The judge gave the vultures the weapon they needed: Argentina had to either pay them back or reverse the default they had negotiated, ruining the country’s credit in the future and threatening its recovery.
Argentina finally opted for something close to the conditions set by Judge Griesa on Thursday. NML Capital will receive about half of the total deal, or $ 2.28 billion for its investment of about $ 177 million, for a total return of 1180%. (Argentina also paid legal fees for the vultures.)
This resolution will come at a heavy price for the international financial system, encouraging other funds to hold on and making debt restructuring virtually impossible. Why would bondholders take a haircut if they could wait and get exorbitant returns on a small investment?
In some ways Argentina was an outlier. It fought aggressively to secure the best terms from the initial set of bondholders, paving the way for a dramatic recovery: from 2003 to 2008, until the intrusion of the global financial crisis, the country increased by 8% per year on average and unemployment fell to 7.8%. by more than 20 percent. In the end, the creditors who agreed to the initial restructuring got the principal value in full and even 40% more.
Most countries are intimidated by creditors and go along with what is demanded, with often devastating consequences. According to our figures, 52% of sovereign restructurings with private creditors since 1980 have been followed by another restructuring or default within five years. Greece, the most recent example, restructured its debt in 2012, and only a few years later is it in desperate need of further relief.
It is common to hear the expression “moral hazard” when looking at countries facing crushing debt, such as Greece or Argentina. Moral hazard refers to the idea that allowing countries (or companies or individuals) to renegotiate and reduce their debts only reinforces the debauchery behavior that got them into debt in the first place. Better if the debtor faces disapproval and harsh consequences. But the deal with Argentina reversed the moral hazard by rewarding investors who make small bets and reap huge rewards.
Britain and Belgium have made certain types of vulture costumes illegal. Similar legislation, with bipartisan support, was blocked in Congress in 2009. Last September, the United Nations overwhelmingly approved nine principles that should guide sovereign debt restructuring. During the debate, an ambassador apologized to real vultures – the birds – for using the term. (One of us, Martin Guzman, made presentations to both the United Nations and the Argentine Senate, but was not paid in any of the cases.)