Risk Factors for those purchasing Argentina debt

Robert Shapiro and Nancy Soderburg:

Argentina reportedly intends to file for Securities and Exchange Commission approval to re-enter U.S. capital markets. The SEC should instead insist that Argentine securities bear a warning like cigarette packages: "This issuer has a record of misrepresentation, debt defaults and debt repudiation, and therefore may be dangerous to your financial health. Do not consume this issuer's bonds unless you have a platoon of lawyers and a Navy to back them up, and you're prepared to use both."

In this global economic crisis, Argentina's financial behavior is especially worrisome. Its status as history's largest sovereign debt defaulter; its unprecedented repudiation in 2005 of bonds held by those who balked at substandard terms for restructuring; and the lack of transparency and fulsome disclosure surrounding its current capital raising efforts set a dangerous example.

If the SEC fails to keep Argentina out of our capital markets -- or set clear terms for its re-entry -- it could encourage other nations to follow that country's irresponsible path.

In 2001, Argentina defaulted on $81 billion in sovereign bonds. Four years later it presented a unilateral, nonnegotiable restructuring plan worth about 25 cents on the dollar. When half of its foreign lenders said "no thanks," Buenos Aires repudiated their claims.

Since Argentina had earlier agreed to waive sovereign immunity and accept the jurisdiction and judgments of New York courts, more than 160 lawsuits were filed. But the governments of Nestor Kirchner and of his wife and successor, Christina Fernandez, have ignored numerous court judgments. Judge Thomas Griesa has repeatedly condemned their conduct, noting in 2005 that "I have not heard one single word from the [Argentine] Republic except ways to avoid paying those judgments." Nothing has changed since then.

If Argentina gets away with its misdeeds -- offering terrible terms for restructuring its debt and then repudiating its obligations to those who object -- the likelihood of additional defaults could increase substantially. If that occurs, it would inflict another serious blow to a global financial system in crisis.

Already, Buenos Aires's scofflaw behavior is being imitated. Citing Argentina's example, Ecuador recently defaulted on sovereign debts issued in the U.S., though it has the means to meet its obligations. The default drove down the market price of the bonds. The Correa government then entered the American secondary market with a massive repurchase program, scooping up much of its own debt at a very steep discount.

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The disclosure the authors are asking for should be in the Risk Factors section of the offering document and in this case the SEC should require that the section start on the first page of the document.

The securities being offered have a high degree of risk and there is a substantial chance of default by the issuer. Following such default there is also a substantial risk that the investor will have no viable remedy other than a court order such as those the issuer has ignored in the past. Investors should also be wary that the issuer has not been candid about its ability and willingness to repay debt in the past.

The paragraph above would be a good start for the page one Risk Factors. There should be additional risk factors disclosing the bad faith of the current government with respect to other agreements.