So, as you might know from Friday’s not-quite-a-post, Argentina defaulted last week (after a 30 day grace period from their payment due date). For the 8th time in their history. Although, admittedly, it’s quite a long history (Argentina has been defaulting on its debts since the early 1800s).

But unlike all the other times (according to President Kirchner), this wasn’t really their fault. Sort of. I mean:

  1. There was a coupon payment due.
  2. Argentina had the money to pay it.
  3. They sent the money to their trustee bank in New York.
  4. But the bank in New York was under an injunction from an irascible 83 year old judge who’d had quite enough of hearing about Argentinian hold-out debt and decided that it was high time that he expedite things.
  5. Because, apparently, that’s what 83 year old irascible judges do.
  6. They get bored.
  7. Then they make things exciting.

This has left Argentina saying that the accusations of default are preposterous and insulting and so forth – because they’ve paid the money. And if their bondholders want the money, then they must go and speak to Judge Griesa and get him to lift his injunction:

judge griesa
Judge Thomas Griesa. #WeAreNotAmused

So to summarise the background (a fuller background can be found in the “Cry for Yourselves, You Vultures,” Says Argentina post):

  1. Argentina defaulted on some debt in late 2001;
  2. It offered its bondholders a deal – in which they could exchange their existing (and defaulted) bonds for lesser bonds. The exchange bonds were worth less than the original bonds were worth originally, but more than the original bonds were worth at the time. To illustrate:
    1. Say that the original bonds would repay $100.
    2. The exchange bonds would repay $35.
    3. But, at the time of the exchange, the original bonds were trading in the market for $30 – because the market had already priced in the default losses…
    4. So if it’s a choice between a defaulted $30 bond, and a $35 exchange bond – you’d likely take the $35 exchange bond.
  3. Not all the bondholders took the exchange (about 93% did).
  4. Or, more specifically, some vulture/distressed-security funds scrambled around to buy these cheap $30 bonds, and then threw money into litigation to try and force Argentina to pay them out in full.
  5. A decade on, Judge Griesa got bored of listening to all the litigation.
  6. He ruled on a “pari passu” clause in the original bond issue, which says that Argentina must treat all its bondholders equally – meaning that they had to pay everyone they owed money, or no one at all.

Interestingly, Argentina does not dispute the fact that it owes money to the vulture funds. It just disputes the fact that it should have to pay it. Argentina’s thoughts:

  1. These particular bondholders have never lent money to Argentina.
  2. There are not the original original bondholders.
  3. They are just opportunistic investors who are refusing to take our exchange offer.
  4. Oh, and also, they’ve covered themselves with Credit-Default Swaps on our debt.
  5. So they’re going to make money if we pay them AND they’ll make money if we don’t.
  6. That excites our Latin American blood and makes us mad.
  7. Oh, and at the same time, because of the RUFO* clause in our exchange bonds, we can’t pay these vulture funds without having to pay exactly the same to our exchange bondholders.
    *Rights Upon Future Offers
  8. Which would mean that we would have to pay back everything.
  9. Which we can’t afford.
  10. SO WHAT DO YOU WANT US TO DO?

About that RUFO clause…

Here it is, in all its glory:

Under the terms of the Pars, Discount and Quasi-pars, if following the expiration of the Offer until December 31, 2014, and except as provided below, Argentina voluntarily makes an offer to purchase or exchange or solicits consents to amend any Eligible Securities not tendered or accepted pursuant to the Offer, Argentina has agreed that it will take all steps necessary, including making any required filings, so that each holder of Pars, Discounts or Quasi-pars will have the right, for a period of at least 30 days following the announcement of such offer, to exchange any of such holder’s Pars, Discounts or Quasi-pars for (as applicable).

Now here it is again, with the key word here emphasized:

Under the terms of the Pars, Discount and Quasi-pars, if following the expiration of the Offer until December 31, 2014, and except as provided below, Argentina voluntarily makes an offer to purchase or exchange or solicits consents to amend any Eligible Securities not tendered or accepted pursuant to the Offer, Argentina has agreed that it will take all steps necessary, including making any required filings, so that each holder of Pars, Discounts or Quasi-pars will have the right, for a period of at least 30 days following the announcement of such offer, to exchange any of such holder’s Pars, Discounts or Quasi-pars for (as applicable).

Almost everyone is agreed that Argentina would be making this offer under duress – there’s not much “voluntarily” about it. But, you know – this is the kind of thing that lawsuits are made of. Lawsuits much like the one that has left Argentina mired where it is. So frying pan, into fire, etc.

And as for those Euro-investors that are running around saying “But what if we all waive our rights to this clause – will you then settle with the vulture funds and pay us our money?” – don’t be silly. There will always be a contingent (of vulture funds) that won’t waive their rights in the hope that they can get the same settlement.

Frankly, I’m in Argentina’s court here. They’re damned if they do, and damned if they don’t, and so you may as well stick it to everyone.

And as for Judge Griesa – why couldn’t you just stay your injunction until 1 January 2015? Because then, Argentina wouldn’t have to worry about the RUFO…

Come now.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.