Argentina: Greed Against Chaos
Argentina wants to be a good country and pay its bondholders. Just not Paul Singer and other holdouts who didn’t participate in the post-default debt restructuring of 2002.
The problem is it cannot do that anymore. On June 16, the Supreme Court upheld a ruling by New York’s 2nd District Judge Thomas Griesa, which bans Argentina from making payments unless it pays everyone.
This would include Singer’s Elliott Management, a hedge fund that bought Argentina debt at distressed prices during the crisis in the early 2000s and refused to participate in a restructuring of $100 billion in debt. Ninety-three percent of the other investors agreed to participate. Some of the bondholders had to take haircuts up to 75 percent.
Singer and his firm are specialized in holding out and litigating for the repayment of 100 percent of principal plus interest, which could be up to $15 billion for all holdouts.
In the subsequent court tussle, the firm even managed to confiscate an Argentine Navy training vessel sailing off the coast of Ghana. Finally, it won the legal battle with the Supreme Court decision, which affects all the bonds because they are governed by New York law.
On the surface, disciplining Argentina looks like it is a good idea. The country is rife with embezzlement and corruption and suffers from an economic crisis every 10 years on average.
It went through hyperinflation in the ’80s and the debt binge in the ’90s to be followed by the default in 2002.
In 2012, it nationalized Argentine oil company YPF, then owned by Spain’s Repsol. Although Argentina compensated Repsol afterward, this gross violation of free market principles doesn’t surprise in a country, which plunders pension funds to make up for budget shortfalls and imposes far reaching capital controls.
Nonetheless, the country paid out a total of $174 billion to holders of restructured debt and institutions such as the IMF and never missed a payment from 2003 and 2012.
Argentine politicians have consequently labeled companies like Singer’s “vulture funds” and made it look like they are harming the country and other debt holders.
Despite Argentina’s shortcomings and its ability to pay the holdouts, this assessment is essentially correct.
Yes, Argentina borrowed too much. But it is up to the bondholders to determine if the country has gone over the limit. If the country defaults, you are just out of luck.
In order to avoid the complete loss of capital, a restructuring takes place to find an equitable solution. The country still has to pay, but the debt burden is reduced to a manageable amount, matching the new economic circumstances. The outcome is never 100 percent fair or 100 percent efficient, but it usually represents a workable solution. If not, there will be other defaults.
Funds like Singer’s contribute nothing meaningful to this process, a process, which is meant to give the country the chance to get back on track.
Instead they pay an army of lawyers a fortune to get outsized returns for themselves. Returns that other investors gave up in order to reach an equitable solution for everyone. On top, it’s not even them who lost money in the first place because they usually buy the bonds after the default happened and at very low prices.
This unproductive and greedy behavior is not entrepreneurial risk-taking or investing. It is using legal cover to game the system at other people’s expense.