Saturday, April 4, 2009

Green Energy from Bad Debt?

Professor Yu's idea to transfer some Asian holdings of U.S. Treasuries into an infrastructure fund, which we mentioned in a recent post ("The Latest Warning from China about the U.S. Dollar and Debt"), reminded me of another proposal related to infrastructure and sovereign debt. An article a couple of weeks ago in the Financial Times ("‘Green’ plan to consign Argentina’s debt woes to history") described a proposal by Argentine lawyer Pablo Giancaterino to assuage the hold-outs of Argentina's 2005 debt swap and give Argentina access to the international bond market by closing the books on litigation associated with its default in 2001. According to the FT, Mr. Giancaterino

[P]roposes creating a trust into which hold-outs would deposit the verdicts won against Argentina, in essence “freezing” them, but leaving them as a guarantee that they could be executed if Argentina defaulted on the new deal.

The trust would issue investors with certificates of participation tradable in New York.

Argentina would receive the old bonds and all it would pay would be interest, with a 66 per cent so-called “haircut” on the original capital, similar to the 2005 swap that hold-outs rejected as too cheap.

Interest would be paid into the trust, which would be obliged to invest the funds in tax-free energy and infrastructure projects for 11 years. Those investments would generate returns to pay back the hold-outs without them having to accept a haircut.

The image above, of the Agua del Toro hydroelectric dam in Argentina, comes from

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