After Argentina defaulted on its sovereign debt back in 2001, it took an approach that many at the time described as hard line. It offered investors the choice of 30 percent of their money back, or none of their money back.
“They stepped on a lot of toes,” says Win Thin, Global head of Emerging Markets strategy for Brown Brothers Harriman.
Though many bondholders were upset, 92 percent agreed to the terms. A small group, primarily hedge funds, did not.
As Argentina began paying out diminutive returns to the creditors who agreed, the holdouts sued. They argued that as long as Argentina was paying some investors back, it was contractually obliged to pay the holdouts too – and to pay them the full amount of their debts.
Reading the relevant contracts narrowly, a lower U.S. court agreed, and in declining to hear the case the Supreme Court has allowed that ruling to stand. Argentina is now on the hook for more than a billion dollars and says it may now default. “If you look at the numbers they simply just can’t afford to pay this right now,” says Thin.
Argentina may negotiate with the holdouts, but after launching a campaign to vilify them as vultures, that may prove difficult. The next payment date for Argentina is June 30, and this represents the deadline for determining whether the country will default or reach some sort of agreement.
The situation is negative for Argentina’s economy, but unlikely to spread into some regional or global financial crisis, says Thin. Investors have generally stayed far away from Argentina since its default.
The global implications are still serious, according to many observers.
“The [International Monetary] Fund remains deeply concerned about the broad systemic implications that the lower court decision could have for the debt restructuring process in general,” said Gerry Rice, spokesman for the International Monetary Fund, in a briefing June 5.
Countries in distress have often used the same framework as did Argentina to extract themselves from default. Usually not quite as aggressively, but the principle is the same: obtain the consent of a majority or plurality of investors to take a haircut.
“The fear is when a country -- whether it’s Greece or Portugal or what have you -- is in a position where it can’t pay its debt, it’s rare that you ever get 100 percent of creditors accepting it,” says Peter Hakim, President Emeritus of the Inter-American Dialogue.
Requiring every defaulting country to obtain approval of all creditors could drag the process out or even dash it altogether, as creditors would now have an incentive to be the last holdout.
“You’re sort of messing with a system that’s working pretty well,” says Hakim. “The U.S. Treasury, although it didn’t formally join in the suit at all, has the same view, that this may interfere with the workings of the financial system.”
Others have more dire predictions.
“This case will impact debt restructuring all over the world, it’ll impact poor country access to credit,” says Eric LeCompte, Executive Director of Jubilee USA, a religiously backed organization that promotes global financial reform.
He says money earmarked for development is being diverted to pay creditors, to the detriment of vulnerable populations.
In one sense, the legal quarrel in Argentina’s case could have been avoided by a different type of contract, where new payment terms become binding for all investors if a certain proportion of them agrees to them.
However, for all the countries who have debt in the here and now, Argentina’s example is a warning that getting out of debt could is a lot harder than anyone thought.
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Williston, North Dakota, has the nation’s highest rents. Thanks to the fracking boom, a basic apartment in Williston costs more than something similar in New York or San Francisco. And it comes with a lot fewer amenities.
For instance, shopping. If Walmart doesn’t have it, the nearest outlet is at least two hours away. Now, a Swiss investment firm has announced plans to build a $500 million development that will include a major shopping center.
There are good reasons retail has taken so long to catch up with the town’s exploding population.
About three years ago, California real-estate developer Jeff Lunnen and his partners went to Williston to check out the fracking boom’s business prospects.
It wasn’t an easy trip. “It was hard to get accommodations," he says. "Hard to get something to eat, and trucks going in every direction.” At the time, many of the workers crowding into Williston camped out in RVs—some in the Walmart parking lot, others on the street.
All of which, to Lunnen, signaled unlimited opportunity. “We went back in two weeks, and started buying real estate,” he says, “and it’s been very good for us.”
The town’s population has more than doubled, and the RVs have been replaced by “man camps”—basically company barracks—after a city crackdown.
Lunnen has focused on industrial projects, but some developers have started to create more-permanent housing, at those sky-high rents.
Retail, says Lunnen, presents special challenges. “It’s a little like building your retail project on the moon,” he says. “There’s some logistical issues.”
For instance: Who would work in the shops? Are they supposed to live in the man-camps? How could retail stores pay competitive wages, when oilfield companies pay unskilled 19 year-olds $80,000 a year?
Traditional lenders haven’t been quick to get involved in retail development. “We are looking to avoid what I would refer to as over-capacity,” says John Giese, who oversees business banking for Wells Fargo in North Dakota. In other words, when things level off, will there be more malls than even a built-up Williston needs?
No one knows for sure how many people live and work in Williston now. A study commissioned by the city planning department puts the range between 39,000 and 44,500.
Meanwhile, like Jeff Lunnen, Wells Fargo has plenty to do in a line that’s more of a sure thing: working with energy producers. “Supporting that industry—making equipment and construction loans and such—will have quicker payback,” he says.
A Swiss investment firm called Stropiq is behind the newly announced $500 million project, to include housing, hotels and 1.2 million square feet of retail.
Donn Fuller, a Jones Lang LaSalle executive who is managing the build-out and soliciting tenants, says the first phase will focus on what he calls commodities: “Grocery, pharmacy, theaters,” he says. “In that area we consider theaters a commodity. Which is a little different, but there’s not a lot of entertainment.”
Fuller hopes to have that phase—which may include department stores and women’s fashion—up and running in about three years. The project as a whole may take seven to ten.
“We’ve got a lot of work to do,” he says. “On the site plan, the financial model. All I can say is, we think it’s going to be profitable. How profitable remains to be seen.”
Fuller admits: He’s never done a project in a location like this before.
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