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ECONOMY | 21-05-2024 14:20

Argentina warns of debt woes if US$1.5-billion award not reversed

Argentina risks struggling to service some of its debt if it’s forced to pay out US$1.5 billion in damages a UK court awarded to investors last year, lawyers argue.

Argentina risks struggling to service some of its debt if it’s forced to pay out US$1.5 billion in damages a UK court awarded to investors last year, lawyers for the South American nation have warned.

Hedge funds including Palladian Partners LP last year won a UK High Court ruling that Argentina must compensate investors for losses in the country’s growth-linked securities after it changed the method of calculating gross domestic product. 

But that verdict is being challenged at the Court of Appeal in London and on Tuesday, lawyers for Argentina argued that the ruling could force its government to pay even if the economy were in recession or not growing at all.

The 2023 ruling disconnects actual economic growth from the bonds and unfairly ties the securities to an outdated measure of GDP, Argentina’s lawyers said. Any forced payments in a recession could jeopardise “the Republic’s ability to service both its ‘GDP-linked’ and conventional debt,” the country’s lawyers said in written arguments.

At the root of the case is the country’s default on US$95 billion of debt in 2001 amid one of the worst financial crises in its history. GDP-linked bonds, which pay out when the economic expansion reaches a set threshold, were part of a restructuring program. 

A dispute arose after Argentina changed the base year for calculating growth in 2013. The changes were necessary to avoid the returns on the warrants to be guided by “obsolete 1993 measure of GDP” until 2035, lawyers for Argentina argued.

Argentina is heading into another recession this year after President Javier Milei’s economic shock therapy. Economists surveyed by the Central Bank expect its economy to contract 3.5 percent this year.

Sue Prevezer, a lawyer for Palladian, dismissed Argentina’s argument as an “exercise in wishful thinking.” 

“The Republic dresses up its main argument in a wholly unrealistic fashion,” and is seeking to re-imagine how it wishes the securities were written to save itself over US$1.5 billion, she wrote in documents prepared for the hearing.  

The Court of Appeal earlier this year ordered the country to deposit 310 million euros in an escrow account for this hearing even as the judge expressed sympathy for “the impact any additional financial burden will have on a distressed economy.”  

The three other hedge funds in the case which alleged Argentina avoided payments on the bonds by making the change are HBK Master Fund LP, Hirsh Group LLC and Virtual Emerald International Ltd. 

by Upmanyu Trivedi, Bloomberg

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