Get off your assets

Alistair Darling had little idea of exactly what he was buying when he signed off on a £20bn state rescue of the Royal Bank of Scotland just after 6am on October 13 2008. The collapse of Lehman Brothers four weeks before – the biggest bankruptcy in history – had sent markets into a tailspin, halting interbank lending. Days earlier, RBS chairman Tom McKillop had called Darling to warn that the bank was hours from collapse, precipitating the decision to take the world’s largest bank into public ownership. Events had progressed so quickly that neither Darling nor anyone within the UK government had had a chance to look at the bank’s books. RBS was sitting on £2.2trn of assets, then equal to the annual GDP of the UK and Spain combined, but nobody knew how bad those books were. The bank’s chief executive Fred Goodwin, then a knight of the realm, had grown so suspicious of RBS’s own accounts that he had asked one of his lieutenants to fly in for a second opinion just a few weeks before. “What we were bothered about was the general condition of British banks, many of which had the look of death about them,” said Darling, then Chancellor of the Exchequer. “They just didn’t have enough capital. We were drawing up plans, but we couldn’t share details with banks. We couldn’t do due diligence because of the lack of time.” It was months before the dire state of RBS’s finances would become clear. The bank was in a far worse position than had been imagined; it was stuffed with worthless junk. Darling later learned the bank owned a golf course in Florida that was 70 miles from the nearest road and a cemetery in the US Deep South. What began was a long process that is still ongoing to clean up the books, return to profit and pave the way for the government selling its stake. Goodwin had agreed to go as a price for the rescue. But McKillop and Johnny Cameron, who was head of the global banking and markets division, insisted on holding on to their jobs for a few more months. Eventually, the two backed down. Stephen Hester, an investment banker by trade and former boss of British Land, took the CEO role, while Philip Hampton became chairman. John Hourican, the man asked by Goodwin to re-examine the books, took the helm at GBM. The bank was still haemorrhaging money, not least in GBM. Emergency liquidity from central banks had helped stabilise things, but many of RBS’s assets were plunging in value by the day. “The turnaround strategy was to salvage whatever it could from the ruins – to save whatever could be saved initially,” said Darling, who said he never considered closing down GBM. “It was all about crisis management. It was never a case of splitting out the retail bank and running down the investment bank.” “We all had an on-the-beaches attitude at the time,” said Hourican, who until Goodwin called him back had been working in Amsterdam unpicking RBS’s joint acquisition of ABN AMRO in what then was the biggest bank takeover in history. “The problems we were discovering were large and continuous. Every day, we would see the value of the assets we were sitting on move significantly – and usually down. A lot of the stuff on the balance sheet was becoming rapidly illiquid and very difficult to value.” What started were many months of shrinking the books, a task which soon fell on Peter Nielsen, the former head of rates who was quickly placed in charge of the markets business, which generated the lion’s share of GBM revenues. “In those early days, every single day was spent trying to get the books down, making sure the books were smaller at the close of business than they had been at the beginning of the day,” he said. “It was a very difficult period. A lot of the systems we relied on had helped bring down the bank. It was like flying in the dark with no ins

To see the full digital edition of the IFR Review of the Year, please <a onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;" href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580">click here</a>. The restructuring of Greece’s €206bn of private sector debt in March – the first by a Western European nation for over 60 years – was a landmark without parallel. In one respect the deal was an outstanding success – with 96% of the eligible bonds exchanged for a range of new instruments with a face value of 46.5% of the old notes. That made the deal the largest ever sovereign restructuring, and with one of the highest ever take-ups by investors. The steep haircut, around 75% on a net present value basis, was astounding, particularly as restructuring had been entirely ruled out when Greece first sought assistance after losing market access two years earlier. As Greece was also a member of Europe’s single currency this aversion to a haircut was understandable. A default would hit the 16 other members of the bloc as well. Would Greece have to leave the euro? Or could it manage its financial predicament within the eurozone? The answers to those questions would set a precedent for other ailing countries. A default also seemed unthinkable for Greece’s largest creditors, principally eurozone financial institutions led by France’s BNP Paribas and Germany’s Deutsche Bank. Banks were, after all, still fragile after the financial storm that followed the failure of Lehman Brothers in September 2008. So the fact that two years after it lost market access, Greece had managed to get its private sector creditors to accept an estimated 75% reduction in the accounting value of their €206bn holdings, without bringing them or the euro down at the same time, was a major achievement. “Before PSI [the private sector involvement deal], Greece on one hand and the European financial system on the other were in intensive care with tubes and wires linking each other,” said Andres de la Cruz, partner at law firm Cleary Gottlieb, which advised Greece on the situation. “Afterwards Greece and the financial system have been moved into two separate intensive care units. They are no longer connected. PSI did not solve the problems but now each problem can be tackled separately.”Franco-German axis Initially, Europe’s diagnosis was that Greece’s predicament was a temporary loss of liquidity rather than a permanent lack of solvency. Banks, led by BNP and Deutsche argued that to admit the possibility of the latter would throw into doubt the whole basis of European finance. Up to that point, eurozone government bonds had been considered essentially risk-free. Undermine that assumption, the banks said, and questions might be asked about other European sovereign bonds and the health of banks as major holders of such instruments. Both BNP and Deutsche, with their significant exposure to Greece, lobbied their respective governments to ensure this point was not lost on them. And initially at least the politicians accepted that argument, leading to a €110bn bailout loan provided to Greece in May 2010. By the spring of 2011, however, it had become obvious to all that the bailout would have to be reworked. BNP remained keen to preserve at least the illusion that European sovereign bonds were risk-free and proposed a plan to extend the maturity of all Greek bonds for between 30 and 50 years. “In return Greece would agree to spend €30bn buying Triple A zero coupon bonds such as OATs or Bunds to enhance the credit quality of the lengthened bonds and ensure the risk-free status would be retained,” said Christopher Drennen, a public debt expert at BNP who worked on the plan. Such an initiative would be massively destructive of a bond’s net present value. But the bank argued that most investors had bought the bonds at issue to hold a risk-free asset to

To see the full digital edition of the IFR Review of the Year, please <a onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;" href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580">click here</a>. Investment banking fees across M&A, equity and debt underwriting and loan syndications are on track to decline almost 10% in 2012 – to probably less than US$70bn, based on Thomson Reuters Deals Business Intelligence data for the first 10 months of the year. The devil is in the detail, though, and the individual product breakdowns reveal more mixed fortunes. Activity in ECM and M&A in particular tends to be correlated with general confidence, which was deflated in 2012. ECM fees will likely see a 20%-plus year-on-year slump to around US$15bn (a 44% slump relative to 2009 totals), while M&A fees could see a decline of more than a quarter over full-year 2011 levels to US$18bn. And because the lending model has been altered by the unfinished cycle of bank deleveraging, strategic realignments, a rethinking of the relationship banking model and general economic misery, 2012 syndicated lending fees look likely to fall by 20% to the US$14bn level. The only saving grace in the past year’s fee data was DCM. A wave of liquidity was unleashed by almost perfect technical conditions (government bond yields close to zero). Sustained quantitative easing and other forms of monetary stimulus by central banks in the US, eurozone, Japan, UK, China and elsewhere led to a surge of new bond issuance. Institutional investors craved positive inflation-adjusted yields and aggressively sought it in credit. Annual DCM fees look like they’re on for a rise of 20% to around US$22bn. The bond market clearly also benefited from the disintermediation trade, as issuers arbitraged between loans and bonds as a direct corollary of bank deleveraging and better technicals, and invariably found they could achieve better execution in the bond market. Investment banks self-evidently depend for their existence on fees and commissions. While financing businesses and M&A only tell part of the overall fee story, FICC trading revenues – the mainstay of investment bank revenues for years – have been in a funk for some time. While there were signs of improvement in some of the third-quarter bank earnings in this product line, it is too early to call a turn in the fortunes of FICC. All in all, 2012 was a tough year for parts of the capital markets and for event-driven activity, as the broad environment was buffeted by a range of political, geopolitical, macroeconomic and financial sector woes.Contending with uncertainties The Greek debt workout was still on the negotiating table in November, while there was still uncertainty as to whether Spain would request a formal EU bailout. As if the continuing eurozone crisis were not enough, market professionals also had to contend with the so-called fiscal cliff following the US presidential election, the escalating row between Israel and Iran, civil war in Syria, economic deceleration in China and other key emerging markets, and recession in areas of the developed world. Those issues did a good job of derailing the investment banking fee-generation environment. Beyond those themes, internal financial sector issues around tighter regulation, higher capital requirements, wholesale/retail ring-fencing, corporate governance failures, market capacity issues, strategic rethinking and headcount reductions created a heady and volatile mix that undermined best efforts. Where businesses contracted due to the general environment, however, it did not mean that banks were idle. “The things that investment banks do are not going away; they just need a good injection of confidence,” said Tom King, deputy CEO of the investment banking division at Barclays. “For businesses we think are going to do well, we fo

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. There were few enough moments of bipartisan accord in Barack Obama’s first term as US president. But one was the April 5 2012 signing of the awkwardly-titled Jumpstart Our Business Startups (JOBS) Act. In theory, the act’s passing, bringing together Democrats and Republicans, was a win-win. Certainly, the legislation’s ambitions were laudable and well-intentioned. It lifted a previous ban against public solicitation by private companies raising funds from a multiplicity of small investors – effectively introducing “crowdfunding”, long established in Britain, to the US. And it cut the cost of going public by allowing smaller firms (so-called emerging growth companies) to circumvent the more onerous provisions of the 2002 Sarbanes-Oxley Act. Public companies are, after all, particularly good at generating employment. According to data from the past four decades collated by the Washington-based National Venture Capital Association (NVCA), 92% of job creation occurs post-IPO. Light a fire under the US’s primary capital markets, the thinking goes, and jobs will follow. So has the JOBS Act worked its intended magic? As former Chinese premier Zhou Enlai is meant to have said (when asked about the impact of the French revolution), it’s too early to say. Unemployment in the US is finally on the wane, dipping below 8% in October for the first time in nearly four years – though most economists ascribe this improvement to a natural (if painfully slow) return to growth in the US economy. It is also not easy to find tangible evidence linking the new legislation to a direct pick-up in primary capital market activity. True, this has been a solid though not stellar year for US IPOs. Between April 5 and the end of October, 83 companies went public on US bourses, raising US$37.4bn, almost double the US$19bn raised over the same period last year – though still down on 2007 figures.Uptick Nonetheless, some executives point to anecdotal evidence that the number of higher-growth firms exploring the possibility of listing shares in the US is on the rise for the first time in years. Of the 56 companies that completed IPO filings in the five months to September, more than two-thirds qualify as higher-growth corporates, according to research firm Morningstar. “We have unquestionably seen an uptick in the number of companies interested in going public,” said NVCA president Mark Heesen. “We were at the point before where many entrepreneurs were seeing acquisitions [of their assets] as the only viable exit, and what many are saying now is: ‘Wait, there is a reason to look at the capital markets again’.” That view is shared by Anna Pinedo, a New York partner at law firm Morrison & Foerster. “There is an incredible number of companies out there doing, or thinking about doing, IPOs,” she said. “Before, they would have seen the process as being too expensive. This suggests the process is working.” Heesen said there was a “healthy and stable pipeline of companies” seeking to go public, thanks to the act, in the new year. Another advantage of the new law is that it makes the listing process cheaper. “Sarbox” forced companies, before and after the listing process, to spend money on lawyers and accountants, rather than putting that capital into research and development, new markets and, of course, the creation of new jobs. For smaller firms at least, the new legislation cuts out much of that subcutaneous fat. “We have unquestionably seen an uptick in the number of companies interested in going public. We were at the point before where many entrepreneurs were seeing acquisitions [of their assets] as the only viable exit, and what many

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. While the Basel III regulations have yet to be set in stone, many banks believe the new capital and liquidity requirements will stifle all kinds of lending across the spectrum, from interbank loans to commercial paper backstops. Even ECB president Mario Draghi has suggested that the liquidity requirements are “overly conservative”, and banks are trying to loosen some of the proposed regulation. The industry insists that, under Basel III as currently written, banks will be forced to hold a significant store of liquid assets behind many short-term loans, which amounts to a disincentive to extend credit. Uncommitted credit lines, such as undrawn term loans, working capital facilities and CP backstops, would be particularly affected. One central reason is the pending imposition of a Liquidity Coverage Ratio (LCR), under which banks will be required to hold cash (or near-cash equivalents) to cover potential cash outflows over a putative 30-day period of “stress”. Banks will be required to have at least a 1:1 ratio of liquid assets to those outflows – which include customers tapping into their lines of credit. The LCR regulation assumes that non-financial companies would draw down 10% of their untapped credit lines during a stress period, but that financial institutions would utilise the full 100% of their available credit facilities. Banks would thus have to squirrel away so much in assets to cover those credit lines, the industry says, that they would simply be deterred from much of that kind of lending. The LCR is scheduled to go into effect on January 1 2015. The ratio requirement could pose a particular problem in the commercial-paper market, where an underlying revolver is used to backstop a deal. The fear is that, without those backstops, commercial paper will become less desirable. “The backstops are likely to remain for those companies with deep bank relationships, although costs will go up,” said one banker. “Those that don’t have such deep relationships, or deep wallets, will have difficulty getting availability.” Meanwhile, bankers expect long-term lending will also feel the squeeze due to Basel III’s liquidity requirements. Banks will have a disincentive to write long-term loans and hold them on their balance sheets, since such debt is an impediment when banks tabulate their risk-weighted assets. “Loans on asset-backed property, such as aircrafts and project finance, or those that are 15 to 20 years in duration, are rare,” one banker said. “They are heavily penalised in terms of their risk weightings.”Wholesale changes Those in the industry say interbank lending, which is facing especially harsh new liquidity requirements, will also be affected at a time when sudden funding droughts have plagued the wholesale market, and even the strongest of banks have been shut out on occasion. Not wanting to be dependent on funding vehicles that can dry up quickly, banks are understandably looking at alternatives. Executives at BNP Paribas, for example, have been pushing to win more deposits from large companies, as the bank aims to rebalance the way it funds its corporate and investment bank over the coming quarters. French banks in particular have been battling over what constitutes the high-quality liquid assets that must be set in reserve under the new Basel regulations, and are pushing to expand the range of acceptable collateral. To date, the Basel committee has decreed that high-quality assets include cash, securities issued by the US government or other highly-rated sovereigns, agency mortgage-backed securities and corporate bonds rated AA or higher. Analysts say banks are pressing regulators to a

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. Japan has seen an uptick in insider-trading cases, with regulators publicly identifying at least five incidents since 2010 involving major domestic and foreign financial institutions. Until recently insider trading was virtually embedded in the Japanese approach to the financial markets. That attitude appears finally to be changing – and observers suggest the increase in cases is due to the government taking the issue more seriously. Japanese authorities have been looking at ways to improve regulation, even considering increased fines as well as jail time for more serious cases. In November, Nomura was fined ¥200m (US$2.5m) by the Tokyo Stock Exchange for compliance issues surrounding insider trading – the largest such punishment ever handed down. Regulators say greater transparency in dealing with cases will boost deterrence. But those close to the situation agree that the biggest flaw in Japan’s regulation is that it ignores those who leak insider information, only treating trading on such information as criminal. This has encouraged a culture in which banks have little incentive not to pass on privileged information to important clients. Many suspect such tip-offs (about upcoming share sales, for example) are tacitly encouraged, with short-selling arguably advantageous for the underwriters in creating liquidity as well as a buzz around a stock. Currently the FSA’s fines are imposed on profits earned by insider trading, not on the act of leaking insider information. Instead, banks, whose employees leaked such information are penalised by a business improvement order from the FSA, exclusion from government-related business deals, imposition of fines/penalties by an industry organisation, etc. “The real problem is that the underwriting banks have an excessively cosy relationship with short-sellers at other firms,” said Lance Miller, regional managing partner for Asia at law firm DLA Piper. “There is a suspicion that this problem is endemic across Japan.” The FSA’s working group on insider trading is determined to address these issues and is considering various changes to the law, including making it a crime to pass on privileged information, said Taro Takeda, standing governor of the Tokyo Stock Exchange’s compliance unit and a member of the group. If the FSA does clamp down on leakers of privileged information as expected, Japan will be well equipped to deal with the insider-trading problem, said Akihiro Wani, a partner at Linklaters in Tokyo. Nomura, for example, has now been implicated in three of Japan’s insider trading scandals. (JP Morgan, Daiwa and Nikko SMBC are among others censured for insider trading). Besides the reputational damage Nomura has suffered, the bank lost mandates as bond underwriter for government deals from the Japan Housing Finance Agency and the Development Bank of Japan. It also failed to get a mandate for the government’s planned selldown of Japan Tobacco shares, expected early next year, and it lost the global co-ordinator position for Japan Airlines’ IPO in September. In August, shortly after being issued with an improvement order by the FSA, the bank pledged in a statement to implement and “firmly establish the preventative measures described in the internal investigation report”. It said it would give regular updates on the progress implementing those measures, along with regular reviews of their effectiveness, in line with regulatory demands. “If a bank or securities company gets that call from the FSA, they take it very seriously,” said Miller. “There is a lot of time and effort associated with that kind of an investigation, it is a long and traumatic process. So

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. There is no escaping the fact that the loan market in Europe has had a really tough year if you look only at the volumes. Syndicated lending in Europe, the Middle East and Africa slipped 35% year on year to US$509bn in the first nine months of 2012, according to Thomson Reuters data. The gloom did not lift at all in the third quarter. At a fairly measly US$135bn, the third quarter was the lowest quarter by volume for the last three years and 37% down on the second quarter. Yet loan bankers sound sanguine. “We came to the end of the cycle of refinancings at the end of last year,” said Jonathan Macdonald, head of global loan syndicate, EMEA and Asia-Pacific for Barclays. The bulk of the European loan market is in corporate refinancing, and most bankers agree that the majority of lines were refinanced between 2010 and the middle of last year. Given that the natural maturity of loans is around five years, there is pretty wide agreement that the cycle will start to pick up seriously again come 2014. An understandable lowering of expectations from bankers aside, there are signs of a pick-up in activity – even in Southern Europe and despite the eurozone crisis. Italian gas distributor Snam pulled off a headline deal in August, allocating the reduced €9bn loan backing its split from Eni. Heart was taken not just from the fact that the deal got away, but from the fact that the margin the loan pays to cover Italian banks’ higher funding costs was only 300bp–350bp. At the start of the year, said bankers, the Italian premium could have been as much as 600bp. Other Italian deals, including motorway financing, have bubbled away in the background as well. Motorway project company Tangenziale Esterna agreed a €120m term loan with Banca Popolare di Milano, Banca IMI and UBI-Centrobanca to help cover the construction costs of a ring road east of Milan. And Brebemi, another motorway financing company, has extended the maturity of its €546m bridge loan backing the Brescia-Bergamo-Milan Direct Motorway. In Spain, the national lottery is in the process of raising €6bn in a syndicated loan. The loan for Sociedad Estatal Loterias y Apuestas del Estado will partially finance the government’s regional fund, along with an €8bn private placement provided by Spanish banks in mid-October and a €4bn payout from the Spanish Treasury. One banker close to the deal said it was “getting some traction”. Some loan bankers are sceptical about how much can be read into these deals. Big national champions like Snam will always survive, and cynics suggest that enthusiasm for Loterias has as much to do with a desire to get on to the IPO as anything else. “Last year we saw European banks go through a liquidity crisis. There was an increase in pricing, especially for lower rated companies,” said Damien Lamoril, head of loan syndicate for Societe Generale. Still, spreads have begun to stabilise, and the premium for non-core Europe has come in.Room for hope Similarly, at first glance the European leveraged loan market is in no better shape. European leveraged loan volumes in the first three quarters of the year reached only US$72.44bn, 42% down from the same period of last year. But here too there is room for hope. Since the beginning of the year, the US has been a saviour of the European leveraged market, especially on larger transactions – with companies looking across the Atlantic simply to get deals away. “While the US market has grown even stronger, European companies are now also going to the US because one of their operating currencies is US dollars, as the most recent cross-border deals have shown,” said Hoby Buvat, managing director of l

To see the full digital edition of the IFR Review of the Year, please <a href="http://edition.pagesuite-professional.co.uk//launch.aspx?eid=24f9e7f4-9d79-4e69-a475-1a3b43fb8580" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>. A profound change for over-the-counter derivatives trading will take place in 2013. With the implementation of Dodd-Frank in the US and the European Markets Infrastructure Review, there will be a massive increase in transparency and a reduction in naked risk. OTC trades, with a few exceptions, will be required to be centrally cleared, traded via electronic platforms and reported to central depositaries. But while the regulations were put in place with the intention to create more transparency and stability, there remain a number of unresolved questions that will play out in 2013. One main issue appears to be a lack of harmonisation between the European and US reforms. With most banks operating in multiple locations, those in charge of banks’ efforts to comply with regulations are uncertain which rules apply to which activity in which location. Consequently, there are widespread concerns that many firms will simply not be ready for implementation. Perhaps most crucially for the wider economy, the new rules are starting to attract the attention of non-financial users of derivatives who claim that EMIR and Dodd-Frank will cripple their liquidity and ability to manage various risks, such as currency or interest rate exposure. Like many of the banks, they too are uncertain about how the rules will affect their businesses. “If I trade in the UK, but my client is in the US, which rule applies?” asked a banker at a large European investment bank based in London. “[Regulators] tell you that they have this sorted out, and we will avoid situations of double jurisdiction, but I’ll believe it when it happens.”Clear as mud? It is a question that many in the finance industry are asking, despite the European Securities and Markets Authority stating that they have been clear and upfront about this issue. “We’re making sure the market is prepared and are planning everything that is needed for the process,” said Fabrizio Planta, the rapporteur of the post-trading standing committee at ESMA. “At the end market participants will have more than six months to be ready for EMIR and they can already start doing preparation work.” However, bankers argue that regulators are in denial about what could go wrong. One example that many pointed to was the difference on the amount of participants needed for a transaction on a request-to-quote basis. If, for instance, a hedge fund wanted to trade a credit default swap on a request-for-quote basis they would send an order to market-makers and select the ones they send it to. In the US they are required to send it to at least five market-makers, but in Europe, at least for now, there is no such requirement. Another example of the problematic nature of enforcing cross-border regulations recently surfaced at a meeting among international regulators. It was discovered that French banks signing up to be swap dealers in the US would be required to give disclosures and allowances to the Commodity Futures Trading Commission, something that would be in violation of European and French privacy laws. While the CFTC is said to be looking for a solution, it highlights the numerous challenges that could arise in 2013. A report published at the end of October by the Financial Stability Board, a body established to promote the implementation of effective regulatory policies, on the progress of the implementation of OTC derivative reforms said that decent progress was being made at the national level, but that the largest concern was regulatory uncertainty – both for national regulators and financial firms. With only two months before the regulations are set to be enacted, the FSB warned that regulato

There have been plenty of headlines out of Argentina in 2012, and few have spelt joy for investors. An Argentine court ordered the seizure of Chevron’s local assets. The country’s Chaco province defaulted when the central bank blocked it from accessing US dollars. And there was the small matter of the government expropriating Spain’s stake in domestic oil producer YPF, a surprise bit of nationalisation that unleashed shock waves in the markets and fractured an important relationship with Madrid. Spain’s foreign minister said Argentina had “shot itself in the foot”. And then in late October, a US federal court ruled that Argentina must indeed pay “vulture funds” – creditors who rejected the restructuring that followed Argentina’s massive 2001 default – at the same time that it pays those who accepted it. The country vowed never to pay the funds, which want full value for their holdings as opposed to the 65% haircut suffered by those who accepted the restructuring terms. “The court effectively commandeered immune Republic assets to pay plaintiffs, and ordered the Republic not to use equally immune assets to pay other legitimate debts unless it submitted to this commandeering,” Argentina said in a court filing. “A greater affront to sovereignty and sovereign immunity is hard to imagine.” Locked out Argentina has been locked out of the international capital markets since the default, and its apparent refusal to play by the rules continues to put the markets off. From early October to mid-November – that is, from just before until just after the appeals ruling – the country’s Boden 2015s fell from around 92.00 to 79.00. Over the same period, five-year CDS on Argentina widened from 980bp to 2,400bp. “There is no shortage of reasons to remain cautious on Argentina credit risk,” Siobhan Morden, head of Latin America strategy at Jefferies, wrote in a mid-November analysis. “Argentina seems more on a path of inward isolation … as opposed to the alternative strategy of normalising external creditor relations.” “Argentina seems more on a path of inward isolation … as opposed to the alternative strategy of normalising external creditor relations” Tensions escalated further on November 21 as the US courts ordered Argentina to deposit US$1.33bn in an escrow account for the benefit of the plaintiffs before a US$3bn payment of GDP warrants could be paid to bondholders that had accepted the country’s 2005 and 2010 exchange offers. Further, the court order said that if Bank of New York Mellon and other US payment agents facilitated any payments to exchange bondholders, they would be breaching the order if the escrow monies had not been deposited. This heightened the risk of default even further. District Court Judge Thomas Griesa was asking Argentina to break its word and pay in full the claims of the bondholders that had not accepted any restructuring, or else risk technical default if it ignored this, as US payment agents were unlikely to make payments to exchange bondholders. He said: “Argentina must pay that US$1.33bn concurrently with or in advance of the payments on the exchange bonds. Argentina owes this and owes it now. After 10 years of litigation this is a just result.” However, the threat of default receded on November 28, when Argentina succeeded in getting a stay on any payments to the vulture funds reinstated. The country was also allowed to appeal the ruling from Judge Griesa about how any payments might ultimately be made. The move gives the sovereign some more breathing space, at least until February 27 2013, when Argentina and plaintiffs must present oral arguments. The final outcome of the court proceedings remains uncertain. But the recent developments have sparked talk that the exchange may be reopened to holdouts. “They have the money to pay the