beyondbrics

When countries crash, does it pay to sue? It’s a timely question, with Greece still poised in the balance. Experience in Argentina suggests that accepting – even with a brutal haircut – may end up being more in the money in the long run.

As this Bloomberg story shows, creditors who accepted Argentina’s first debt swap in 2005, four years after its default on nearly $100bn of sovereign debt, and kept their swapped bonds ever since have enjoyed returns of 90 per cent – outpacing a 70-per cent return on emerging-market bonds overall. That’s a sweet recompense for having accepted just 30 cents on the dollar for their investments.

Argentina sought to put its default behind it with a second swap in 2010 that brought the total amount of defaulted paper swapped to some 92 per cent. The government says the remaining “holdouts” – including funds like EM Ltd and NML Capital that the Argentine government dismisses as vultures who don’t deserve paying – have missed the boat.

But such funds, who are suing to recover some $2bn, reckon it pays to be patient. They pursue governments in places like Peru and Republic of Congo to settle, and have scored some high profile victories. Like dogs with a bone, they are not letting go of Argentina and want to take an appeal in one suit to the US Supreme Court. Other remaining holdouts are also pursuing their claims at the World Bank’s arbitration tribunal, ICSID.

All this is food for thought for Greek investors as the country teeters and a scalping, rather than a haircut is being mulled.

Argentina has clawed itself back from the default, reveling in Chinese-style growth rates in recent years. Despite the lingering lawsuits that some believe could torpedo any Argentine attempt to sell a bond on international markets for the first time since the default as long as the litigation remains unresolved (because the assets could in theory be seized), the economy expanded about 9 per cent last year. Argentina’s country risk, though high, has been falling recently, and despite lingering and serious economic problems like high inflation, it has enviably manageable debt levels now.

Argentina bounced back from crisis in part through policy choices, and in part because it produces food commodities the world wants and needs, and booming prices have spurred growth that have aided a swift recovery. But Greece has no soya.

In short, as women visiting hairdressers the world over know, betting that a haircut will change your life can sometimes prove misplaced. Argentina’s creditors may have done well by taking the debt swap – but that’s no guarantee for anyone else.

Related reading:
Argentina: ghosts of 2001 default linger, beyondbrics
Argentina’s advice for Greece, beyondbrics
Dithering risks creating the Argentina on the Aegean, FT
Argentina: A high-risk recovery, FT