Argentina proposed a creative way out of its debt showdown on Friday night, describing a mix of cash and bonds that it suggested would amount to a huge profit, but not a gargantuan one, for the investors it calls "vulture funds."
The government's lawyers gave an appellate panel in New York a proposed payment plan that could take many more years to cancel US$1.44 billion ($1.72 billion) in defaulted bonds, interest and penalties left unpaid since the country's world-record 2001 default.
"Argentina's proposal accounts for past-due amounts to bring the debt current, provides for a fair return going forward, and also gives an upside in the form of annual payments if Argentina's economy grows," the lawyers said.
The money directly at stake in this case is just a fraction of Argentina's remaining defaulted debt, which adds up to more than $11 billion in capital and interest. This plan would also enable those creditors to get paid as well, over time, providing an equitable solution, the lawyers argued.
And to be truly fair to all, they said the new bonds would also be made available to the vast majority of investors who accepted pennies on the dollar in 2005 and 2010 for their defaulted debt.
Argentina is arguing that to do otherwise would violate the principle the court aims to uphold, the "pari passu" clause in the original bond contracts, which means the sovereign debt issuer must treat all bondholders equally.
"This proposal would provide plaintiffs with significant compensation, and unlike the '100 cents on the dollar immediately' formula adopted by the court below is consistent with the pari passu clause, longstanding principles of equity, and the republic's capacity to pay," Argentina argued.
Just who owns these bonds and at what price they were originally bought for is impossible to say. Even defaulted bonds are constantly traded, and the plaintiffs include huge hedge fund investors like billionaire Paul Singer as well as Argentine retirees who saw their much more humble life savings melt away in Argentina's economic crisis.
Under this deal, Argentina said the mum and dad investors would get immediate cash for the interest that has built up since 2003, plus Par bonds and GDP bonds that would eventually make them whole.
Institutional investors would be offered a different mix, mostly discount bonds, which Argentina said would reward them handsomely.
It cited as an example nearly US$50 million in defaulted debt that the lead plaintiffs, NML Capital Ltd, reportedly purchased in 2008. Accepting the mix of new bonds in exchange for these bad debts would eventually provide an aggregate profit of 284 per cent, but not an unfair gain of 1380 per cent, the lawyers argued.
President Cristina Fernandez personally reviewed the proposal just before it was filed.
Fernandez and her economic team are proud of sharply reducing the country's foreign debt burden from 166 per cent of GDP in 2002 to just 46 per cent recently, and never failing to meet payments on the new bonds her government issued in exchange for the defaulted debt.
Argentina can pay US$1.44 billion, but there are many more creditors seeking the same kind of judgment that NML Capital won from US District Judge Thomas Griesa last year. If upheld, it would force the country to pay out an economy-destroying US$43 billion in cash, the government said.
But the payment plan it proposed on Friday night includes some bonds that wouldn't come fully due for 25 years, and that could be a non-starter with the appellate judges in New York, whose rulings in bond litigation are almost never second-guessed by the US Supreme Court.