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Matt Levine

Argentina's Bond Fight Comes Down to Its Worst Bonds

An offer of 730 cents on the dollar doesn't look like enough.

We've talked a lot about Argentina's sovereign-debt saga, but now that it is perhaps drawing to a close I'd like to tell the story again, from a slightly different perspective. (If you want it from the regular perspective, you know where to go. ) This version of the story starts in 1998, when Argentina issued some bonds called floating rate accrual notes. The FRANs were due in 2005, and their floating interest rate was based on the market yields of other, fixed-rate Argentine debt. The idea was that if Argentina's credit deteriorated, holders of these bonds would be compensated in the form of a higher interest rate. This sounds like a sensible enough idea. It was a terrible, terrible idea.

Argentina's credit deteriorated. It defaulted on its bonds in 2001. In one obvious way, this was bad for the FRAN holders: They stopped getting paid. But in another, much more theoretical way, it was great for the FRAN holders: The interest rate on their bonds, which was meant to reflect the risk of Argentina's sovereign credit, went up as Argentina approached and then tipped into default. At one point, just before the 2005 maturity of the FRANs, the holders were supposed to get paid an astonishing 101 percent per year. Of course, they were actually getting paid nothing, so this did them no immediate good. But there they were, with a document saying they were supposed to get 101 percent a year. Remember that document, which has Chekhovian significance in this story.