Citigroup’s twists and turns with Argentina could make a good soap opera, though perhaps not a musical.
On Wednesday, Argentina announced it was suing Citi (C) over a deal the bank struck late last month with group of hedge funds. But Citi officials probably knew that Argentina was upset with the global bank. Over the past few weeks, Argentina has banned Citi from its capital markets. It has forced the bank to fire the CEO of its Argentina business. Argentina’s financial regulators have also announced that they are reviewing whether Citi has enough capital to continue to do business in the country.
The government’s actions against the bank are just the latest moves in a long-running fight between the Latin American nation and a group of bond holders who have fought a long-hatched Argentina debt restructuring plan that would deny the investors billions of dollars. In general, countries are allowed to restructure their debt on their own terms. It is a risk that has been generally understood and long accepted by investors. Countries can’t go bankrupt, but they can restructure.
However, in Argentina’s case, a number of hedge funds led by Paul Singer’s hedge fund Elliot Management have blocked Argentina from officially completing its restructuring. Last year, a U.S. judge upheld the investors’ right to do so. Argentina is doing everything it can to fight that ruling.
Citi has found itself caught in the middle. As the custodian of Argentina’s bonds, both old and new, the bank is responsible for paying the country’s bond holders, both its interest on its regular and restructured debt as well as what is owed to Singer and the other holdouts, as least what they and a U.S. judge say is owed to them. The U.S. judge won’t let Citi pay regular bond holders without paying the holdouts. And Argentina won’t let Citi pay the holdouts. So the bank is in a bind.
The odd thing about Argentina’s current rage against Citi is that the bank hasn’t agreed to pay Singer and the others, or anything close to that. In fact, as part of the deal, Citi will make two payments to Argentina’s general bondholders, the ones the country wants paid. The bank has agreed to drop its suit against the hedge funds, which basically mirrored Argentina’s legal case, and it was losing anyway. Argentina is free to fight on.
Citi is also pulling out of the custodial bond paying business in Argentina, which, given its inability over the past few months to pay bonds in that country, probably makes sense.
Argentina alone shouldn’t matter that much to Citi’s shareholders. Of the bank’s $74 billion in sales last year, the company generated over $13 billion, or less than 20%, in Latin America. Argentina is just a portion of that. And while Argentina has threatened to push Citi out of the country altogether, that probably won’t happen. Most at risk is Citi’s institutional business, which underwrites bonds and other offerings, and generates $4 billion in revenue, of which, once again, only a portion comes from Argentina. Although, if Citi can’t operate in Argentina, that will probably hurt its business in other countries in the region.
But here’s why Citi’s shareholders should worry about Argentina: Citi’s value proposition—why you would invest in the bank and not JPMorgan Chase or some other large U.S. ban—is that it is more global than the others. Investing in Citi, more than any of the other large banks, is a play on the growth of emerging markets. Remember the whole Citi never sleeps thing? A big portion of Citi’s business model is that it can process payments in every corner of the world. But if Citi can’t figure out how to pay bondholders in Argentina and the U.S. at the same time, it may suggest that Citi’s business model has more problems than just Argentina.
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