The Examiners: Richard A. Chesley on Argentina and Distressed Invest...

As Argentina finds itself on the verge of a second default, what blame, if any, does the distressed investing community hold?

With the crisis surrounding Argentina’s debt continuing to play out in both the U.S. courts and in Buenos Aires, questions are being asked about who is responsible for the potential economic collapse of this significant and fragile economy. In large measure, the answer depends upon how the protagonists in this decade-long struggle are perceived.

Are the hedge funds spearheaded by Paul Singer and NML Capital Ltd., who purchased Argentinian bonds at rock bottom prices solely to reap massive profits, “vultures?” Are they willing to thwart Argentina’s restructuring to further that aim? Or, are these hedge funds properly exercising their legal rights to maximize the return to their investors? On the other hand, is Argentina merely taking all available efforts to restructure its debt? Or is the country, as the Second Circuit noted, “a uniquely recalcitrant debtor?” Realistically, the answer falls somewhere in the middle.

There is little doubt that the hedge funds acquired well over $1 billion in Argentinian bonds at heavily discounted prices based upon the pervasive financial crisis of the early 2000s. Nonetheless, as holders of the bonds, the hedge funds acquired all rights and obligations of par holders, and they have relied upon this to the fullest extent of the law. In doing so, however, well over 90% of outstanding holders had agreed to the bond restructuring, albeit many reluctantly. These hedge funds became holdout creditors, which gave them enormous leverage over Argentina. And while this leverage has led to years of litigation, by all accounts, the funds have expressed a willingness to negotiate a consensual resolution.

On the other side, as Carmen Reinhart and Kenneth Rogoff outlined in their analysis, This Time Is Different: Eight Centuries of Financial Folly, Argentina has been infected with, among other failings, decades of woeful banking policies, speculative lending and outright fraud. Nonetheless, for its economy to begin to recover—and aid its 40 million citizens—the outstanding debt must be restructured responsibly, and the country has put forth a plan that while arguably insufficient, is a step toward resolution.

Regardless of which side of this debate one is on, what is clear is that a decade of litigation has not resolved the issue for either side. Perhaps a conference room, rather than a courtroom, is the better venue for this political-commercial dispute to be concluded.

Richard A. Chesley is the co-chair of DLA Piper’s restructuring practice, focusing on bankruptcy transactions both in the United States and internationally. He is based in Chicago.