16
Sep

Preventing the Next Argentina

Written on September 16, 2014 by Waya Quiviger in Americas, Financial crisis, News

Investors, bankers, government officials, and academics are all scrambling to come up with fixes in hopes of preventing another debt fiasco like that of Argentina, but it likely won’t be in place by the time the next country goes belly-up.

This week the United Nations General Assembly weighed in with a resolution that was supported by an overwhelming majority of countries. China and a coalition of developing countries put it forward, but the United States, Germany, the United Kingdom, and Japan rejected it, illustrating one of many divides holding back efforts to change the system.

Argentina went into default for the eighth time at the end of July, after U.S. courts ruled that the government couldn’t continue paying bondholders who’d struck an earlier deal to accept less money without also paying holdout creditors. But default is not the end of the story.

President Cristina Fernández de Kirchner, who says the investors who took her government to court are “vultures,” still has to find some sort of resolution. Her government tried to get bondholders to trade in their bonds under U.S. law for ones governed by local Argentine law, a move that gives the debtor government more control. An exchange would also allow Argentina to avoid the U.S. ruling, but government officials acknowledged this week that bondholders weren’t going for it. The rejection was expected because the switch would have significantly lessened investors’ bargaining power in the ongoing settlement negotiations.

Trade groups, the IMF, and now the U.N. are all trying to come up with a fix. The only problem is that they have vastly different ideas for what that should look like — making it increasingly unlikely that the chaotic current system will change in any meaningful way.

The scramble is an attempt to prevent a repeat of the chaos that erupted when a U.S. court ruled that the Argentine government couldn’t continue paying bondholders who’d struck an earlier deal to accept less money without also paying a holdout group of American investors 100 cents on the dollar. The ruling was a huge win for NML Capital, which had bought the bonds on the cheap, but infuriated Argentine officials like Kirchner.

Beyond the vitriol, the court decision brought new attention to the messy default process that’s currently in place for countries that can’t pay their debts. Fixing it is increasingly important for poverty-ridden countries like Grenada and the Democratic Republic of the Congo, both of which are fighting investors in U.S. courts who are hoping to use the NML ruling to boost their case for being paid back in full. Ukraine, whose already shaky finances have gotten even rockier during its standoff with Russia, could also need a way of persuading investors to take a “haircut.” Under the current system, that won’t be easy.

Key powers at the United Nations are hoping to make it easier. Earlier this week, the U.N. General Assembly voted to put in place a new bankruptcy procedure for indebted countries that would create a global system for arbitrating debt disputes. The resolution called for an intergovernmental framework, but didn’t detail how it would work.

“The time has come to give a legal framework to the financial system for restructuring sovereign debt that respects the majority of creditors and which allows countries to come out of crises in a sustainable manner,” Argentine Foreign Minister Hector Timerman said after the vote, according to Reuters.

The nonbinding U.N. resolution garnered 124 out of 193 votes and won support from China, which holds huge amounts of debt. Eleven countries, including the United States, voted against the measure. American officials said it would create uncertainty in markets that could make it more expensive for developing countries to borrow money.

Read more…

Published on Sept. 11 in www.foreignpolicy.com by Jamila Trindle.

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