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7/22/14

Argentina: Is it or is it not a default?*

Today July 22nd sees a key meeting between Judge Griesa and the "holdouts", or "hard-done by bondholders who deserve justice" or "vulture funds" whatever other name you want to put to Singer, NML and friends. According to the northern English language press, if Griesa doesn't change his pari passu-based position, allow a stay and let the 92-and-bits percent of bondholders that accepted the revised haircut terms a few years ago receive interest payments, come the end of this month when the grace period ends Argentina will be in default. 

That above is a bit of a mouthful, but long story short all your hear in the English press on the subject, "Argentina Facing Default" etc. As a result, we again heard from Argentina's cabinet minister Jorge Capitanich this morning who insisted (and I've lost count how many times he's used this official government line in the last weeks) that whatever happens Argentina will not be in default of its debt, because Argentina has paid its dues. Which brings us to the question: Will Argentina be in default come August 1st if nothing changes? Points to make:
  • Argentina says it has paid. Which is true, it has indeed deposited the cash it owes for interest payments to the non-holdouters at the relevant banks. Therefore, says Argentina, if you pay you can't be in default. That's a position that has plenty of common sense and logic on its side (for further reading and backing, try the Webster's dictionary definition of the word "default").
  • However, Judge Griesa and assembled says that unless Argentina pays everybody, including the holdouts, then it's breaking its contract and nobody gets paid any more. That's the essence of his pari passu judgment of a couple of years ago and the problem set up by the Supreme Court ratification of his call in June this year, the one that's brought it all to a head.
  • In other words says Griesa/NML etc, Argentina has paid the people it wants to pay, it hasn't paid everyone. Whereas Argentina says it's paid everyone it has an agreement with but also wants to reach a negotiated agreement with the holdouts, so until that time let's put a freeze on the current judgment (the 'stay' it's looking for) until such time etc etc.
  • So in the eyes of Argentina it's not going to be in default because a pesky judge stopping the money from flowing is the real culprit, while in the eyes of Griesa/NML etc Argentina will be in default because if you're going to pay you have to pay everybody else you're breaking the deal. In their eyes, Argentina's selective payment to 92% is the same as deciding to pay 0% or 50% or 25% or 80% or whatever else portion, they're not in a position to choose who does and doesn't get paid. 
  • Therefore, the use of the word "default" in this matter is now in the eyes of the beholder. It's moved from an objective matter of law to a subjective matter of justice. Argentina's position will be, in essence, "It's not default because the law's an ass". NML/Griesa etc position is "It is default because the law says it's default" and importantly, the fact that Griesa has frozen payments to the vast majority of non-holdout bondholders who agreed to Argentina's haircut terms years ago is beside the point. 


So yes, Argentina is facing default in the eyes of the law because when it comes down to it, like it or not, Griesa IS the law, he's an octagenarian Judge Dredd and to add to the weight of his Dreddness, since June 2014 he's had the US Supreme Court on his side. For sure Argentina can claim the USA has no right to pass judgment on a foreign sovereign state and on that it may have a point, the country might even claim Griesa is in the pocket of the vulture funds, but the fact remains that when it signed up to the bonds deal it did so saying that the US courts would rule on any disagreement and hey, here we are. We've seen the term "technical default" bandied around as well, which tries to add nuance and differentiate between the binary situation. Sadly (and on this I fully agree with Capitanich and the Arg govt) it's a meaningless term because the bottom line is that Argentina is facing default, plain and simple undiluted default. It may be unjust and in fact I firmly believe it to be unjust, but since when did the law care about a priori justice? Laws do not create justice, laws change due to justice. So, nice and clear here:

Yes, if nothing changes Argentina's going into default.

P.S. For my Argentine friends now tuning in: Quien hace la ley hace la trampa.

*With apologies for using a question mark in the title line, it was difficult to avoid this time even though it comes across as one of those annoying 21st century clickbait hooks