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Friday, August 23, 2013
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Argentina Just Lost Huge To A Bunch Of Hedge Fund Creditors, And The Judge Was Brutal About It
Argentina just lost its appeal to continue refusing to pay a group of hedge fund managers, led by Paul Singer, $1.6 billion worth of sovereign debt dating back to its $95 billion default in 2001. You can read the full decision here (via Credit Slips).
For years the country has been trying to avoid paying a bunch of "vulture" hedge fund managers that refused to take a 70% haircut on Argentine bonds like every other investor. This has resulted in some wacky news items — Paul Singer getting the government of Ghana to impound an Argentine naval ship last October, President Cristina Fernandez de Kirchner flying commercial to see the Pope so her jet isn't taken — you get the idea.
Now it's (almost) come to a head. A New York Judge fully rejected Argentina's appeal of a decision made last year — a decision that would've had it pay Singer and company in full. Argentina wanted to be able to pay hedge funds that restructured debt without making a payment to Singer (the "vulture"), and yet again that idea has been given a massive thumbs down.
The decision comes from U.S. Circuit Judge Barrington Parker and frankly, it seems like he zero patience for Argentina. He doesn't buy the argument that paying Singer causes injury to third parties, basically implies the country hasn't been arguing in good faith, and binds Bank of New York Mellon, Argentina's custodial bank, to comply with it.
From the decision:
"...the proposal submitted by Argentina ignored the outstanding bonds and proposed an entirely new set of substitute bonds. In sum, no productive proposals have been forthcoming. To the contrary, notwithstanding its commitment to resolving disputes involving the FAA in New York courts under New York law, at the February 27, 2013 oral argument, counsel for Argentina told the panel that it “would not voluntarily obey” the district court’s injunctions, even if those injunctions were upheld by this Court. Moreover, Argentina’s officials have publicly and repeatedly announced their intention to defy any rulings of this Court and the district court with which they disagree...
What the consequences predicted by Argentina have in common is that they are speculative, hyperbolic and almost entirely of the Republic’s own making...
The most important argument that the Judge rejected was Argentina's assertion that this would impact future sovereign debt restructurings (Think: Greece restructuring over and over again). He essentially says we'll deal with those as they come.
For now, Argentina has one more recourse — The Supreme Court — and it's not looking good.
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Argentina loses US bond appeal
In a move that could have major repercussions for eurozone economies, a US appeals court dealt Argentina a blow on August 23 in the legal battle over the country's massive 2001 default by upholding a ruling ordering Buenos Aires to pay over €1bn to bondholders.
The decision by the 2nd US Circuit Court of Appeals in Manhattan stayed the order to pay so that Argentina could file an expected appeal to the US Supreme Court.
The decision "affirms a proposition essential to the integrity of the capital markets: borrowers and lenders may, under New York law, negotiate mutually agreeable terms for their transactions, but they will be held to those terms," the appeals court wrote.
The case stems from Argentina's financial crisis a dozen years ago, when the government could not pay its debts and Argentine bonds became nearly worthless. As the country tried to get its finances in order, it offered creditors new bonds that initially paid less than 30 cents for each dollar of bad debt. More than 90 percent of bondholders agreed and some of them have since recovered three-quarters of their pre-default investment.
But a small fraction of bondholders, some of whom bought the debt securities at cut-rate prices during the crisis, say Argentina should pay them the face value of the bonds, plus interest. Investment fund NML Capital and 18 other creditors sued and a lower court ordered Argentina to pay $1.4 billion.
When Argentina issued the bonds in 1994, it promised to treat them "at least equally with its other external indebtedness," the appeals court wrote. "As we have held, by defaulting on the bonds, enacting legislation specifically forbidding future payment on them, and continuing to pay interest on subsequently issued debt, Argentina breached its promise of equal treatment."
The impact of the ruling on Argentina's economy could be severe, since a novel payment formula already generally upheld by the appellate court last year could prompt the South American government to default again.
The case draws interesting parallels with recent moves, reported in the Financial Times, by thousands of Greek bondholders seeking compensation for having to accept a 75 per cent “haircut” on the value of their investments in last year’s partial default agreed with the EU and International Monetary Fund. Greece's creditors want to see their case examined by US courts.
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The Character Of The Market Has Taken A Significant Turn For The Worse
Last week’s breakdown from a consolidation top looks more and more like a significant change in market trend to the downside on both a fundamental and technical basis.
Technically, the sharp move down was a classic definition of a breakaway gap, typified by a daily high that was lower than the prior day’s low in a direction opposite to the previous market trend. In addition, the August 2nd peak in the S&P 500 was not accompanied by a new high in breadth while the 10-day average of new daily NYSE highs was only 400, compared to 800 during the period of the May highs in the market. It is also significant that the decline occurred from the top of an aging bull market that had gained 156% in four years and five months.
Fundamentally, as well, the market appears to be reacting to some important changes in comparison to the last few years. The Fed, in posing the strong probability of a finite limit on quantitative easing (QE), has changed the nature of the game. The market climbed strongly during QE1 and QE2, only to correct when they ended. To avoid that pitfall, the Fed made QE3 and QE4 open-ended, and the market accordingly responded with a strong bullish move. Now that period is over, and whether tapering occurs in September or December or early next year doesn’t matter as much as the fact that the market focus has been changed toward anticipating a finite ending as illustrated by the sharp rise in the 10-year yield.
This is happening at the same time that corporate earnings growth is slowing down after rising rapidly since the end of the recession. It was this factor combined with the QE programs that kept the market going higher despite an extremely sluggish economic recovery. From 2008 through 2011 S&P 500 earnings increased 95%, but only 2% annualized since then. In addition forward-looking estimates are being revised down, and still appear to be too high. This is confirmed by recent disappointments at key companies such as Wal-Mart, Macy’s, Cisco, IBM, Amazon and Google.
The market is continuing to receive minimal support from the economy, which has been slogging along at about a 2% growth rate for the last three years. Real disposable income has risen by an average of only 0.5% year-to-year over the first six months of 2013, and retail sales have been accordingly tepid with little room left to reduce an already low consumer savings rate. Job growth remains inadequate with an unusual proportion of employment gains coming in low-paying industries and part-time jobs. Now, the sharp increase in mortgage rates threatens the growth of the housing industry as well, with monthly payments on a $300,000 mortgage rising by 14% or close to $200. Add to that mix an escalating crisis in the Mid-East, the likelihood of a 3rd Greek bailout and the coming conflict in Washington over the budget and debt limit.
In sum, it appears to us that the character of the market has taken a significant turn for the worse, and that the period ahead will far more difficult than the years since 2009. Now selling at 19.5 times trailing reported (Gaap) earnings on the S&P 500, the market is highly overvalued compared to the long-term norm of 15 times and its bear market lows under 10. In our view the potential downside for the market is unusually high.
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