In 2001, the Argentinian economy was deeply mired in a crisis which ended with a sovereign default when the nation was unable to meet its commitments. That default, on something like $95 billion worth of obligation, has meant that Argentina has effectively been frozen out of the international money markets. To dig itself out of the hole it found itself in, Argentina managed to get 93% of its creditors to agree to a credit write-off which meant that debt would be redeemed at about 30% of its face value. As they say, the devil is in the detail.
A secondary market has always existed for “distressed” credit. Some hedge funds saw Argentinian debt as a good bet and bought tranches of it at heavily discounted rates. These creditors, pejoratively known as “Vulture Funds” hoped that any eventual settlement would see them in profit. Part of this group has refused to accept the Argentinian debt settlement and is insisting that the debt is honoured at face value. They won a victory in a US court this summer that, essentially, required Argentina to honour its obligations, but critically blocked repayment to the 93% of creditors who had accepted the deal. The court’s decision has been heavily criticised by Argentina and inside the US – such a decision could set a precedent making future defaults (sovereign or corporate) insoluble. It would have blocked nations like Greece from being able to resolve their financial crisis.
Argentina is seeking to challenge the decision within the US court system, but in the meantime it is preparing a bill designed to sidestep the court’s decision which ought to mean that creditors accepting the haircut can get paid; albeit outside of US jurisdiction. In the interim, credit rating agencies are indicating that Argentina is in partial default.
In these days of concern that the Eurozone is hovering on the brink of deflation, it is interesting to note what happens when things go wrong: Argentinian inflation is running at an annual rate of 28%.