Argentina vs. hedge funds debt drama


Banks have long been addicted to credits to the third world. The spigots opened wide in the 1970s, and for a while, all was calm. Walter Wriston, then Citibank chairman, made a now infamous statement to the effect that lending to sovereign countries was a great idea because they didn't default on loans. That notion proved very wrong.

Country after country defaulted, forcing banks to swallow big losses. That cycle has continued at varying levels of intensity ever since. The difference now is that credit hedge funds tend to be involved. This is topical all over again in light of the drama playing out over $1.3 billion in Argentinian debt that the country defaulted on in 2001, burning lots of debt holders, including many U.S. institutions, as reported by DealBook.

The country eventually issued exchange bonds that paid out at much less, and thus inflicted big losses on investors. Many accepted the exchange bonds as their least worst option. Some holdouts, however, have been pressing their case in court, and recently won a court ruling that required the original bond holders to be paid.

That ruling has been escalated up to the appellate level and is now being heard. Even if the appellate court rules favorably for the hedge funds, it's an open question as to whether they will ever get paid, given that Argentina has passed laws preventing such payment. In any case, this is an interesting reminder that the developing world debt crisis is still alive and well, albeit not all that mediagenic anymore.

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