[Marxism] How Hedge Funds Held Argentina for Ransom
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Fri Apr 1 08:20:45 MDT 2016
NY Times Op-Ed, Apr. 1 2016
How Hedge Funds Held Argentina for Ransom
By MARTIN GUZMAN and JOSEPH E. STIGLITZ
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
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
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
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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