It's the "Liberdad," training ship of the Argentine Navy presently birthed in Ghana. Really pretty ship, and it is central to the story of Argentina and its creditors, a story which I love to tell because short of human suffering on an individual basis there is, IMHO, nothing too bad that can happen to Argentina. There is also applicability to what is going on Over There right now, what has already happened in Greece and indicative of what the future may hold in store for all those parties who choose to engage in the sovereign debt market--on either side.
Back around the turn of the century, Argentina which had a constant battle with inflation and debt decided, in a bold stroke, to link their currency, the Peso, to the dollar. Now pages can be written as to whether this was a good idea and to how it was managed but this is not central to the story. Almost immediately, the result was a huge success; inflation dropped like a stone and the economy took off. Everyone knew that to continue to be successful the one thing that could not happen, the one thing the government could not do was to allow the amount of Pesos in circulation to exceed the amount in dollars held by the Central Bank for, under the scheme, one Peso was immediately exchangeable for a dollar upon request. No way could you print pesos, no way.
Most Latins can't stand the Argentines. The common description of what is an Argentine is an Italian who acts like a German and thinks he's an Englishman--a race unencumbered by concerns for an indigenous population (they killed most of them) as well as anyone else for that matter. But the language is Spanish and the form of government similar in many respects to Spain and in one important respect greatly similar: the presence of essentially independent states within a Federal framework.
Back in 2000 the central government knew what they couldn't do; the states couldn't have given a damn so off they went raising copious amounts of debt in both domestic and international markets knowing full well that whatever credit they enjoyed was based upon the credit of the Republic which itself would be destroyed from a credit standpoint if the states defaulted. And so, the one thing that could not happen did; Argentina soon became swamped in Pesos, inflation soared, the economy collapsed, the dollar was dropped and Argentina defaulted on all its debts including the debt of the states which the Republic was forced to assume. When things like this happen a restructuring is called for and that is exactly what occurred, but not like previous restructurings in Latin America. Oh no, this one was much different.
Past efforts were for the most part true negotiations with both side achieving favorable results but making mutual sacrifices as well. This one was in the true Argentine style of "take it or leave it" and at the end of the day, lacking as in the old days a sufficient amount of gun boats to sail up the river Platte, the creditors took it...right in the neck. The agreed to 30 cents on the dollar on the face amount of the bonds, reduced interest rates on what was left and a far longer pay-out period rendering, on a present value basis, the remainder worthless. At least 93% of the creditors did. Enter the Liberdad years later.
As you probably know, there exists in the firmament of finance organizations that exist to invest in troubled assets, seeing value where others do not. To explain them one can use a sports metaphor, they are like the Yankees or Notre Dame; you either hate them or you love them--no one seems to be in between. For the lovers they will point to the fact that these firms provide liquidity where there is none and one simply need look at the state of the housing market which, without the liquidity provide by these funds, would undoubtedly be much worse. Those having the opposing view have a bit easier time explaining their position: they refer to them as Vulture Funds.
The 7% of the debt holders who refused the Argentine's generous offer are two in number. Obviously, they purchased their holdings from the original creditors at an enormous discount very much like certain holders of Greek debt which you might remember received 100 cents on the Euro or dollar when the Greek restructuring closed. But in the scheme of things, their holdings were different; they were not under Greek law but under English or New York Law. Little of Argentina's debt was under local law; English or New York applied to all. And here's the rub. Greece, faced with law suits in foreign courts chose to pay the creditors holding foreign law obligations. There were many reasons for this which we shall touch upon later. The Argentines did not and won out except for the 7%. The 7% sued and were successful at both the trial and appellate level in both the U.S. and in England. After years of litigation the 7%ers had the Liberdad "arrested" as we say in the trade and there she sits in Ghana, subject to $20,000,000 in bail money and acting as a huge embarrassment to Argentina...assuming Argentina can be embarrassed.
What does all of this mean in the great scheme of things? Perhaps little, perhaps a great deal. That's part II of this story. Tune in tomorrow although I may not be able to get to it in full. Good story so far though, isn't it.
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