Key questions about Argentina’s fight with US hedge funds over outstanding debt

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BUENOS AIRES, Argentina – Argentina risks financial default unless it reaches an agreement with a group of holdout bondholders by Wednesday. Here are the issues at stake:

HOW DID ARGENTINA GET HERE?

In 1998, Argentina fell into recession and faced crushing payments on its international debt. As it tried to avoid default in 2001, it arranged a “debt swap,” asking investors to trade in bonds coming due for longer-term ones. The swap, however, failed to resolve Argentina’s troubles. In December 2001, the country declared it would stop making payments on about $100 billion of debt.

Argentina’s government lined up two more swaps in 2005 and 2010, offering existing creditors new bonds worth much less than the old ones. Critics described Argentina’s negotiating style as “take it or leave it.” Most investors accepted — something is better than nothing — and traded in roughly 93 per cent of the defaulted bonds.

WHO’S SUING?

Hedge funds began buying Argentina’s bonds as the country slid into crisis and kept adding to their holdings after it defaulted. Some, like NML Capital, refused to participate in the exchanges and held out for a better deal.

These holdouts then turned to U.S. courts, seeking to force Argentina to pay up under terms agreed to when the bonds were first sold, before 2001.

Argentina’s government demonizes the investors as “vulture funds.” ”The vultures feed on carrion, and these fund groups are circling around countries in default or close to default,” said Matthias Carugati of the Management & Fit consulting firm in Buenos Aires.

At least two of these groups are in litigation with Argentina: Billionaire Paul Singer’s NML Capital Ltd., and Aurelius Capital Management.

HOW MUCH DOES ARGENTINA OWE?

U.S. District Court Judge Thomas Griesa in Manhattan ruled in 2012 that the creditors who rejected Argentina’s earlier debt-swap offers deserved to be paid in full — a figure he put at $1.33 billion. With interest, that amount has risen to about $1.5 billion. The creditors say they are due $1.6 billion.

The U.S. Supreme Court last month refused to overturn Griesa’s ruling. The court also allowed the plaintiffs to ask any court in the country to investigate Argentina’s assets and subject them to liens to ensure payment of the debt.

WHAT IS ARGENTINA’S POSITION ON THE RULING?

Argentina asked Griesa to temporarily suspend his order, saying it could not comply because it has legal obligations to creditors who accepted the debt swaps. It says a delay would give it time to solve the problem of the holdouts.

Since Griesa refused to suspend his ruling, Argentina must continue negotiations led by a court-appointed mediator. The meetings are taking place in New York.

WHY IS THERE TALK OF A NEW DEFAULT?

Griesa blocked a $539 million payment that Argentina was due to make on June 30 to holders of the restructured debt securities. He said it would violate his orders unless Argentina also pays money owed to the plaintiffs. A 30-day grace period for paying the restructured debt expires Wednesday.

Normally, any country that didn’t pay its bondholders would be in default. Argentina’s situation has a wrinkle. The Argentine government maintains it will not default because it has already deposited the payment in a New York bank. If that money fails to reach the creditors, it says, Argentina isn’t to blame because the judge has blocked the release of the money.

WHAT ABOUT THE OTHER BONDHOLDERS?

A clause in Argentina’s earlier debt restructuring agreements bars the government from voluntarily offering the plaintiffs a better deal than the one given investors in the debt swaps of 2005 and 2010, according to Anna Gelpern, professor at Georgetown University in Washington. The clause expires on Dec. 31. If Argentina fails to abide by that agreement, the other creditors could file claims worth $120 billion, according to the government.

WHAT ARE GRIESA’S OPTIONS IF THE NEGOTIATIONS FAIL?

According to analysts, the judge could order that the payment Argentina has deposited in the New York bank be divided among the debt-swap creditors and the plaintiffs. He could also authorize embargos against Argentina to pay the plaintiffs.

WHAT WOULD THIS MEAN FOR OTHER COUNTRIES?

Gelpern said other countries could find it much more difficult to restructure their debt unless there are changes in laws and financial institutions, which “could take a long time.”

WHAT COULD THIS MEAN FOR ARGENTINES?

Economists and businesses warn it would further choke off Argentina’s ability to obtain dollars through international financial markets and would complicate the government’s plans to loosen the foreign exchange market, restricted since late 2011. Private businesses and local governments would find it harder to get dollars or international credit, leading to fewer jobs. It could drive down the value of Argentina’s peso against the scarce dollars and drive inflation even higher.

According to private economists, the country’s inflation was 30 per cent in 2013. So far in 2014, it is 19 per cent. According to the government, the rate in 2014 is 15 per cent.

“We believe that a default would be completely negative because the Argentine economy day by day already is in recession,” said Carugati of Management & Fit. “This, for the average citizen, would mean greater pressures on the rate of exchange … and obviously would end up aggravating the recession that already is underway.”

HOW WOULD A NEW DEFAULT DIFFER FROM THE 2001 DEFAULT?

One of the biggest differences is that the economy in 2001 was deeper in recession. Unemployment was rampant. The possibility of social unrest was greater.

Ramiro Castineira, of the Buenos Aires consulting agency Econometrica, said that in 2001, Argentina defaulted on its debts “because it was broke, and now it would be because it doesn’t comply with a (court) ruling.” The financial system, he said, “is better prepared to cope with a default.”

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Torrens reported from New York. Business Writer Matthew Craft contributed to this report from New York.

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