August 27, 2013 2:47PM

Bondholders Should Think Twice about Argentina’s Debt Swap Offer

The video below shows interim-Argentine president Adolfo Rodríguez Saá (he was president for a week) announcing before Congress in late December 2001 that Argentina would default on its debt—the largest sovereign default in history. Rodríguez was interrupted by a standing ovation and chants of “Argentina! Argentina!”

Fast forward 10 years to May 2012 when Argentina’s congress voted overwhelmingly to seize (without compensation so far) Yacimientos Petrolíferos Fiscales (YPF), the country’s largest oil company whose controlling stake belonged to Spain’s Repsol. When the 207-32 vote was announced, the chamber erupted in a wild celebration, with deputies hugging each other and singing:

This is just a taste of Argentina’s flimsy rule of law.

Yesterday, Buenos Aires announced that it will reopen its 2010 debt swap under which it restructured its debt by replacing old bonds with heavily discounted new bonds. The announcement came in the face of a likely decision by the U.S. Supreme Court (the United States has jurisdiction over debt issued under New York law, as was the case here) not to review an appeals court ruling that says the Argentine government must first pay “holdout” creditors, that is, bondholders who didn’t accept the terms of the previous debt swaps. The Argentine government has stated categorically that it won’t do so.

In an effort to avoid a technical default, Argentina will offer the bondholders who agreed to the 2005 and 2010 debt swaps new bonds issued under Argentina’s jurisdiction. The Economist Intelligence Unit has a good analysis of the case here.

Argentina’s bondholders now face a terrible choice: either they stick to their U.S.-issued bonds and face the likelihood of a default, or accept Argentina’s offer of new bonds issued under the “protection” of its shaky legal and political institutions.

Before taking up the offer, bondholders should remember that chant, “Argentina! Argentina!”