Mutual funds have won two battles in international courts against Argentina in less than a week. In his verdict on Wednesday, a British judge found the South American state guilty of changing the mechanism used to calculate gross domestic product (GDP) in order to avoid paying debt interest linked to economic growth. Five days ago, a US judge sided with the plaintiffs in an open hearing over the expropriation of oil company YPF, finding they had been harmed in the operation for violating the company’s charter. Both cases are lawsuits triggered by economic decisions made during Cristina Fernández de Kirchner’s tenure.
In his ruling, Judge Simon Picken of the London High Court ordered Argentina to pay 643 million euros ($704 million) in damages and compensation to the four plaintiff funds: Palladian Partners, HBK Master Fund, Hirsh Group LLC and Virtual Emerald International Limited. According to Portal, the judge also ruled that Argentina must pay around 1.33 billion euros ($1.46 billion) “in respect of all GDP-linked securities, of which the four funds own approximately 48%.”
The funds condemned the Argentine state over the changes made to the financial instrument known as “PBI coupons.” It was launched in 2005 to swap unpaid debt since the 2001 bankruptcy, and as an attraction it provided for a larger payout to bondholders should Argentina’s annual economic growth exceed 3.2%.
Argentina’s substantial growth in the first decade of the century made bonds an attractive investment. In 2012, GDP fell, but the following year Argentina’s economy grew by 4.9% according to the methodology in place at the time the bonds were issued, which was based on 1993 data. However, the government changed the measurement method and with this new calculation the increase in GDP was less than 3% and therefore the planned payout of almost $3,000 million was not made.
The root of the problem lies in the manipulation of official statistics released by the National Institute of Statistics and Census (INDEC) between 2007 and 2015. The panel intervened and has since started underestimating the inflation data and throwing numbers that are ever further from reality. This statistical change began to skew other measures, such as poverty, which was no longer 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 global crisis of Lehman Brothers erupted, with a plus of 0.5%. Reviewing the data using the new methodology, it was found that Argentina’s GDP shrank by 5.9% this year.
The plaintiffs argued that Argentina tended to manipulate economic data to save millions of dollars. On the other hand, they ignored that statistical fraud has benefited them in recent years by overestimating GDP growth.
The Argentine state can appeal the verdict, but there is another similar lawsuit in the United States, filed by the Aurelius Fund. The trial could begin later this year in the Southern District Court of New York.
Trial for the expropriation of YPF
This court is the same one that also ruled against Argentina last Friday in a case related to the expropriation of 51% of YPF shares in 2012, when it was under the control of Spanish oil company Repsol. Judge Loretta Preska sided with the Burford Capital fund, arguing that it was entitled to compensation from the South American government “for breach of contract.” The amount of this compensation must be clarified in another court proceeding.
Burford had accused the Argentine state and YPF of failing to comply with the oil company’s charter, which required that anyone buying more than 15% of the company had to offer all shareholders, not just Repsol, the same value. The plaintiff also claimed damage because, when the company was nationalized, the State had decided to suspend the dividend payment agreed between the Spanish oil company and the Argentine Petersen Group, which owned 25% of YPF. This decision caused companies in this Eskenazi family-controlled group to file for bankruptcy. The US fund acquired the bankruptcy cases of two companies, Petersen Energía Inversora and Petersen Energía, and filed suit in the New York courts.
In her verdict, Judge Preska found the Argentine state guilty but absolved YPF of responsibility. The compensation, which the plaintiffs say will range between $8,000 and $20,000 million, will cause significant financial damage to the state.
Wednesday’s court backlash sent Argentine bonds down as much as 5% in international markets, although they were reduced to almost 2% by the end of the trading day. Sovereign risk, which measures the difference US Treasuries pay compared to the rest of the countries, stood at 2,432 points, up 3.4% from the previous day.
The verdicts are a setback for the governing coalition, the Frente de Todos. Both the expropriation of the YPF in 2012 and the decision to change the GDP measurement in 2014 fell in Kirchner’s second term. The former head of state, now vice-president, is fighting with Alberto Fernández against the candidacy of Peronism for the elections next October. It also harms the current governor of the province of Buenos Aires, Axel Kicillof, who, as economics minister and later head of department, played a key role in the alleged crimes.
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