What Greece Can Learn From Argentina's Default
“Argentina is going to make this month’s bond payment without any obstacle,” Economy Minister Hernán Lorenzino assured reporters on his 40th birthday—on March 5—in Buenos Aires. He was shrugging off a ruling by U.S. District Judge Thomas Griesa in favor of creditors who have been challenging Argentina’s debt restructuring in New York.
Lorenzino was still in his 20s when the country defaulted on a then-record $95 billion in debt in December 2001, an event that in some ways parallels the recent Greek melodrama. South America’s second-biggest economy hasn’t sold bonds overseas since. It has, however, kept law firm Cleary Gottlieb Steen & Hamilton busy fending off attempts by funds run by billionaire investors Kenneth Dart and Paul Singer to seek compensation. And Griesa, 81, has made so many rulings on the dispute that he’s become a minor celebrity in Buenos Aires newspapers.
Argentina’s 2001 default came as its budget deficit widened and the country’s economy was shrinking for a third-straight year, fueling unrest that left more than two dozen people dead. Four years later, then-President Néstor Kirchner offered to swap the defaulted bonds for new ones worth 70 percent less, similar to Greece’s proposal. Nearly three-quarters of the bondholders accepted the deal. Others went to court to try to collect.
In 2010, President Cristina Fernández de Kirchner, who began her second term in December, four years after succeeding her late husband, renewed the 2005 exchange offer, saying it was the final chance for holdout creditors to get new bonds. At this point, Argentina says litigating creditors still hold about $4 billion of defaulted debt. Along with the hedge funds suing in New York, a group of Italian bondholders is seeking an arbitration award at the World Bank’s International Centre for Settlement of Investment Disputes.
Could the drawn-out legal legacy of Argentina’s restructuring be a cautionary tale for Greece, which this month offered to exchange more than $200 billion of debt? “It very much depends on who is the last of the Greek creditors,” says Anna Gelpern, a law professor at American University in Washington. “Greece has threatened not to pay off holdouts, but I think the population of holdouts will be tiny compared with what it was in Argentina, and that’s unlikely to generate the same level of legal heat.” In the Greek exchange offer, 95.7 percent of bonds were tendered.
After defaulting, Argentina abandoned a one-to-one peg to the dollar and let its currency float. Gross domestic product fell 10.8 percent in 2002. By the next year the economy began to soar on the back of higher soybean and grain prices and Brazilian demand for the country’s manufactured goods. GDP has risen about 7 percent a year on average since the 2005 swap. Export taxes also helped push international reserves to a record $52.6 billion last year. Fernández has tapped the reserves during the past three years to make debt payments.
Argentina’s growth has come with annual inflation that economists including ex-central bankers Alfonso Prat-Gay and Martin Redrado say is above 20 percent today, more than double the 9.7 percent reported by the government. Standard & Poor’s rates the country B, five levels below investment grade, the lowest among the Group of 20 biggest industrialized and emerging economies.
Dart and Singer say Argentina owes at least $2 billion to investment funds they manage. In 2000, Singer’s Elliott Management was paid about $58 million by Peru to settle a lawsuit over defaulted bonds after a European court issued an order that prompted the country to halt a bond payment.
The latest ruling by Griesa said Argentina needed to pay overdue interest to holdout creditors such as Dart and Singer if it wanted to keep paying interest to investors who had accepted the new bonds. Argentina quickly appealed, which means the payments to new bondholders will proceed as planned this month, says Lorenzino.
That Singer and Dart have been unable to collect anything from Argentina even though they’ve won court rulings may be one reason most bondholders took Greece’s restructuring offer, according to former Argentine Finance Secretary Guillermo Nielsen. “Greece has benefited from the fact that none of the vulture funds have been able to grab anything so many years after the exchanges have closed,” Nielsen says. “Nobody wants to play the game of a decade of litigation.”