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Wednesday, September 03, 2014 10:32 PM


Argentina to Circumvent US Supreme Court Bond Ruling Via French Banks; Comments on "Vulture" Funds


It's increasingly likely that Argentina will come up with a way to get around a US supreme court ruling on bond payouts.

Here is the background ...

Argentina defaulted on bonds following a debt crisis in 2001-2002. 92% of the investors agreed to haircuts, but an alleged "vulture fund" picked up an 8% share at rock bottom prices and refused to negotiate.

In June, the US Supreme Court ruled that Argentina Cannot Selectively Default on the small group of hold-outs.

Today El Pais reports Argentina Offers to Pay Creditors in France.

Comments Regarding "Vultures"

I have nothing against "vultures" and do not even like the term. In general, vultures serve a purpose, as do those who short stocks.

That said, I find the US Court ruling that Argentina Debt Swap Proposal is Illegal rather odious.

Fortunately the judge stopped short of making a "contempt of court ruling".

Here's the deal in a nutshell. Those investing in Argentinean debt should have known the possible outcome. Argentina has defaulted before. It did so again, and alleged "vulture funds" made a bet they would be paid in full even if no one else would be.

But if holdouts were guaranteed to be paid in full, everyone would be a holdout.

Holdouts Give Vultures a Bad name

I seldom agree with Financial Times writer Martin Wolf, but his September 2, piece Holdouts Give Vultures a Bad Name is spot on.

His conclusion "Argentina’s creditors should make every effort to protect themselves from the vagaries of American judges. Fleeing US jurisdiction would seem an extremely sensible move."

And so they did.

On July 19 I wrote Argentina "Determined to Default" Second Time (and it indeed did just that).

I noted, "the problem with the US court ruling is that if Argentina pays the vulture fund full value, it will have to pay all the bondholders full value, and that would wreck the country again." Wolf made similar comments.

I also stated, that "In the future, bond agreements will force everyone to go along with a majority decision." Again, Wolf made a similar statement.

Wolf is likely not aware of my article, so I presume he came to the same conclusions independently.

The problem in this case is US judges think they can tell sovereign nations whether they can or cannot default. I find that both arrogant and ridiculous.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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