Argentina’s $16bn saga with a US court

This is an audio transcript of the Behind the Money podcast episode: ‘Argentina’s $16bn saga with a US court’

Michela Tindera
Hey there. It’s Michela. I have some exciting news to share. Behind the Money was recently selected as a finalist for a big competition in podcasting called the Signal Awards. Now, we need your help. We’re in the running for a Listeners’ Choice Award. That’s where listeners like you can show how much you love the show and vote for us. I’ve dropped a link in our show notes where you can easily click to cast your vote. So thanks for listening, and let’s get on with this week’s show.

[SOUND OF CHEERING CROWD]

It’s 2012. And inside Argentina’s presidential palace in Buenos Aires, there’s about to be a big announcement.

[SOUND OF CHEERING CROWD, VOICE CLIP OF CRISTINA FERNANDEZ DE KIRCHNER PLAYING]

Michela Tindera
That’s Argentina’s president at the time, Cristina Fernández de Kirchner greeting the crowd there. She’s also the leader of Peronism, the country’s populist leftwing political movement.

[VOICE CLIP OF CRISTINA FERNANDEZ DE KIRCHNER PLAYING]

Ciara Nugent
She’s wearing a very elegant black dress and pearls and she’s speaking to a room of mostly suited men, mostly her supporters.

Michela Tindera
That’s my colleague, Ciara Nugent. She covers Argentina for the FT.

Ciara Nugent
She’s giving a kind of trademark, flamboyant, quite chatty speech to lots of supporters. And she’s announcing that she is sending a bill to congress to allow Argentina to expropriate 51 per cent of the shares of oil company YPF.

Michela Tindera
In a speech, Fernández de Kirchner is saying she wants to take control of YPF, which is a private sector company, and expropriate it. That means turn it into a state-run company.

Ciara Nugent
And so by expropriating it, she was kind of both asserting Argentina’s sovereignty, which is a big thing for the Peronist movement, and also saying the private sector here has done a very bad job and we, the state, are gonna do a better job.

Michela Tindera
Fernández de Kirchner’s supporters celebrated the move (sound of people clapping). It was portrayed as a chance for Argentina to take back control of one of its valuable natural resources and grow the country’s wealth. In the years since Fernández de Kirchner’s Peronist government took the swing and took control of YPF, the entire country’s fortune has taken a turn for the worse.

[NEWS CLIPS PLAYING]

Ciara Nugent
So annual inflation in Argentina is running at 124 per cent. The price of food and other goods is going up all the time. Salaries are really not keeping pace with that and it’s all that anyone is really talking about on the streets of Buenos Aires. On a macroeconomic level, Argentina is really held together, tied to eggs and string at this point. They have been making some very unsustainable economic choices, rolling over lots of debt.

Michela Tindera
The country owes more than $420bn, mostly to local bondholders and the IMF. And now, as Argentina struggles, its decision years ago to seize YPF has also come back to haunt it. A judge in New York ruled just weeks ago that the country owes shareholders $16bn for its seizure, adding even more pain to a country under a lot of pressure.

Ciara Nugent
The timing of this judgment, given the state of Argentina’s economy at the moment, is pretty unfortunate. For a lot of Argentines, it’s almost outrageous.

[MUSIC PLAYING]

Michela Tindera
I’m Michela Tindera from the Financial Times. Today on Behind the Money, we’re gonna look at why the Argentine government owes shareholders billions of dollars. And what this means for Argentina as an important presidential election is just weeks away.

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So let’s talk a bit more about this oil company called YPF.

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YPF is an old business. It was founded back in 1922 as an Argentinean state-run oil company. But by the early 1990s, Argentina’s government decided it didn’t want to run the company anymore. They wanted to sell it. But selling YPF required some special stipulations. Argentina’s reputation on the international stage wasn’t great. Here’s the FT’s US legal correspondent, Joe Miller. He’s been reporting on the story with Ciara.

Joe Miller
When Argentina tried to privatise YPF, it had to offer very strong guarantees to investors that their investment would be safe and that their shares would be safe. And so it implemented a load of incredibly restrictive bylaws, one of which stipulated that if Argentina ever tried to seize this asset again and take it into state hands, then they would have to make a mandatory offer to the existing shareholders, essentially buying them out at a previously agreed price that depends on quite complex calculation.

Michela Tindera
This agreement that Argentina guaranteed the investors’ money would be safe, would turn out to be a critical decision for the country. And at the time, it works. These bylaws are put into place and the company is sold. Now, let’s flash forward to 2012. At the time, a Spanish oil company called Repsol is the majority owner of YPF. And this is when Argentina’s president Cristina Fernández de Kirchner pops into the picture.

[MUSIC PLAYING]

Now, it’s important to remember here that Fernández de Kirchner is a part of the Peronist movement. Here’s Ciara again with a bit of background on that.

Ciara Nugent
The Peronist movement came out of an alliance in the 1940s between General Juan Domingo Peron and trade unions, and it was a leftwing populist movement that has kind of morphed into lots of different things over the years and really defines Argentine politics. You’re either Peronist or you’re anti-Peronist.

Michela Tindera
Ciara says that when Peronists have been in charge in Argentina, history has shown that they often make some unorthodox economic decisions.

Ciara Nugent
So the Peronists have tended to rely on both high taxes and money printing in order to fund high state spending. And they’ve also resorted to some more unorthodox measures like currency controls. Argentina has an official exchange rate, so currently the government says that $1 should buy you 350 pesos. But there are lots of parallel exchange markets where a dollar will actually buy you 800 pesos. And that disconnect, the fact that the government says the peso is worth almost twice as much as it actually is, creates a lot of distortions in Argentina’s economy.

Michela Tindera
So you have a ruling coalition that historically makes, let’s say, unconventional economic choices. And that might have also been the case when Fernández de Kirchner and the Peronist government renationalised YPF in 2012. When the expropriation happens, those bylaws, the ones that were written up in the 1990s and guaranteed that investors’ money would be safe — well, apparently they weren’t really followed. Here’s Joe again.

Joe Miller
Not only did Argentina not do that when it finally expropriated YPF in 2012, but the then vice economy minister said at the time that it would be stupid to comply with YPF bylaws.

Michela Tindera
Now it took some back and forth, but within a couple of years Repsol did get some money out of Argentina. But there were other smaller shareholders who were left waiting.

Joe Miller
The second and third largest shareholders were companies called Petersen, which is a Spanish investment company, and a far smaller company called Eton Park, which was a US-based hedge fund. And both of them suffered terribly as a result of this expropriation. Petersen actually went bankrupt as a result. Eton Park was wound up soon afterwards, but they both launched proceedings against Argentina in order to force the country to pay them for the shares that had been essentially deemed worthless by the expropriation, or near worthless.

Michela Tindera
So by 2015, those smaller shareholders decided to go very big. They decided to take the country of Argentina to court.

[MUSIC PLAYING]

So, Joe, what happened next?

Joe Miller
How long have you got, really? It’s been an eight-year battle and it’s gone through various guises and appeals.

Michela Tindera
Joe tells me that the case started inside a federal court in New York City. That’s because the plaintiffs argued YPF shares had been traded on the New York Stock Exchange before Argentina took control of the company. And after almost a decade in court, it all culminated in a decision this year.

Joe Mille
In March, a judge in the Southern District of New York decided that Argentina was, in fact, liable for breaching its obligations to the YPF shareholders. But that wasn’t the end of the case. In September, the judge issued her order saying that Argentina owed the highest amount possible, which is a combined $16bn, and that’s the largest award ever in the Southern District of New York and certainly the largest award against a sovereign nation.

[MUSIC PLAYING]

Michela Tindera
Argentina has vowed to appeal the decision and that process has already started. But this case has brought up some big questions. So I wanted to ask Ciara and Joe more about what it all means.

Now, Joe, I understand that it was determined that this case could proceed in a New York court because YPF had been on the stock exchange here. But I mean, can this court actually enforce this type of judgment on a whole other country? I mean, is that even possible?

Joe Miller
The reason that New York courts can enforce such a judgment is this is where global capitalism is essentially orchestrated from. And if Argentina ever wants to raise debt again, it’s gonna have to do it through New York. If it ever wants to join international markets again, it’s gonna have to do it through New York. And that’s true of almost any large company around the world. And so until laws are changed in Washington, a US federal court is going to have the power to seize assets that come through this city.

Michela Tindera
So has anything like this ever happened before?

Joe Miller
This is by no means Argentina’s first skirmish with American hedge funds. You may remember that Elliott Management, one of the world’s largest hedge funds, which is headed by Paul Singer, a famous investor here in the United States — he led a 15-year campaign to get Argentina to pay out bondholders after it defaulted on its debt in 2001. And that battle led to some really extraordinary moves by Elliott. They seized, for example, an Argentinean Navy vessel in Ghana and tried to impound that in order to embarrass Argentina into paying up. They even forced Argentina’s president to charter private planes to fly around the world, because if the president flew on government-owned planes, they could be impounded as soon as they landed in a jurisdiction that the US courts could command to comply with a court order.

Michela Tindera
Wow. That is completely wild. So what ended up happening there? Was it resolved?

Joe Miller
So that was an enormous battle, which Argentina eventually ended with a $2.4bn settlement in 2016. And even though Argentina was in a very difficult economic situation then, in some ways this is worse because bondholders, you know, the government has a right to try to renegotiate debt, which it issued. This is just a simple case of owing $16bn.

Michela Tindera
OK. So in that previous case, I’d assume that Elliott Management being, as you said, one of the world’s largest hedge funds, had the deep pockets you’d need to pursue a country for, you know, 15 years. But I thought you said that the shareholders in this new case had gone bankrupt. So how’s this whole thing been funded?

Joe Miller
There’s an extra twist to this litigation in that it was funded by an extraordinary company called Burford Capital. And I say extraordinary because this was a company that has essentially pioneered something called litigation finance. And essentially what it does is if you have plaintiffs, claimants with a solid complaint who can’t afford to pay the very expensive lawyers you’d have to hire to, say, go after a country like Argentina, well, Burford then steps in and says, we will pay for this litigation in exchange for a share of the eventual award. And it’s a kind of controversial practice. Some people say it encourages frivolous litigation. Burford would, of course, contest that what they do just means that people who have a genuine claim and can’t afford to bring it are finally able to pursue justice.

Michela Tindera
So how likely is it that this money does get paid back? I mean, you know, Elliott, I guess eventually got what it wanted, but that took 15 years.

Joe Miller
So Jay Newman, for example, who’s the person who spearheaded Elliott’s campaign at the time, he told us that he doesn’t believe Argentina can pay this claim even if it wanted to. And it’s fair to say that almost every analyst looking at this case doesn’t believe that the plaintiffs will get anywhere near $16bn. What will end up happening, if indeed Argentina decides to settle, is that they will be forced to take a significant haircut.

[MUSIC PLAYING]

Michela Tindera
So, Ciara, how is this $16bn judgment been received in Argentina?

Ciara Nugent
So $16bn is obviously a big sum for Argentina. Last week, Argentina’s lawyers actually wrote to the judge pointing out that $16bn is 20 per cent of its national budget. At the same time, Argentina has over $400bn in public debt, and about 120bn of that comes due by the end of next year. So it’s a drop in the ocean in terms of how bad the Argentine debt situation is. I’d say most politicians in Argentina are kind of sitting back and waiting to see what happens with the appeal.

Michela Tindera
Now, in just a few weeks, there’s gonna be a presidential election. And then this issue with the YPF shareholders will be that new person’s problem. So can you just give us a brief lay of the land here with what’s happening with that election?

Ciara Nugent
So Argentina has a very high stakes election coming up and we have the Peronist government trying to stay in power with Economy Minister Sergio Massa, and then his main rival was expected to be the kind of establishment, pro-business coalition Juntos Por el Cambio whose candidate is Patricia Bullrich. But both of them have been really put on the back foot by Javier Milei who is a libertarian economist with a really radical plan to shrink Argentina’s state and dollarise the economy. And he’s been surging in the polls and is now the frontrunner for the election.

Michela Tindera
Now, as we learned, the Peronists were in charge when YPF was renationalised in 2012, and they’re currently in power now and trying to hold on to that by running a candidate in this election. So what implications might this $16bn judgment have on the election? Have the candidates said anything about this?

Ciara Nugent
Both Milei and Bullrich have really held up the ruling as evidence of the failings of the Peronists and reasons why Argentina should not stick with them. But neither of them has really been willing to say that they approve of the ruling or think it’s a good thing. I think the case fits into this political divide that is ever present in Argentina, where on the one side you have the populist Peronist movement kind of doing quite economically unorthodox things to protect what they see as the rights and the sovereignty of Argentines. And then on the other side, you have anti-Peronists who tend to be more kind of pro-business and internationalist, who say that by not following the rules and by making short term decisions, the Peronists are mismanaging the economy and end up having big consequences for the country long term.

Michela Tindera
So, I mean, is Argentina the victim here with this case, do you think, or was this just gross economic mismanagement on the side of the government when they decided to nationalise YPF again?

Ciara Nugent
I mean, I think there’s a real tension here. Like, Argentina should have the right to decide what it does with its natural resources. And I think, you know, today the idea that a US firm and US courts are trying to wring cash out of a country that is really struggling to look after its people is pretty depressing. But on the other hand, Argentina didn’t follow the rules that its government had committed to when it privatised YPF in the 90s. And it’s hard to see how Argentina regains the confidence of creditors, which it will eventually need to do in order to get out of the kind of hole it’s in, unless it abides by laws in the future.

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Michela Tindera
Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Monique Mulima is our intern. Special thanks to Michael Stott. Cheryl Brumley is the global head of audio. Thanks for listening. See you next week.

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