Argentina In Default: Everyone Lost, From Cristina Kirchner And Paul Singer's Elliott To Judge Griesa

Things couldn’t have come out worse.  Everyone lost: Argentina defaulted on its sovereign debt for the second time in nearly 13 years, the holdout bond holders were left empty handed, and Federal Judge Thomas Griesa’s strategy to force Argentine to negotiate a settlement with the so-called venture funds failed.  Furthermore, a last ditch effort by a group of Argentina bankers led by Banco Macro’s Jorge Brito fell through at the last second.
The decade-long legal battle between a group of hedge funds led by billionaire Paul Singer’s Elliott Management and the Argentine government, which is by no means done, resulted in the worst possible scenario.  At the stroke of midnight on Thursday in New York, Argentina once again entered into a state of default, as holders of its restructured debt didn’t receive interest payments for $539 million.  Credit rating agency Standard & Poor’s downgraded the country’s rating to selective default.

Cristina Kirchner with Finance Minister Axel Kicillof to her left –  (Photo credit: Ministerio de Cultura de la Nación)

Beyond the consensus opinion among U.S. commentators that the administration of Cristina Fernandez de Kirchner is solely responsible for this outcome, blame is widespread and encompasses practically every actor involved.  And while the fallout of the default wasn’t immediately discernible, failure to find a solution in the short-term could lead to dire consequences for the people of Argentina and all of the country’s creditors, from exchange bondholders to the holdouts.
Argentine officials rejected their responsibility, with both President Kirchner and Finance Minister Axel Kicillof remaining completely inflexible in their position, while trying to rest the blame on Judge Griesa’s shoulders.  At the end of the day, though, it was President Nestor Kirchner who agreed to give up sovereignty by transferring part of the legal jurisdiction to New York courts, and by signing a restructuring agreement that included a pari passu clause and failed to include a collective action clause that could’ve inoculated the bonds against minority holdouts looking to extract higher payment.
Judge Griesa, who tried to enforce the laws of New York also employed a losing strategy.  By ruling on a very tight interpretation of the pari passu clause with the intention of forcing Argentina to settle, he failed to take into account another obscure contractual obligation that bared Argentina from complying.  The RUFO clause, which stands for rights upon future offers, prohibits the government of Argentina to offer anyone a better deal than what they gave to creditors who tendered their bonds and accepted a 70% haircut.  The RUFO clause expires at the end of 2014, which hypothetically would allow a willing Argentine government to settle with Elliott/NML, Aurelius, and the other holdouts.
And the vulture funds, which legally won their case in three consecutive instances, finally failed to extract any sort of payment for themselves and their investors.  Having perfected a business model of intense litigation against generally struggling nations under a mountain of badly managed debt, in many cases encouraged by Western governments through multilateral institutions and financial interests based on the failed logic of the Washington Consensus, these hedge funds ultimately succeeded in alienating Argentina without achieving their goal while eroding the value of their assets spending millions on lawyers, who for now are the only winners in this whole mess.
Fortunately for everyone involved, the issue isn’t closed.  While Argentina’s delegation headed by Kicillof is already on their way back to Buenos Aires, it’s still in their best interest to find a solution.  Argentina has the financial condition to pay its creditors, and there are interested parties, including the aforementioned banks and major Argentine corporations like state-owned energy company YPF with a strong interest in resolution.  The vulture funds want to get paid, and Griesa doesn’t want to see his long career tarnished by a major failure such as failing to resolve such a transcendental case.  There is still time to limit collateral damage, but every day that passes makes things worse.