The spectacle of the fight between the government of
Argentina and the bond holdouts, led by Paul Singer of Elliot Management has
been fascinating to watch. It does, however, point out weaknesses in the
international financial system, is detrimental to the economy and, therefore, the
people of Argentina, and highlights a problem with credit default swaps.
Some observations:
·
The Obama Administration should not have
effectively blocked the IMF from submitting briefs to U.S. courts, including
the Supreme Court, outlining its views of the dangers Judge Griesa rulings pose
to future needed restructurings of sovereign debt. The Administration submitted
an amicus brief to the Supreme Court;
it is a mystery why it did not permit the IMF to submit its views.
·
The failure of Argentina and the holdouts to
reach an agreement and their subsequent actions indicates that this is about more
than just money. Argentina is investigating Elliot Management for
insider trading in connection with credit default swaps on Argentine
government debt; Elliot Management has
court permission to investigate certain entities incorporated in Nevada.
The amount of money that could possibly belong to Argentina located in Nevada
appears to be quite small in relation to the amount in dispute, if it exists at
all. The real purpose seems to be to find financial fraud committed by
high-level Argentine government officials, perhaps including that of President Cristina
Fernandez de Kirchner. I do not know whether there is any potentially illegal
activity for either side to discover, but that they are investigating shows how
difficult it will be to reach a compromise. Each side seems to want humiliation
and capitulation of the other side. Ego, pride, politics, and contempt for and
antipathy towards the other side are playing a large role.
·
Argentina’s recent announcement that it plans to
offer existing bond holders the ability to swap their bonds for ones issued
under Argentine law with a different trustee than the Bank of New York Mellon
has caused lawyers watching this to question the government’s tactics. (For
example, see Anna Gelpern’s posts on this, here
and here.)
This does not bode well, though, for a compromise. The next President of
Argentina may be handed this mess.
·
There needs to be serious consideration given to
finding a different way to settle credit default swaps. Elliot Management is a
member of the ISDA Determinations Committee for the Americas, and, even though
it has a clear conflict of interest whether or not any funds it manages hold
credit default swaps on Argentine government debt, it has not recused itself
from voting on issues pertaining to Argentina. I wrote about this in a previous
post.
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