Actually Argentina has defaulted on its foreign debt. Such things happen in the contemporary world, the country has become a victim of financial vultures and the so-called legal imperialism of the United States.
Argentina: victim of financial vultures
It all started in 2001. Argentina had to declare a sovereign default on around $130 billion. It was a usual story, the state had no money to pay off its debt (interest rates) and redeem the main sum. It was the largest default in history. Argentina began talks on restructuring. The lenders agreed to write off the bulk of it (75%) and alter the conditions for paying off the rest. There were two debt restructurings in 2005 and 2010. Some bondholders in possession of around $4 billion of Argentinian bonds refused to comply with the agreements’ terms. This included a small group of hedge funds holding over $1, 3 billion bonds headed by Elliott Management Corp. of billionaire Paul Singer. The hedge funds had already obtained the reputation of financial vultures. They acquired the bonds of the states that were on the verge of sovereign default or the ones already in default and then demanded 100% payments refusing to accept any compromises. The audacity is supported by the fact that they have informal relations with the judiciary of the United States and Great Britain. They normally win the trials demanding 100% payments on the bonds. This phenomenon has started to be called legal imperialism.
New York court hands down ruling or US legal imperialism in action
Argentina is the best illustration of how the legal imperialism works. The vultures went to the New York court to sue Argentina for the whole amount without restructuring. In October 2012 the United States Court of Appeals for the Second Circuit (New York) ruled on the pari passu clause that required they receive full payment. Moreover it forbade Argentina to pay off its restructured debts till it complies with the court’s decision. It has been an uphill struggle for Argentina, however. In November 2012, a U.S. court ruled that the country was to pay all the bondholders at the same time. The problem with this ruling is that if Argentina paid Singer and his friends the full amount they want, other creditors could well want to be paid in full also, making the country liable for as much as $15 billion immediately, more than half the country’s reserves. All told Argentina might face a total debt of some $120 billion. Argentina appealed the decision at the U.S. Supreme Court but the judges refused to hear the case last week. Now Argentina faced the June 31 early morning deadline when it is supposed to pay the next installment of interest to all bondholders. No settlement had been reached so the leading rating agencies greatly lowered the country’s investment rating. The regular payments by Argentina to comply with the conditions of restructured debt were blocked by the court’s ruling. Actually the court brought to naught the 2005 and 2010 agreements of restructuring. The story is acute and a lesson should be learnt by other countries because some other countries bondholders have all the traits of financial vultures.
Ukraine on the verge of default
Ukraine is one of those who should take a page out of the Argentina’s book. As of May 1, the Ukraine’s foreign debt went up to $140 billion with $100 billion accounting for private sector of economy. $36, 86 billion falls on the state. The public debt was equal to 38, 6% of gold reserves.
Those who prefer to see a silver lining in each and every case will say the situation is not that bad. The overall Ukraine’s public debt (including internal) was $65, 22 billion as of May 1, 2014 or 40 % of the country’s GDP. Though some experts say the index may go up to 60% till the end of the year. It’s not that awesome if you compare it with Greece, for instance, which, according to different estimations, has the debt equal to 150-160% of GDP. The figure can be 100% for some countries of the eurozone. But there is a little difference here; there is no war raging in Europe, there is no unrest there, the tax collection process is running smoothly and the main thing – there is no GDP downfall. 60% does not look that critical under the conditions when economy is not going down. The Ukraine’s economy is declining. That’s the conclusion Standard & Poor's has come to. It has brought deep down the Ukraine’s rating: according to its estimations, the GDP will have fallen by 7% this year. Private experts predict the GDP (in purchasing power parity – PPP) will fall by one third. Nothing makes believe the Ukrainian crisis will slow down soon, the majority of experts predict that Ukraine will default on external public debt no matter how the events in Donbass will unfold.
Is restructuring of Ukraine’s debt possible?
They understand it all well in Kiev still hoping for some special preferences related to restructuring of the foreign debt. These are dim prospects. A part of the Ukraine’s debt belongs to the so-called privileged investors or the financial organizations banned to change the conditions of granting debts. The Ukraine’s government owes huge sums to such investors as the International Monetary Fund, the World Bank and the European Investment Bank. Normally restructuring has relation to bonds. As of May 1, 2014 the overall Ukraine’s sovereign debt in Eurobonds was $ 17, 4 billion or around a half of external public debt of the country. Franklin Templeton is the largest Ukraine’s bondholder. On May 1, 2014 the Ukraine’s Eurobonds portfolio of the American holding company was $7, 6 billion or around 43% of the Ukraine’s overall debt in Eurobonds. Franklin Templeton has all the traits of a financial vulture. These investors are not the ones who meet the debtors halfway and agree to restructure debts.
Argentina and loud-voiced statement by Yatsenyuk
On July 31 Ukraine’s Prime Minister Yatsenyuk made a loud-voiced statement. «The first major economic news today is that Argentina went into default», he told lawmakers. «And the second is that Ukraine didn’t default, and it never will». Perhaps he pins his hopes on the US sponsors. There is little ground to believe that Washington will grant billions (or even dozens of billions) to have the Ukraine’s debt restructured. Brussels will hardly lift a finger to help because the plight of the European Union is quite comparable with the debt problems faced by Ukraine…
Of course, Yatsenyuk is not that naïve to believe in good will of financial vulture Franklin Templeton. Perhaps he counts on Washington to influence the US holding. May be he is aware of how the process of restructuring went in Greece as far back as in 2012. The world oligarchy wrote off around $100 billion of debt and this example is seen by Yatsenyuk as a reason for inspiration. Let me remember that in the case of Greece the very same group of world tycoons brazenly ignored the reluctance of a small number of investors (predominantly the ones from Germany that have no relation to financial vultures) to take part in restructuring. In the case of Greece they pursued other goals (they needed to urgently evade the default of the whole Europe); there were other participants, other beneficiaries and other losers. So if Yatsenyuk compares Ukraine with Greece, he does it in vain. He’d better take into consideration something else – what about the American «bosses» having their own interests in the operations of the holding company? Otherwise it is hard to explain why Franklin Templeton was so willingly buying off Ukrainian bonds that other investors feverishly ran away from? Though, Yatsenyuk is dry behind the ears in money matters, he perfectly knows what he is doing. May be his statement is nothing more that wishful thinking or he just puts up a brave front.