A day after the US Supreme Court ruled in favor of the “vulture funds” pecking at Argentina’s heels, the country’s economy minister announced a risky debt swap to avoid a destructive default.
On Monday, the court refused to hear Argentina’s appeal of a lower court’s decision in favor of several funds that have pursued the country since it defaulted on about $100 billion of debt in 2001 — some of it originally accrued by US-backed military dictatorships in the 1970s and ’80s.
After defaulting, Argentina negotiated agreements with over 90 percent of its bondholders, who accepted roughly 30 cents on the dollar and received new bonds that have been paid on time ever since.
However, a small segment of bondholders refused to renegotiate. The most vocal among them were several vulture funds, so-called because they specialize in wringing returns out of “distressed” assets (generally in developing countries) by litigating weakened governments.
The largest of them is NML Capital, a subsidiary of Elliott Management Corporation. Elliott CEO Paul Singer wants Argentina to pay his company the full amount, even though it bought most of its bonds at bargain rates after Argentina had already defaulted — and planned to sue all along.
“They initially purchased with the precise intent to speculate on huge returns,” Aldo Caliari, director of the Rethinking Bretton Woods Project at the DC-based Center of Concern, told VICE News.
'The United States would be gravely concerned about an order of a trial court in a foreign country, entered at the behest of a private person, seeking to establish a clearinghouse in that country of all the United States’ assets.'
Because the bonds were issued under American jurisdiction, NML filed suit in New York. In late 2012, a federal judge ruled that Argentina had to pay the vulture funds $1.3 billion, including interest. This figure has meanwhile grown to $1.5 billion.
NML’s share of the bounty, according to government figures, is $832 million from assets it purchased for $48.7 million — representing a return of 1,608 percent.
The Supreme Court, in denying the appeal, agreed that Argentina couldn’t treat the holdouts differently from other bondholders.
Argentina’s President Cristina Fernandez de Kirchner — whose late husband Nestor oversaw the start of restructuring as President in 2005 — responded Monday by saying that Argentina would continue paying the bondholders that had settled, but not the vulture funds.
Argentina was willing to negotiate, she said, “but it is not willing to submit to extortion.”
Argentina’s government says that complying with the US ruling would jeopardize the country’s ability to honor the restructured debt, since paying the plaintiffs the $1.5 billion they say they’re owed could trigger demands from other creditors for similar terms totaling some $15 billion — more than half of its foreign reserves — which would cause it to default. This would effectively prohibit Argentina from borrowing from international lenders anytime soon.
'The decision screws things up for everyone but the vulture funds.'
To skirt the US decision and separate the two groups of bondholders once more, Argentina now plans to swap the restructured bonds a second time, reissuing them under Argentine jurisdiction but not altering their principal and terms.
“We cannot be prevented from honoring our commitments to the 93 percent of bondholders” that had renegotiated with the government, said Economy Minister Axel Kicillof.
The move is bound to scare bondholders, but by Argentina’s logic, it has no choice.
Part of the problem stems from the lack of an international mechanism for sovereign bankruptcies. Individuals, companies, and hedge funds like Singer’s can declare themselves insolvent, but there is no court equipped to allow the same for countries — so their solutions can take years to cobble together.
After Argentina defaulted in 2001 and devalued its currency, the peso plummeted 75 percent. In recent years, the government has depleted its foreign currency reserves to prop up the currency, but dollars exchanged on the black market still cost about 50 percent more than the official rate. The government’s unorthodox debt swap risks further currency depreciation.
Shortly after declining to hear Argentina’s appeal Monday, the justices voted 7-1 to allow bondholders to subpoena financial institutions in order to track down Argentina’s assets abroad. In 2012, NML was briefly able to detain an Argentine naval vessel docked in Ghana.
Even if Argentina’s government moves the bulk of the bonds back to Buenos Aires, the court’s decision makes it difficult for it to use the international banking system. Most dollar-denominated transfers, even if they originate in Argentina, are routed through New York, where the vulture funds could siphon off what they are owed. One option is for Argentina to issue the new bonds in pesos, though that move would open investors to currency fluctuations that have plagued the country for decades.
Earlier this year, the US — along with the governments of Brazil, France, and Mexico — warned the Supreme Court that the lower court’s decision would set a dangerous precedent.
“The United States would be gravely concerned about an order of a trial court in a foreign country, entered at the behest of a private person, seeking to establish a clearinghouse in that country of all the United States’ assets,” Deputy Solicitor General Edwin Kneedler told the justices.
Indeed, the decision screws things up for everyone but the vulture funds.
The IMF and the World Bank came out against NML’s case, arguing that it could endanger the debt restructuring it oversees around the world.
“We are concerned about possible broader systemic implications,” a spokesperson for the IMF told VICE news.
The court’s decision sets precedent for financiers like Singer to hold countries hostage as they try to stave off default. In the past, Singer has successfully gone after such economic titans as Peru and the Republic of the Congo after purchasing distressed debt at bargain prices.
In order to put pressure on Argentina’s government, Singer has funded conservative groups and politicians that seek to paint Argentina as a close ally of Iran. (He has also financed pro-gay rights groups. His son is gay, though unfortunately for Kirchner & Co. not Argentine.)
Lawyers for NML — including Theodore Olson, who represented then-governor George W. Bush in Bush v. Gore before serving as his solicitor general — did not return multiple requests for comment.
“The court’s decision is really going to have repercussions throughout the global economic system,” said Caliari. “This is satisfactory to a very small sector of the creditors. For the rest, it’s in their interest that the debt gets restructured.”
It’s bad news for New York as well. To avoid being held hostage by vulture funds, investors might prefer debt issued in other locales, like London.
Argentina will find itself in technical default if it does not begin making payments to the holdouts by June 30. In a desperate effort to avoid this, lawyers from both sides will meet in federal court on Wednesday. It is still possible the vulture funds could settle for less.
Meanwhile, the vultures are circling.
Follow Samuel Oakford on Twitter: @samueloakford
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