[Marxism] How Hedge Funds Held Argentina for Ransom

Louis Proyect lnp3 at panix.com
Fri Apr 1 08:20:45 MDT 2016

NY Times Op-Ed, Apr. 1 2016
How Hedge Funds Held Argentina for Ransom

PERHAPS the most complex trial in history between a sovereign nation, 
Argentina, and its bondholders — including a group of United 
States-based hedge funds — officially came to an end yesterday when the 
Argentine Senate ratified a settlement.

The resolution was excellent news for a small group of well-connected 
investors, and terrible news for the rest of the world, especially 
countries that face their own debt crises in the future.

In late 2001, Argentina defaulted on $132 billion in loans during its 
disastrous depression. Gross domestic product dropped by 28 percent, 
57.5 percent of Argentines were living in poverty, and the unemployment 
rate skyrocketed to above 20 percent, leading to riots and clashes that 
resulted in 39 deaths.

Unable to pay its creditors, Argentina restructured its debt in two 
rounds of negotiations. The package discounted the bonds by two-thirds 
but provided a mechanism for more payments when the country’s economy 
recovered, which it did. A vast majority of the bondholders — 93 percent 
— accepted the deal.

Among the small minority who refused the deal were investors who had 
bought many of their bonds at a huge discount, well after the country 
defaulted and even after the first round of restructuring. These kinds 
of investors have earned the name vulture funds by buying up distressed 
debt, then, often aided by lawyers and lobbyists, trying to force a 

The companies involved included some of the best-known vulture funds, 
including NML Capital, a subsidiary of Elliott Management, a hedge fund 
co-led by Paul Singer, a major contributor to the Republican Party, as 
well as Aurelius Capital and Dart Management. NML, which had the largest 
claim in the Argentina case, was the lead litigant of a group of 
bondholders in New York federal courts.

For a long time, Argentina refused to pay the holdouts. The funds tried 
all sorts of ways to change the country’s position, including, at one 
point, having an iconic Argentine ship seized in Ghana.

Then a 2012 ruling by Judge Thomas Griesa of the United States District 
Court for the Southern District of New York threw the game in the 
vulture funds’ favor, ruling that Argentina had to pay them back at full 
value, a cost to Argentina of $4.65 billion. NML, for example, would get 
a total return of 1,500 percent on its initial investment, according to 
our calculations, because of the cheap prices it paid for the debt and 
because of a “compensatory” interest rate of 9 percent under New York law.

The ruling, which became effective in 2014, did something else: Judge 
Griesa issued an injunction blocking Argentina from paying anything to 
the creditors who had accepted the deal until it had paid the vultures 
in full.

The judge gave the vultures the weapon they needed: Argentina had to 
either pay them off or renege on the default they had negotiated, 
ruining the country’s credit in the future and threatening its recovery.

On Thursday, Argentina finally settled for something close to the terms 
that Judge Griesa set. NML Capital will receive about half of the total 
agreement — $2.28 billion for its investment of about $177 million, a 
total return of 1,180 percent. (Argentina also paid the legal fees for 
the vultures.)

This resolution will carry a high price for the international financial 
system, encouraging other funds to hold out and making debt 
restructuring virtually impossible. Why would bondholders accept a 
haircut if they could wait and get exorbitant returns for a small 

In some ways, Argentina was an outlier. It fought aggressively for the 
best terms from the initial set of bondholders, setting the stage for a 
spectacular recovery: From 2003 to 2008, until the global financial 
crisis intruded, the country grew 8 percent per year on average, and 
unemployment declined to 7.8 percent from more than 20 percent. In the 
end, the creditors who had accepted the initial restructuring got the 
principal value in full and even 40 percent more.

Most countries are intimidated by the creditors and accept what is 
demanded, with often devastating consequences. According to our figures, 
52 percent of sovereign restructurings with private creditors since 1980 
have been followed by another restructuring or default within five 
years. Greece, the most recent example, restructured its debt in 2012, 
and only a few years later it is in desperate need of more relief.

It’s common to hear the phrase “moral hazard” when looking at countries 
that face crushing debt, like Greece or Argentina. Moral hazard refers 
to the idea that allowing countries (or companies or people) to 
renegotiate and lower their debts only reinforces the profligate 
behavior that put them in debt in the first place. Better that the 
debtor faces disapproval and harsh consequences. But the Argentina deal 
reversed the moral hazard by rewarding investors for making small bets 
and reaping huge rewards.

Britain and Belgium have made particular kinds of vulture suits illegal. 
Similar legislation, with bipartisan support, stalled in Congress in 
2009. Last September, the United Nations overwhelmingly approved nine 
principles that should guide sovereign debt restructuring. During the 
debate, one ambassador apologized to actual vultures — the birds — for 
using the term. (One of us, Martin Guzman, made presentations to both 
the United Nations and to the Argentine Senate, but was not paid in 
either case.)

Only six countries voted against, but as those are the major 
jurisdictions for sovereign lending (including the United States), these 
principles will not be very effective.

Many countries have bankruptcy laws. But there is no equivalent 
framework for sovereign bankruptcies, not even something remotely close 
to that. The United Nations has taken the lead to fill this vacuum, and 
as Argentina’s case proves, the initiative is more important than ever.

Martin Guzman is a research fellow at the Columbia University Business 
School and a senior fellow at the Center for International Governance 
Innovation. Joseph E. Stiglitz, a professor at Columbia, won the Nobel 
in economic science in 2001.

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