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Falklanders Vote 170 Years After Argentina Offer

March 05, 2013

Argentina Offered Falklands to U.K. in 1843 Over Bond Default

The argument over who owns the Falkland Islands, 300 miles off the coast of Argentina and nearly 8,000 miles from Britain, dates back 200 years. Photographer: Michael Luongo/Bloomberg

Argentina offered to give up its claim to the disputed Falkland Islands in 1843 if Britain would take responsibility for a 1 million-pound loan on which it had defaulted, according to newly released U.K. government records.

The argument over who owns the islands, 300 miles (500 kilometers) off the coast of Argentina and nearly 8,000 miles from Britain, dates back 200 years. It led to war in 1982, when Argentina invaded, leading Margaret Thatcher to send a military task force to recapture the islands at a cost of more than 900 lives on both sides. Islanders will hold a referendum March 10- 11 to demonstrate their desire to stay British.

In May 1982, as the task force was approaching the islands, John Orbell, the archivist at Baring Brothers & Co. Ltd. in London, wrote to the government, enclosing handwritten letters dated 1843 and 1844, from the Argentine government to the merchant bank’s representative, who was trying to secure repayment of an 1824 debt that had been in default for 15 years.

“The letters indicate the willingness of the Argentine government to cede the Falkland Islands to Britain in settlement of these claims,” Orbell wrote, adding that the letters contain “a strong assertion of Argentina’s claim to sovereignty over the islands.”

Orbell’s letter was passed to Thatcher and was among documents released this year under regulations providing for the publication of government papers after 30 years.

The Argentine letters, addressed to the company’s agent in Argentina, Francis Falconnet, are still in the Baring archive, now owned by ING Groep NV, which bought the bank in 1995 after its collapse.

Port Funding

According to “The Sixth Great Power: Barings, 1762-1929,” by Philip Ziegler, Argentina issued the bond in 1824 to fund a port in Buenos Aires, running water for the capital and frontier settlements. The coupon was 6 percent, and the bonds were sold by Argentina at 70 percent of face value, meaning the government was effectively paying 8.7 percent interest.

Barings took a fee of 30,000 pounds and a 1 percent commission on sales. At first, speculators kept the price high. When they began to dump the securities, Barings bought them and ended up, according to Ziegler, with “an uncomfortably large amount of capital locked up in virtually unsalable bonds.”

Argentina initially kept up its interest payments, until war with Brazil drained its revenues and caused a collapse in its currency. In January 1828, the country had its first default on its first sovereign loan.

Argentina is currently locked in a court battle in the U.S. with holders of bonds left over from its record $91 billion default in late 2001.

No Gunboat

Back in the early 19th century, bondholders in London realized they had nowhere to turn. Even at a time when Britannia ruled the waves, Foreign Secretary George Canning had refused to send a gunboat to Colombia to deal with a default there five years earlier. They simply had to send representatives to Buenos Aires.

According to Ziegler, Argentina made a series of offers to settle the debt, starting in 1828 with “a couple of unwanted frigates,” and moving on in 1831 to land in Patagonia, a “bleak, southern outpost” where Argentine citizens were reluctant to settle.

In 1842, Falconnet arrived to reopen negotiations. The Argentine leader, Juan Manuel de Rosas, told the Barings representative he wanted to settle the matter, and in 1843 he offered to drop claims to sovereignty of the Malvinas, as the Argentines called the Falklands, if the British government would take over the debt.

Britain refused, on the grounds that the islands were already British territory. A first British settlement had been established in the Falklands in 1766.

Naval Blockade

Instead, Falconnet persuaded Argentina to pay 5,000 silver dollars a month from 1844, worth about 12,000 pounds a year, a fifth of what the bondholders were expecting, according to Ziegler. Even this collapsed the following year, when an Anglo- French naval force blockaded Buenos Aires harbor. Payments were finally resumed in 1859, by which time the debt stood at more than 2.6 million pounds.

By 1871, Argentina was paying interest at 3 percent on the debt. Far from ending Barings’ troubles in the country, this resumption encouraged more lending, to fund railroad and land improvement projects. During the 1880s, close to half of all British sovereign lending was to Argentina, with by far the most coming from Barings. When Argentina’s economy ran into trouble in 1890, Barings was judged too big to fail, and the Bank of England had to organize a bailout.

While Rosas’s offer of the Falklands was rejected by Britain at the time, from a historical perspective, it looks attractive. According to the Bank of England’s inflation calculator, 1 million pounds in 1824 is equivalent to 108 million pounds in 2012. In the current financial year, the U.K. government estimates the cost of defending the Falklands, which have fewer than 3,000 inhabitants, at 61 million pounds ($92 million).

According to Orbell, Thatcher’s government, which had requested the Falconnet letters, never used them. “It was a very, very doubled-edged sword,” he said in an interview.

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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