was ready and willing to pay. The smarter decision, made by the nation was to default. The primary idea behind this decision was that paying out all the holdouts would cost about another $15 billion according to certain sources, and this would have a domino effect of sorts, creating innumerable new financial obligations for the country.
Essentially, there are 2 ways this can probably end:
- The country can make a deal with the “vulture funds” syndicate wherein the bondholders could agree to waive their RUFO (Rights Upon Future Offers) rights, which promised them whatever the holdouts would get. Keep in mind, the fact that a few have already agreed to do so.
- Second, a deal could be struck with the bondholders wherein new bonds would be set up outside the jurisdiction of the United States and where the holdouts would be given absolutely zilch.
Either way, what is evident now is the fact that there is a need for change because at this rate, the country would face a default everyday. The 2nd of the aforementioned solutions would be unfair, however, since that would leave the holdouts with nothing but vacuum. Consulting expert economics and maybe setting up a committee could help, but fast action needs to materialize. It’s only a matter of time before we will know whether the country will fall prey to another bad economic policy or if this will be the point in time that the globe sees Argentina’s rise.
Kevin is a second year, undergraduate business student at NMIMS University, Mumbai. His hobbies include listening to bands such as Coldplay and Oasis, writing, going on nightly runs and occasionally playing the guitar. He has also participated in various Model UNs across the country. He loves to travel and is an enthusiastic supporter of the Kolkata Knight Riders.