Argentina debt swap sets stage for big legal battle
November 10, 2004

Buenos Aires: Argentina’s $US100 billion debt restructuring will not only be the biggest and most contested in modern history. It is also likely to unleash a legal battle without precedents between a state and its creditors.

With the final debt offer now on the table and the government planning to open the swap on November 29, bondholders are considering legal options to get more than what Argentina is offering for debt in default for nearly three years.

More than 500,000 private creditors are facing an estimated 70 per cent write-off on their investment, but analysts said the most prone to litigation will be the investment funds in the United States.

“There will be a lot of judicial manoeuvring,” said one analyst who follows the restructuring at an international bank in New York and asked to not be identified. “Argentina has good lawyers, but the funds are going to probe all avenues.”

The analyst believes a single fund will test the waters with a lawsuit while others wait for the outcome. If it doesn’t work in their favour, another fund will try a different tack.

In addition to the funds, small investors – from German dentists to Italian pensioners – have also gone to the courts in their countries to try to stop the swap, which seeks the largest write-off in the modern history of sovereign restructurings.

But so far, Argentina bears few legal scars for failing to pay its debt since January 2002.

Protection of state assets from embargoes, the high costs of litigation and the long waits for rulings have all worked to Argentina’s advantage. Court-ordered freezes on government assets like real estate in Washington, DC or Italy have been very limited.

But the situation could change once the government manages to push through its restructuring. A well-crafted lawsuit could stop payments to creditors who accept the government’s offer.

“You cannot embargo state assets, but financial flows are another question,” said Patricia Rosito Vago, a lawyer for creditors from 11 countries at law firm Dreier LLP in New York.

If Argentina anchors an acceptance rate of 60 to 70 per cent in its swap, as analysts estimate, that means creditors representing at least $US30 billion could go to court. But Argentina would never be able to pay all those suing.

If the perception grows that the legal option is only viable for those willing to endure the long process, then more creditors are likely to accept the terms of the swap.

There are few precedents of creditors who have opted for litigation in sovereign restructurings, and those who did represented a very low percentage of capital.

“I don’t think we will have more than 3 to 5 per cent of nominal capital in litigation,” said Rosito Vago.

The main restructurings in recent years – Ukraine, Ecuador, Pakistan and Uruguay – all managed acceptance rates of at least 90 per cent. And the governments continued to pay interest on the old bonds, which stayed in the hands of those who didn’t accept the swaps for new debt.

But Argentina’s swap of $US40 billion in new debt for $US100 billion in old debt is proportionally much bigger than those previous swaps and the government has no plan for those who do not accept.

“There are two scenarios: that the people who don’t accept have the critical mass to force the government to negotiate again with them or that they are small enough that the state pays them to settle the issue,” said Miguel Kiguel, former assistant finance secretary in Argentina’s government.

Indeed, many creditors believe they will have a second opportunity, even though Economy Minister Roberto Lavagna has adamantly said this is a “take it or leave it” offer.

Whatever happens in this battle will likely reverberate beyond Argentina’s borders.

“Argentina will create a precedent for other indebted countries in the region,” said Sebastian Rodrigo, partner at Alfaro Abogados in Buenos Aires.

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