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This is Argentina’s last month to avoid another default

Foreign ‘vultures’ and Argentines alike are demanding their money back. But will their quest for compensation push the country to default again?

Argentina holdout 2014 07 02Enlarge
Horacio Vazquez says if Argentina bailed out its banks but ignored the people. (Ed Stocker/GlobalPost)

BUENOS AIRES, Argentina — Maria Elena Corral worked for 42 years as a secretary in this South American capital city. Her parents, immigrants who fled Franco’s Spain, instilled in her the need to be frugal.

But an investment decision over a decade ago has haunted her ever since, and it’s kept the pensioner locked in a lengthy legal battle rather than enjoying retirement.

It all goes back to when Argentina defaulted on a record $95 billion of debt at the end of 2001. The economy crashed. The International Monetary Fund pulled its aid. Riots ensued. Several presidents resigned. People saw their dollar bank balances convert to heavily devalued pesos.

So Corral, who had $80,000 of life savings in bonds, was left with next to nothing.

“They told me at the bank that I was buying sovereign debt bonds and that I’d never have a problem,” says the 77-year-old, who lives alone in Buenos Aires’ Palermo neighborhood. “But just in case, I was told to purchase bonds that fell under foreign legislation.”

She’s one of 13 Argentines, almost all retirees, who are fighting to recoup their lost investments in a New York court, where their bonds have jurisdiction.

But Corral is also part of a much bigger debt drama, pitting the interests of international hedge fund managers against a nation. The fight could once again plunge Argentina into default. While it may not prove as catastrophic as 2001, failing to resolve this situation could do serious damage to Argentina’s economy — and to its prospects of rejoining international capital markets it’s been locked out of since the crisis.

Alongside the 13 Argentines in the case is a group of hedge funds, led by NML Capital, a subsidiary of US billionaire Paul Singer’s Elliott Management. Unlike the individuals, the funds bought bonds after the country had already defaulted — and at a fraction of their original value. They’ve been seeking full repayment in court, setting them up to make a tidy profit.

The individual Argentine bondholders and the funds are referred to as “holdouts,” because they held out while most of the other investors agreed to the Argentine government’s exchange deals — of around 35 cents on the dollar — in two restructuring agreements in 2005 and 2010.

But for Corral, accepting a compromise would have been “madness.”

In 2012, US District Judge Thomas Griesa in New York ruled that if Argentina pays the exchange bondholders, it must also pay holdouts like Corral and NML Capital.

Argentina’s government argues it cannot pay what it says would amount to $15 billion — if all the holdouts’ claims were taken into consideration — and appealed against Griesa’s ruling to the US Supreme Court. Last month the high court declined to hear Argentina’s case, seemingly opening the way for Corral to recuperate her loses.

“Until I see that money in my hand I won’t believe I’ll get it back,” Corral says. She claims her health suffered while looking after her sick mother, who died in 2009, because she wasn’t able to afford a medical caregiver.

The Argentine government has yet to sit down and negotiate a way to pay, although talks between the sides are expected on Monday. Economy Minister Axel Kicillof said last week at the United Nations that the country would be pushed “into a technical default and an economic crisis” if it were made to pay both the holdouts and restructured bondholders.

Argentine President Cristina Fernandez de Kirchner has described this situation as “extortion” by “vulture funds” — a term critics use for funds like NML that buy the distressed debt of companies or countries that are struggling with bankruptcy.

But the government seems to be flip-flopping — one moment chastising, the other seeking conciliation — making it hard to know where the negotiations will lead.

“Argentina argues that the [international] financial system is the problem — and they’re probably right — but they already knew that,” argues Fernando Navajas from the Latin American Economic Research Foundation. “They knew the rules. If you want to fight the vultures, you have to have a much stronger fiscal position.”

More from GlobalPost: NML Capital’ profit quest could push Argentina to default

But individual Argentine voices are rarely heard.

Horacio Vazquez, 57, bought bonds as a mid-term investment a few years after Corrales, at the end of 2000, and says the $70,000 he later lost was the “start of a struggle.”

Vazquez claims that the government saved the banks in Argentina’s 2001-02 crisis — paying them the full value of the bonds they had invested in order to stop them from going bankrupt — but ignored the people.

“I understand the need to save the banks, but when they start to make money again why not charge them a tax and return the money to us?” he says, sipping espresso in a northern Buenos Aires cafe.

Vazquez is one of some 40 claimants in a separate court case initiated in 2003 — also overseen in New York by Judge Griesa — that ended in favor of the holdouts three years later. But he hasn’t received any money, due to Argentina’s refusal to pay, though he hopes the finality of the Supreme Court’s recent decision will lead to a solution.

“Argentina is playing for time,” he adds. “The best thing for my country would be to keep its mouth shut and negotiate the best way possible [to pay].”

But time appears to be running out. Last week Argentina deposited money in several bank accounts to pay restructured bondholders — part of a scheduled payment due June 30. Judge Griesa was enraged, saying there was no compensation made for holdouts and calling the move “a brazen step in violation of this court’s orders.”

Griesa blocked the money, ordering it sent back to Argentina. That means Argentina missed the June 30 deadline. The country has a 30-day grace period to pay — if it doesn’t, it will default on its debt for the second time in 13 years.

“The government needs to find a solution for all of the holdouts,” says Buenos Aires-based economist Miguel Kiguel, who has advised the IMF and the World Bank. “If they don’t, this is never going to end.”

With ongoing claims in several European countries, Argentina must decide whether it wants to finally close the darkest chapter in its economic history, despite what it sees as an unjust ruling.

“I’m tired of all of this,” retiree Corral says. “Sometimes I can’t even talk about it.”

http://www.globalpost.com/dispatch/news/regions/americas/argentina/140702/argentinean-debt-default-holdouts