Argentina just defaulted last week after having defaulted in 2001. The fact is Argentina has defaulted 8 times in its 200 year history but this time around I actually feel the Argentinians are getting the short end of the stick,let me explain.
Argentina’s $100 billion default in 2001— was at the time, the largest ever. That default threw millions of Argentinians into poverty and left over 25% of the people unemployed. The crime rate exploded and it left the poor to fend for themselves. During this time, the poor would go on to the streets looking for food, there were numerous reports of cattle cars being stopped on the street where the cattle would be slaughtered and butchered on the sides of the road just so that the people could eat.If you want to read a great account of that default please read “And The Money Kept Rolling In.”
Having read the book I can tell you the book is heart wrenching in the damage that it caused the people. Imagine butchering a helpless animal on the side of the road just so that you can eat. Some of the main takeaways from the default were the following:
- The disconnect between the political class and the people. The politicians raided the coffers, promised the world to its citizens and when the money ran out, the citizens suffered. The leadership in the country knew the damage that they were causing but still spent the money because they wanted to stay in power. The citizens trusted their officials to balance the fiances but they were betrayed.
- Wall Street acted as a conduit to sell as many bonds as possible because by doing so they reaped millions of fees in the underwriting. The Wall Street banks knew that Argentina was going to default and they knew there would be a lot of money to made in the restructuring of bonds.
- Wall Street helped facilitate the purchase of more bonds by creating indices and forced fund managers to buy the bonds. As Argentina issued more bonds, the weighting in the indices became greater so that a fund manager trying to replicate the performance of the index of emerging market bonds was actually forced to buy more bonds. The more bonds that Argentina created, the greater the weighting would be in the index and the more the fund manager would have to buy that debt.
After the default in 2001, Argentina a few years later restructured its debt. “It offered the holders of its defaulted debt—which was still trading at deep discounts—new “exchange bonds” that paid about 35 cents on the dollar of the original ones. It was an offer they couldn’t refuse. If investors said no, they got nothing. That’s why 93 percent of the old bondholders accepted the new ones. ” (Washington Post).
The 7% that held out got nothing. In addition the Argentinians told the 93% that accepted the new bonds, that if they were to renegotiate with the 7% that held out, any deal they got would be granted to them as well. The reason being is that all senior sovereign bonds are created equal and are treated as such.
In 2005 after all the old defaulted bonds had been exchanged, there was still these un-exchanged defaulted bonds circulating. out there. A few hedge funds started buying the old defaulted bonds to the point where they controlled most of these bonds. They did so knowing that if they controlled all of these “old bonds” they could try to force Argentina to pay them 100 cents on the dollar.
These hedge funds that bought these old defaulted bonds did not lose money in buying them. They bought them in the hopes that they would get paid in full. Many of these bonds were bought when they were trading at 30 cents on the dollar.
Over the last few weeks the courts have agreed with the hedge funds and their claim to be paid in full. The courts have ordered Argentina to pay the old defaulted unexchanged bonds in full. However as a consequence of this ruling, Argentina will be forced to pay all the old bonds holders from 2001 the same 100 cents on the dollar (the other 93%). And because Argentina does not have the ability to pay every bond holder from 10 years ago at 100 cents on the dollar, they have defaulted once again.
Argentina will once again plummet into despair and the poverty level will shoot through the roof . Argentina bears a heavy burden for the faults that they made but the decisions of the fund managers to force Argentina to default once again will cause untold misery on the poor once again. Finance and bonds are a rich mans game but the poor are the ones that really pay the prices. For them, it won’t be the legality or rule of law but having enough food to eat that will concern them.