Investment funds have won two battles in international courts in less than a week against Argentina. In this Wednesday’s ruling, a British judge found the South American State guilty of having altered the mechanism for calculating the Gross Domestic Product (GDP) and, with this change, avoiding paying debt interest linked to economic growth. Five days ago, a US judge sided with the plaintiffs in the open trial for the expropriation of the YPF oil company and considered that they were harmed in the operation for having breached the company’s statute. In both cases, these are lawsuits triggered by economic decisions taken during the term of Cristina Fernández de Kirchner.
In his ruling, Judge Simon Picken, of the London High Court, orders Argentina to pay 643 million euros (704 million dollars) in damages and compensation to the four plaintiff funds: Palladian Partners, HBK Master Fund, Hirsh Group LLC and Virtual Emerald International Limited. According to Reuters, the judge also ruled that Argentina must pay around 1.33 billion euros (1.46 billion dollars) “in relation to all the securities linked to GDP, of which the four funds own approximately 48%.”
The funds denounced the Argentine State for the changes made to the financial instrument known as “PBI coupons”. It was launched in 2005 to exchange unpaid debt securities since the bankruptcy of 2001 and as an attraction it contemplated a larger disbursement to bondholders if Argentina’s annual economic growth exceeded 3.2%.
Argentina’s significant growth during the first decade of the century made bonds a tempting asset. In 2012, GDP fell, but the following year, according to the methodology in force at the time the bonds were issued, which was based on 1993 data, the Argentine economy grew by 4.9%. However, the Government modified the method of measurement and with this new calculation, the increase in GDP was less than 3% and, therefore, the planned disbursement, close to 3,000 million dollars, was not made.
The origin of the problem lies in the manipulation of official statistics published by the National Institute of Statistics and Censuses (Indec) between 2007 and 2015. The body was intervened and since then it began to underestimate the inflation data and throw figures that are increasingly distant of reality. This statistical alteration began to distort other measurements, such as poverty, which stopped being published in 2013, and GDP. In the latter case, the statistics showed uninterrupted growth of the economy between 2003 and 2011, even in 2009, when the Lehman Brothers global crisis broke out, with an advance of 0.5%. When reviewing the data with the new methodology, it was seen that Argentina’s GDP contracted by 5.9% that year.
The plaintiffs argued that Argentina had a propensity to manipulate economic data to save millions of dollars. On the other hand, they ignored that statistical fraud benefited them in previous years by overestimating GDP growth.
The Argentine State can appeal the sentence, but there is another similar complaint in the United States presented by the Aurelius fund. The trial could begin at the end of the year in the Southern District Court of New York.
Trial for the expropriation of YPF
That court is the same one that last Friday also ruled against Argentina in a case related to the expropriation of 51% of YPF’s shares in 2012, when it was under the control of the Spanish oil company Repsol. Judge Loretta Preska sided with the Burford Capital fund and argued that it is entitled to compensation from the South American State “for breach of contract.” The amount of this compensation must be resolved in another judicial process.
Burford had accused the Argentine State and YPF of failing to comply with the oil company’s statute, which required whoever bought more than 15% of the company to offer the same value to all shareholders and not just Repsol. The plaintiff also alleged damage because, when nationalizing the company, the State decided to suspend the transfer of dividends that had been agreed between the Spanish oil company and the Petersen Group of Argentina, which owned 25% of YPF. That decision caused companies in this group controlled by the Eskenazi family to declare bankruptcy. The US fund acquired the bankruptcy proceedings of both companies, Petersen Energía Inversora and Petersen Energía, and filed a lawsuit before the New York courts.
In her ruling, Judge Preska found the Argentine State guilty, but exempted YPF from responsibility. The compensation, which according to the plaintiffs will oscillate between 8,000 and 20,000 million dollars, will entail notable patrimonial damage to the State.
The judicial setback on Wednesday caused falls of up to 5% in Argentine bonds in international markets, although they were reduced to close to 2% at the close of the trading day. The country risk, which measures the difference that US Treasury bonds pay compared to the rest of the countries, stood at 2,432 points, 3.4% more than the day before.
The rulings are a setback for the ruling coalition, the Frente de Todos. Both the expropriation of YPF in 2012 and the decision to change the way GDP was measured in 2014 were made during Kirchner’s second term. The former head of state, now vice president, is fighting with Alberto Fernández in the face of Peronism’s candidacies for the elections next October. It also harms the current governor of the province of Buenos Aires, Axel Kicillof, who played a key role in the denounced facts as secretary of economic policy, first, and head of the portfolio, later.
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