A Short Trip to Understand the "so called" Argentinian's Default and the Vulture Funds
Vulture Funds...
A distressed equity fund is a private equity or hedge fund that invests in debt considered to be very weak or in imminent default, known as distressed securities. Investors in the fund profit by buying debt at a discounted price on a secondary market and then suing the debtor for a larger amount than the purchasing price. Debtors can include companies, countries, or individuals.
Distressed equity funds have had success in bringing attachment and recovery actions against sovereign debtor governments, usually settling with them before realizing the attachments in forced sales. In one instance involving Peru, such a seizure threatened payments to other creditors of the sovereign obliger.
Settlements typically are made at a discount in hard or local currency or in the form of new debt issuance.
Term "vulture fund"
The term "vulture fund" is a metaphor used to compare distressed equity funds to the fund to the behavior of vulture birds “preying” on debtors in financial distress by purchasing the now-cheap credit on a secondary market to make a large monetary gain, in many cases leaving the debtor in a worse state. The term is often used to criticize the fund for strategically profiting off of debtors that are in financial distress, and thus is frequently considered derogatory.
However financiers dealing with vulture funds argue that "their lawsuits force accountability for national borrowing, without which credit markets would shrivel, and that their pursuit of unpaid commercial debt uncovers public corruption."
A related term is "vulture investing", where certain stocks in near bankrupt companies are purchased upon anticipation of asset divestiture or successful
Argentina's President Cristina Fernandez calls holdouts greedy, bent on thwarting deal
Argentina's President Cristina
Fernandez took toFacebook on Saturday to rail against her country's holdout creditors, calling them greedy and bent on thwarting a solution in order to keep Argentina mired in debt.
Fernandez' post on the social network was her government's latest acrimonious attack on the bondholders she calls "vultures" following the collapse of debt talks this week that sent Argentine bond prices tumbling.
"The main thing with vulture funds is that they don't want a solution," Fernandez wrote on her Facebook page.
"Not just out of greed and avarice but also because of a political and geopolitical decision of wanting to indebt Argentina again, and to destroy, in any way possible, the restructuring of sovereign debt."
Argentina defaulted for the second time in 12 years on July 31 after losing a lengthy legal battle with hedge funds demanding full payment on debt they own that stems from the country's record $100 billion default in 2002.
Prospects for a private sector solution to the dispute worsened on Wednesday after holdout investors said they entertained no realistic offers from bankers for a chunk of the debt.
One of the leading holdout creditors, Aurelius Capital Management, said on Wednesday that there was "no realistic prospect" of a private deal and that Argentina's economy would suffer because of it.
Fernandez called Aurelius' comments "threatening and hurtful to national sovereignty."
"This is a threat against all Argentines," she said.
Fernandez' defiant stance on the funds has won growing support among Argentines, opinion polls show.
Many Argentines side with their government against hedge funds that rejected the country's debt restructurings in 2005 and 2010 in which bond holders received less than 30 cents on the dollar.
Argentina dubs holdouts an 'international mafia' as deal hopes fade
Argentina branded the hedge funds suing the country over their debt holdings an "international mafia" on Thursday after talks to bring a swift end to its latest default collapsed and sent Argentine bond prices tumbling.
A group of international banks had appeared to be nearing a deal to buy a chunk of the debt held by holdout creditors whose legal battle against Argentina tipped Latin America's No. 3economy into default on July 31.
But holdout fund Aurelius Capital Ltd said on Wednesday there was "no realistic prospect" of a private solution, dealing a heft blow to market optimism Argentina's second default in little over a decade could be swiftly cured.
Argentine bonds extended losses in local over-the-counter trading. The dollar-denominated Par bond ARPARD=RASL slumped 4 percent to a bid price of 48.4, while the dollar-denominated Discount bond ARDISCD=RASL shed 1.7 percent to end at 82.55.
"Today we are in the hands of an international financial power comprised of small, voracious interests that form a real international mafia," Argentine Cabinet Chief Jorge Capitanich, told reporters.
Although Argentine bond prices remained way off prices typical of distressed debt, the sharp falls pointed to fading confidence on Wall Street of a quick end to the country's latest debt saga.
Talks between Citigroup (C.N), Deutsche Bank (DBKGn.DE), HSBC (HSBA.L) and JP Morgan JPM.L appeared to collapse over disagreements over the price the banks would pay and the absence of a guarantee from the government it would honor payments on them, sources told Thomson Reuters IFR.
Who is paul Singer
Paul Singer is a billionaire from New York and is the founder and CEO of Elliott Management Corp, a hedge fund managing over $21 billion in assets. Singer is a big-time backer of the Republican Party, helping George W. Bush get elected and putting up $1 million to fund a PAC that tried to get Mitt Romney elected. Notably, he’s also a vocal advocate of gay rights and helped New York state pass a same-sex marriage law.
He buys debt from countries, such as Peru and Congo-Brazzaville, that have defaulted. He gets this “distressed debt” for pennies on the dollar. Then he tries to force those countries to pay up through international courts. It’s a take-no-prisoners approach to debt negotiations. It’s time-consuming, it’s costly and it can get ugly. But the profits can be huge. In Peru’s case, for example, Singer paid a reported $11 million but won court judgments for $58 million, which the South American republic eventually paid because it had no choice. These tactics have won Singer and other such firms the nickname “Vulture Funds.”
Through one of his companies, Singer acquired a bunch of Argentina’s defaulted bonds, as did some other hedge funds. There has been speculation about how much the hedge funds paid for the debt, or what its face value is, but whatever it was, they wanted more. Certainly, they wanted more than the 30 cents on the dollar Argentina was offering.
So they sued.
Who is Griesa..?
Appointed by President Nixon in 1972 to the federal bench in the Southern District of New York, Thomas Griesa oversaw some of the most important litigation in the long-running case. In February 2012, Griesa interpreted a clause in the debt contracts (known as Pari Passu) to mean that Argentina could not make further payments to the bondholders who agreed to the debt exchange unless it also paid the holdouts. In full.
What’s more, the court told banks and other financial institutions that did business for Argentina that if they attempted to make payments to bondholders that had accepted the earlier deal without also paying the holdouts, the banks would be held in contempt.
It was a stunning decision and led to some serious questions about global poverty. In effect, Griesa seemed to be rewarding the holdouts, while punishing the exchange bondholders. If the prize for holding out on distressed debt is 100 cents on the dollar, then why would anyone negotiate?
By extension, would poorer countries be forced to repay all their debts in full, regardless of their economic woes, without a chance at negotiation? Many impoverished countries can barely afford health care or education, in part because interest on debt takes up such a large share of their treasury. (Some debt investors, such as Singer, have argued that rampant corruption in these countries is a bigger problem.) To help those countries develop, rich nations have helped negotiate terms with creditors in which only part of the debt needs to be repaid. But Griesa’s ruling made many wonder if such negotiations were now moot, because bondholders might refuse to negotiate altogether.
Argentina blames US for debt woes, denies default
Argentina blamed the United States for the legal battle that forced it to miss a debt payment and, despite ratings agencies' declarations to the contrary, denied being in default.
US District Judge Thomas Griesa has blocked Argentina from paying its "exchange creditors" -- those who agreed to take a 70-percent write-down after the country's 2001 default -- without also paying two American hedge funds that took it to court demanding full payment.
Argentine stocks plummeted Thursday, closing 8.43 percent down as the repercussions of the default began to set in.
President Cristina Kirchner's cabinet chief, Jorge Capitanich, blamed the US government, Griesa and a court-appointed mediator for the messy legal dispute, which made Argentina miss a $539 million payment to exchange bondholders.
"If there's a judge who's an agent of these speculative funds, if the mediator is their agent, what is this justice you're talking about? There's a responsibility of the state here, of the United States, to create the conditions for the unconditional respect of other countries' sovereignty," he said.
He accused Griesa and mediator Dan Pollack of "incompetence" and said Argentina would take the matter to international courts.
Argentina says paying the holdouts the $1.3 billion it owes them could expose it to claims for up to $100 billion from exchange creditors, who are entitled to equal treatment under what is called a Rights Upon Future Offers, or RUFO, clause.
- Denial in Buenos Aires -
View galleryDaniel Pollack -- the US-court appointed mediator in …
Daniel Pollack -- the US-court appointed mediator in the Argentine debt crisis -- leaves the US Fede …
The US State Department said it opposed the court ruling but called on Argentina to get its books in order.
"They’ve made some good progress towards meeting their obligations, and we believe it's in their interest to normalize relations with all of its creditors," said Deputy State Department spokeswoman Marie Harf.
Kirchner denied her country was in default, reiterating that it had transferred the payment in question and condemning the tactics of the hedge funds, which she calls "vulture funds."
"We live in a profoundly unjust and profoundly violent world and this is also violence. Like missiles in war, financial missiles also kill," the president said in a nationally televised address.
"I want all Argentines to remain very calm, because Argentina is going to use all the legal instruments our contracts give us."
The Bank of New York confirmed Buenos Aires' payment to the exchange creditors was still sitting in the US bank's account at the Argentine central bank, frozen there by Griesa's ruling.
Amid the back-and-forth, some in the financial world called for a simple yes or no on whether the country had defaulted.
The International Swaps and Derivatives Association, a trade organization for participants in the derivatives market, said it had accepted a request from Swiss bank UBS to rule whether Argentina was in default or not.
A default would activate insurance contracts on the relevant debt.
- 'Moral hazard' -
Argentina got a show of support from more than 100 economists, including Nobel laureate Robert Solow and other prominent academics, who sent a letter to the US Congress urging it to intervene.
Argentina calls for U.S. intervention in its debt battle
Argentina called on Washington to intervene in a court case over the country's defaulted debt after a U.S. district judge threatened the South American country with contempt for making what he called false statements.
U.S. Judge Thomas Griesa, overseeing Argentina's long-running battle with hedge fundsover defaulted debt, said on Friday he would issue a contempt of court order unless the government stopped publicly claiming it had met its obligations and was not in default.
Cabinet chief Jorge Capitanich countered on Monday that a contempt order would violate Argentina's sovereign immunity and he called on the Obama administration to rein in Griesa.
"When it comes to a bilateral relationship with a sovereign country and the violation of its immunities, it is necessary for the executive branch to intervene," Capitanich said. "The executive has a monopoly on relations with other countries."
"The United States is responsible for the actions of its branches of power, in this case the judicial branch, regardless of the independence of the functioning of those branches," he said.
The U.S. Department of Justice declined to comment. A senior U.S. State Department official said Washington continued to urge the Buenos Aires government to engage with its creditors to break the deadlock.
"With respect to the U.S. court, we cannot speculate on any possible developments or actions in the litigation," said the official who requested anonymity.
In 2002 Argentina defaulted on about $100 billion in sovereign bonds. It restructured most of that debt in a deal that gave holders less than 30 cents on the dollar while a group ofhedge funds went to court for full repayment.
In 2012 Griesa ruled that Argentina could not repay holders of restructured debt without also paying hedge funds their court-award of $1.33 billion plus interest at the same time.
Argentina says it met its obligation to the holders of restructured bonds when it deposited $539 million into the account of intermediary Bank of New York Mellon in June. Griesa called the deposit illegal and ordered the money frozen.
As a result, Argentina effectively missed the coupon payment after a grace period ended on July 30, pushing it into default on its restructured debt. Griesa reiterated on Friday that "there has been no payment."
Argentina has long accused the judge of overstepping his bounds and being partial toward the funds, which bought Argentine bonds at steep discounts and are characterized by President Cristina Fernandez as "vultures" out to wreck her country's finances in their pursuit of huge profits.
The U.S. Government filed an amicus curiae or friend-of-the-court brief in 2012 that asked the 2nd Circuit Court of Appeals to reverse Griesa's decision, arguing that his ruling could undermine future sovereign restructuring mechanisms.
However, Washington did not in writing favor Argentina, or "condone or excuse a foreign state's failure to comply with the judgment of a U.S. court imposing liability on the state." (here )
Argentina has published paid advertisements in newspapers in Europe and the U.S. in recent weeks disparaging Judge Griesa and court-appointed mediator Daniel Pollack, who succeeded in getting the two sides to meet face-to-face for the first time in nearly 13 years but could not get them to an agreement by July 30. Those negotiations are to continue.
But Argentina says it cannot make a deal with the holdouts that is better than the terms offered in its two restructurings based upon a clause in its agreement known as the Rights Upon Future Offers (RUFO). The RUFO clause expires on Dec. 31, 2014. In June the U.S. Supreme Court declined to hear Argentina's appeal of the case, effectively exhausting Buenos Aires' recourse in the U.S. legal system.
How Barack Obama could end the Argentina debt crisis
US president need only inform a federal judge that vulture fund billionaire Paul Singer is interfering with the president's sole authority to conduct foreign policy. He hasn't. But why not?
The "vulture" financier now threatening to devour Argentina can be stopped dead by a simple note to the courts from Barack Obama. But the president, while officially supporting Argentina, has not done this one thing that could save Buenos Aires from default.
Obama could prevent vulture hedge-fund billionaire Paul Singer from collecting a single penny from Argentina by invoking the long-established authority granted presidents by the US constitution's "Separation of Powers" clause. Under the principle known as "comity", Obama only need inform US federal judge Thomas Griesa that Singer's suit interferes with the president's sole authority to conduct foreign policy. Case dismissed.
Indeed, President George W Bush invoked this power against the very same hedge fund now threatening Argentina. Bush blocked Singer's seizure of Congo-Brazzaville's US property, despite the fact that the hedge fund chief is one of the largest, and most influential, contributors to Republican candidates.
Notably, an appeals court warned this very judge, 30 years ago, to heed the directive of a president invoking his foreign policy powers. In the Singer case, the US state department did inform Judge Griesa that the Obama administration agreed with Argentina's legal arguments; but the president never invoked the magical, vulture-stopping clause.
In the case of Argentina, Obama certainly has reason to act. The US State Department warned the judge that adopting Singer's legal theories would imperil sovereign bailout agreements worldwide. Indeed, it is reported that, in 2012, Singer joined fellow billionaire vulture investor Kenneth Dart in shaking down the Greek government for a huge payout during the euro crisis by threatening to create a mass default of banks across Europe.
The financial press has turned on Singer. Commentators in the Wall Street Journal and FT are enraged at the financier's quixotic re-interpretation of sovereign lending terms in the way that the Taliban interprets a peace agreement. No peace, no agreement.
Singer has certainly earned his vulture feathers. His attack on Congo-Brazzaville in effect snatched the value of the debt relief paid for by US and British taxpayers and, says Oxfam, undermined the nation's ability to fight a cholera epidemic. (Singer's spokesman responded that corruption in the Congo-Brazzaville government, not his lawsuits, have impoverished that nation.)
As if to burnish his tough-guy credentials, Singer has mounted legal attacks on JP Morgan Chase, Citibank, BNY Mellon, and UBS, demanding they pay him the money that Argentina had paid them over the last decade. Furthermore, Singer's lawyers persuaded the judge to stop BNY Mellon, Argentina's agent, from making $500m in payments to Argentinian bondholders.
Surely the president would intervene. He didn't. He hasn't. Why?
Well... Since taking on Argentina, Singer has unlocked his billion-dollar bank account, becoming the biggest donor to New York Republican causes. He is a founder of Restore Our Future, a billionaire boys club, channelling the funds of Bill Koch and other Richie Rich-kid Republicans into a fearsome war-chest dedicated to vicious political attack ads.
And Singer recently gave $1m to Karl Rove's Crossroads operation, another political attack machine.
In other words, there's a price for crossing Singer. And, unlike the president of Argentina, Obama appears unwilling to pay it.
Investors sanguine as Argentina defaults
Argentina´s Economy minister Axel Kicillof said, “We are not going to sign any agreement that compromises the future of the Argentine people,” said Mr Kicillof at a press conference at Argentina’s consulate in New York after the talks collapsed.
He said Argentina would take all measures available to put an end to “unprecedented and unjust situation”, adding the country remained open to a dialogue with creditors.
NML, the fund leading the holdouts, said in a statement that the court-appointed mediator in the talks, Daniel Pollack, “proposed numerous creative solutions, many of which were acceptable to us. Argentina refused to seriously consider any of them, and instead chose to default.”
Separate behind-the-scenes negotiations between the holdouts and a group of Argentine banks also fell through on Wednesday, according to local press reports, although hopes remained that a deal can yet be reached in the coming days.
Nevertheless, with official negotiations having reached an impasse, Marcelo Etchebarne, an Argentine lawyer, speculated that Argentina may now attempt to restructure its US and UK bonds under local law, although he doubted this would be feasible.
Although the government had already deposited the $539m with Bank of New York Mellon, the bondholders’ trustee, New York Judge Thomas Griesa , has forbidden the bank from transferring the funds to the bondholders. He said that was because it would violate his ruling, upheld on June 16 by the US Supreme Court, that Argentina must pay the holdouts in full at the same time as holders of its performing debt.
“Default cannot be allowed to lapse into a permanent condition or the Republic of Argentina and the bondholders, both exchange and holdouts, will suffer increasingly grievous harm, and the ordinary Argentine citizen will be the real and ultimate victim,” said Mr Pollack.
Mr Kicillof maintained a defiant attitude before the default. “Who believes in the rating agencies? Why didn’t they warn the owners of mortgages in 2008 if they know so much about risk?” he asked.
Argentina defaulted on $100bn of debt in 2001-02, at the time the largest sovereign default in history.
Argentina makes up less than 2 per cent of the JPMorgan emerging markets bond index, which means that even if prices in the country’s debt fall dramatically the knock on effect will be relatively mild across EM bonds. Analysts said that the default is not expected to trigger widescale problems across emerging markets. “These problems have been rumbling along for years and were well flagged,” said Mr Culverhouse.
‘To say that there is no investment because of vultures is a lie’
Kicillof, in a press conference Thursday, said that it was an “atomic absurdity” to claim that the country had entered into default. His argument, essentially, is that Argentina had deposited the money to pay the bondholders in the bank; what blame did it have?
Economy Minister Axel Kicillof reiterated his criticism against industrial leaders for using Argentina’s dispute with vulture funds as an “excuse” for not investing. He stressed that the “government is an ally” of those who wish to invest.
“If business leaders want to invest and they say they cannot because of the vulture funds situation, they are lying,” Kicillof said during an interview with a local TV station. “In the industrial sector there are those who want to invest and then those who use anything as an excuse not to,” he stated.
In response to the claims that the vulture funds dispute prevents business owners access to financial credit, the official pointed out that “Argentina has not asked for money to the international financial sector in ten years because it does not need it”, and said “the government is an ally” of business leaders who wish to invest. “My doors are open,” he added.
