Bond Vigilantes’ Ghana Ambush Proves Default Hex Unbroken
Argentina received a reminder this week that the consequences of reneging on its creditors extend far beyond the bond market.
A court in Ghana, the West African nation sandwiched between Togo and Ivory Coast, blocked an Argentine navy training vessel from leaving one of its ports after granting a request from billionaire Paul Singer. The hedge fund manager, who owns debt from Argentina’s record $95 billion default in 2001, is trying to force the South American country to repay in full.
While the value of the triple-mast frigate represents a fraction of the $1.6 billion that the Argentine government owes Singer’s Elliot Management Corp., unresolved claims have prevented the nation from tapping international debt markets for more than a decade, according to Arturo Porzecanski, director of American University’s international economic relations program. That has compelled President Cristina Fernandez de Kirchner to use central bank reserves to pay its obligations and increased Argentina’s borrowing costs, now 10.7 percent, to more than double the average for developing nations.
“It’s a reminder to the Argentina government that it cannot ply the financial waters of the world without fear of attachment,” Porzecanski said in a telephone interview from Washington. “The Argentines are definitely afraid that any money they could raise abroad could be impounded.”
Argentina’s Foreign Ministry protested the Ghanaian court decision yesterday, saying in a statement it won’t give in to “attempts at international and local extortion by vulture funds.”
Peter Truell, a spokesman for Elliot Management, declined to comment on the decision or the fund’s Argentina strategy.
Elliott Management’s NML Capital Ltd. and EM Ltd., a fund owned by billionaire Kenneth Dart, are among the investors who want to force Argentina to pay the full value of defaulted bonds that weren’t swapped in two restructurings. About 94 percent of the securities were exchanged in 2005 and 2010 through offers that gave creditors about 30 cents on the dollar.
NML is also waiting for a federal appeals court to rule on a decision from a U.S. district court that a so-called pari passu clause in the defaulted debt securities bars Argentina from paying owners of the new bonds before it pays the so-called holdouts. The appeals court heard arguments in July.
The action against the ARA Libertad, the Argentine tall ship stuck in Ghana, follows attempts by owners of the defaulted bonds to seize Argentine government assets from aircraft owned by flagship airline Aerolineas Argentinas to central bank funds deposited in banks in New York.
Argentina’s inability to resolve its obligations on the defaulted debt is one reason its borrowing costs are among the highest in the world, even as the third-biggest soybean exporter profits from record grain prices and the country prepares to develop the third-biggest shale gas deposits on Earth.
Fernandez has also failed to reach an accord on $8.9 billion of defaulted Paris Club debt and is engaged in a public dispute with the International Monetary Fund, which threatened to censure Argentina if it doesn’t improve its inflation reporting. Private economists have questioned the government’s data since 2007, saying that prices are rising about 24 percent a year, versus the official rate of about 10 percent.
Since her re-election in October, Fernandez has tried to stop money from leaving the country and shore up international reserves by banning most purchases of dollars, limiting imports and ordering companies to repatriate money held abroad.
A press official at the Economy Ministry didn’t respond to an e-mail seeking comment on whether the court decision in Ghana affects the government’s stance toward the holders of defaulted bonds or its financing plans.
The Ghana injunction reflects the intention of holdout creditors to harass Argentina’s government as they try to force it to comply with judgments won in U.S. courts, said Mark Weidemaier, a law professor at the University of North Carolina at Chapel Hill who studies international financial contracts.
“The strategy is to use your court judgments and legal enforcement rights to be as disruptive as possible in an effort to gain leverage,” he said. The order “is quite diplomatically embarrassing to Argentina and the broader fear that a creditor can inflict pain on a country like Argentina gives the creditor the leverage it’s looking for to get paid.”
The government will continue to dismiss the holdouts because it can use central bank reserves to pay its obligations, rather than relying on overseas debt financing, according to Diego Ferro, who helps oversee more than $500 million at Greylock Capital Management LLC in New York.
Debt payments have caused reserves to decrease to $45.1 billion from a record high of $52.6 billion in January 2011.
“They don’t have easy access to international markets because of their policies, so they go tap the central bank that had been accumulating reserves for a long time,” Ferro said. “That is easy money for the government and it allows them to pretend that it doesn’t matter what the holdouts do.”
The cost of protecting Argentine debt against non-payment for five years with credit-default swaps fell 10 basis points, or 0.1 percentage point, to 928 basis points at 5:44 p.m. in Buenos Aires, data compiled by Bloomberg show. The swaps pay the buyer face value in exchange for the underlying securities or cash if a government or company fails to comply with debt agreements. The peso was little changed at 4.7037 per dollar.
Holdout creditors may also target YPF to derail the state- controlled oil company’s plans for an international bond sale next year, according to American University’s Porzecanski.
YPF Chief Executive Officer Miguel Galuccio announced on Aug. 30 that the company intends to sell bonds abroad by the first quarter of 2013 to help finance its $37.2 billion five- year investment program.
“It wouldn’t surprise me if bondholders tried to throw a monkey wrench into those plans as well,” Porzecanski said.
To contact the reporter on this story: Drew Benson in New York at email@example.com