The U.S. Supreme Court recently let stand the right of hedge fund NML Capital, a subsidiary of Elliott Management Corporation, to collect on their defaulted Argentinian bonds, whether by collecting from the Argentinian state or by seizing the assets of the Argentine leadership that raided their treasury and made off with public monies.
The court case involves the largest sovereign default in history -- Argentina's 2001 debacle, involving US$100-billion in bonds. Most bondholders in 2005 and 2010 negotiations agreed to take a 70 per cent loss and settled with Argentina, which then resumed its corrupt, free-spending ways. The funds' founder and CEO, Paul Singer refused, saying he wanted the owed money in his pockets, not in those of Argentina's rulers and their cronies. The U.S. courts agreed, all the way to the top, when the Supreme Court decided to accept a lower court decision.
This decision, says the government of Argentina's President Cristina Kirchner, amounts to "extortion," and Singer and others who refused to settle are "unscrupulous financiers" plundering the country's poor. If these "speculators," who bought the bonds at discounted rates when Argentina's economy was distressed, could now collect the face value of the bonds, they would earn better rates of return than organized crime, she railed. Last weekend in full-page ads in the New York Times, Washington Post and Wall Street Journal, Argentina cried for sympathy, arguing that "paying the vulture funds is a path leading to default." On Wednesday, Argentina's economy minister warned a gathering at the UN that complying with the ruling would send Argentina's economy into a tailspin.
To date, Singer's and other funds have seen some repayment, generally after taking wide-ranging measures, not all of which have been successful. In pursuing Argentina's assets around the world to enforce judgment debt, they attempted to seize the presidential plane, won an injunction in Ghanaian superior court to hold an Argentine naval vessel docked in Ghana and were awarded assets of Argentina's Banco Hipotecario, worth approximately $23-million.
They have also pursued president Cristina Kirchner and, until his death, her husband and past president, Nestor Kirchner, who in annual filings submitted to federal anticorruption authorities revealed an impressive increase in wealth, the result, says the current president, of her past prowess as a lawyer. Others that the funds have pursued include 136 members of Kirchner's administration, including most of the cabinet. NML succeeded in a suit to have Bank of America disclose information related to the Kirchners' personal accounts.
In another pursuit, earlier this year Singer asked a federal court to turn over information about the assets of Lazaro Báez, an Argentinean businessman and close friend of the president's family, who is accused in that country of embezzling $65-million from government contracts. According to NML, it "has reason to believe that the illicit relationship between Báez and the Argentine government may have allowed Báez to abscond with tens of millions of dollars in assets, now hidden around the world." If Baez is convicted of embezzlement, it says "any funds traceable to the embezzlement scheme would be property of Argentina available to satisfy NML's judgments against Argentina."
Although the creditors are often referred to as "vultures," the pejorative is highly misleading. They are bondholders with the law on their side, seeking nothing more than repayment of debts voluntarily entered into by Argentina. Elliot Management, for example, is a multi-billion operation that manages university endowments and pension funds.
The creditors also argue, with justification, that they serve a needed function by pinpointing the vast sums that corruption costs citizens in poor countries. "We share a common interest with the Argentine people in identifying and recovering stolen state funds," NML said.
Argentinians would not need to suffer if assets hidden from creditors could be recovered and, in any case, the country need not default. As a senior portfolio manager at Elliott Management wrote in the Financial Times, Argentina "could easily afford to pay all of its defaulted debt tomorrow."
As Singer himself views it, rather than blaming bondholders, countries should honour their debts. Not doing so often speaks to a wider corruption that is likely to be harming citizens, he told the Times.
In hopeful signs, those citizens may be in agreement. In a poll last September, 68 per cent of Argentinians said the government should pay the bondholders in full and Diálogo 2000, an NGO, wants a public audit into the country's debt. Argentinians may be tiring of being seen as the world's deadbeats, and of being fleeced by their leaders.
This article first appeared in the Financial Post on June 27, 2014.
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