Argentina to Cut Out US Hedge Funds

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Argentina to Cut Out US Hedge Funds

Government announces plan to replace New York-based bank with state-run Banco de la Nación

Argentine pesos (Photo: Alex Proimos)

Argentina President Cristina Fernández de Kirchner announced this week that the government would be attempting to sidestep the demands of aggressive U.S. vulture funds by establishing international payments for creditors through its own state-run Banco de la Nación as opposed to the U.S. bank. The move is seen as an affront to a U.S. court order which had sided with a number of hedge funds looking to profit from degraded Argentinian bonds afterf the nation voluntarily defaulted on portions of its international debt in 2001.

Agence France Presse writes:

One of two hedge funds that sued Argentina over defaulted bonds branded the country's leaders "outlaws" Wednesday after Buenos Aires moved to shift its bond payment method.

"Argentina's leaders have literally chosen to be outlaws. They have chronically flouted US court orders, lied to our courts, and proclaimed utter disdain for our courts," Aurelius Capital Management said.

Argentina went into default at the end of July. The plan would allow the government to skirt a New York judge's ruling that blocked bond payments to all creditors, after Argentina refused to reimburse a group of hedge funds led by billionaire Paul E. Singer.

The Guardian reports:

Argentina slid into default on its restructured bonds last month after a New York court blocked an interest payment of $539m (£324m). The payment did not go through to investors because US district judge Thomas Griesa says restructured bonds cannot be paid unless the holdouts get paid at the same time.

The $539m remains with intermediary Bank of New York Mellon. Argentina says Griesa overstepped his bounds by blocking the coupon payment, and is moving to ensure future payments go through local banks.

"The point is to protect the 92.4% of bond holders who participated in the exchanges," said the government's cabinet chief Jorge Capitanich.

Progressive economists welcomed Argentina's decision. Offering his explanation of the dynamics, co-director of the Center for Economic & Policy Research Dean Baker, said:

The funds that have pressed their suit in U.S. courts against Argentina did not hold its debt at the time of the default in December of 2001. They bought it up later at sharply reduced prices. Since purchasing the debt they have tried to use legal pressure to force Argentina to pay the full face value of the bonds.

This is exactly what "vulture funds" do. That is not a term that was invented by Argentina to denigrate these funds, it is a common term used to describe the type of activities that the Elliott Management Corporation (the lead actor in the lawsuit) is pursuing in this case. As a practical matter, there are almost no "holdout" investors involved in this action. Almost all of the original holders of Argentine debt accepted the terms offered by the government. Most of those who did not accept the terms sold their bonds to investors like Elliott Management.

Also coming out against the position of the vulture funds recently was Nobel-prize economist Joseph Stiglitz, who wrote:

The vulture funds — the small number of creditors who held out from Argentina's earlier debt restructuring -- had no interest in the country or its people. They picked up their bonds on the cheap, in hopes that by spending enough on litigation, they would eventually find a sympathetic judge who did not understand what was at issue and rule in their favor.

All investors in sovereign bonds know that there is a risk of default — that's why the bonds can pay a far higher interest rate than U.S. bonds. But anyone buying bonds after a country announces a debt restructuring knows with virtual certainty that they will not be repaid in full without manipulating the legal system.

The growing complexity of the market makes it harder for developing nations to free themselves of debt, increasing inequality worldwide.

The vultures have invoked the rule of law but we should be clear: This is about greed. By arguing for an interpretation of the legal principle that all investors be treated the same — totally at odds from that which is traditionally ascribed to it by both economists and market participants — they have undermined the rule of law, and made debt restructuring almost impossible.

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