In 2001, Argentina defaulted on its national debt. More than 90% of lenders subsequently agreed to restructuring deals that allowed the country to exchange new bonds for the defaulted ones at a significant loss for the creditors. However, some investment firms labelled “vulture funds” by their critics – most of which are based in the Cayman Islands – bought up Argentine bonds at discount prices, hoping to use the US legal system to force the country to repay their full value.
One such firm, NML Capital, purchased a chunk of discounted Argentine debt for $48 million and has fought a six-year legal battle to force the nation to pay up. After a series of decisions in favor of the so-called “holdouts” (creditors who did not accept the restructuring deals, like the vulture funds) NML is now poised to collect more than $1 billion from the country.
NML’s parent company Elliot Management Corporation and its founder and CEO Paul Singer have successfully used the vulture fund strategy in the past. Referring to its implementation in Peru and the Democratic Republic of the Congo, investigative journalist Greg Palast wrote that Singer “waits for the United States and European taxpayers to forgive the poor nations’ debts, then waits at [sic] bit longer for offers of food aid, medicine and investment loans. Then Singer pounces, legally grabbing at every resource and all the money going to the desperate country.”
Singer has an estimated net worth of more than $1 billion and donates generously to conservative candidates and causes in the United States. He is also one of the major supporters of the lobbying group American Task Force Argentina. ATFA executive director Robert Raben told the Huffington Post in 2013 that the group’s mission is to “do whatever we can to get our government and media’s attention focused on what a bad actor Argentina is.”
On July 6, 2014, ATFA launched a new website called Fact Check Argentina, intended to provide rebuttals to the “myths” Argentine officials allegedly proffer regarding the country’s debt situation. The organization also placed full-page ads in the Washington Post, the Financial Times, and the Wall Street Journal, as well as prominent Argentine media outlets such as Clarín and La Nación as “an answer to a campaign of misinformation being waged by the Argentine government, specifically by its Economy Minster Axel Kicillof.”
The next day, Jay Newman, a senior portfolio manager at NML Capital, published an editorial in the Financial Times implying that Argentina had not expressed an interest in negotiating with the holdouts in good faith. In a widely-distributed open letter, Kicillof responded to Newman and ATFA by pointing out that his country has successfully completed negotiations with the vast majority of its creditors and has repeatedly promised to pursue a constructive dialogue with the holdouts.
In fact, the same day Newman’s article was published, a delegation headed by Kicillof arrived in New York to meet with Daniel Pollack, the mediator for the debt dispute appointed by US District Court Judge Thomas Griesa, who ruled in favor of the holdouts last year in the Southern District of New York. Nevertheless, ATFA’s Fact Check Argentina website has put out a series of blog posts and “fact sheets” this week as part of its fight against Argentina’s “campaign of misinformation.”
One fact sheet purports to expose the truth behind the “myth” that “[i]f Argentina pays holdouts ‘it will have to pay $15 billion’ out of its reserves ‘in the immediate future.'” ATFA claims that “[t]o the extent that Argentina has other outstanding obligations, those are on entirely separate legal footing and in no way tied to the judgments issued in US courts.” However, there is significant disagreement about this issue.
The debate centers around a clause in the country’s bond contracts known as “Rights Upon Future Offers” or RUFO. According to the clause, should Argentina “voluntarily” make a better offer to the holdouts than it did to other creditors before December 31st, 2014, the other bondholders get the right to seek the same terms. Agreeing to pay the vulture funds in full could trigger this clause and allow other debt holders to sue the country for full and immediate payment.
The Argentine government has floated the $15 billion figure as an estimate of how much the worst-case scenario could cost the country, but even ATFA admits that “most independent economists put Argentina’s actual outstanding obligations to holdout creditors at between $7 and $9 billion.” Argentina has recently been increasing purchases of US dollars to prepare for making such payments, but it still has only about $29 billion in reserves. A large and sudden outflow in dollars would likely wreak havoc on the nation’s already-troubled economy.
One way to avoid triggering the RUFO clause would be to delay the settlement with the vulture funds until after December 31. But another ATFA fact sheet claims it is a “myth” that “Argentina needs a ‘judicial decision’ that would give it more time to negotiate.” ATFA offers scant evidence to back up their assertion, instead accusing the government of “saying one thing and doing another” and issuing “wildly vacillating pronouncements” in response to US court decisions.
In actual fact, the Argentine government has been consistent and clear about its desire and intention to pay its debts. On July 10, President Kirchner’s cabinet chief Jorge Capitanich stated that “Argentina complies regularly with its obligations of a financial character…There is no possibility of default on the part of Argentina.” Argentine stock markets have risen to record levels based on the expectation that the country will eventually reach a deal with the vulture funds. ATFA’s third fact sheet even acknowledges that “[n]oted international economists and pollsters have pointed to the significant economic benefits that would accrue to Argentine [sic] after settling with creditors — including billions of dollars in savings generated by lowered borrowing costs.”
The same document also asserts that the vulture funds “and a judge in New York are [not] forcing Argentina to default.” Rather, “[b]y refusing to negotiate with its creditors, Argentina’s leaders are choosing to default.” According to Judge Griesa’s ruling, Argentina cannot continue to make payments to the restructured bond holders without first paying the vulture funds. Paying the vulture funds could result in large outflows of dollar reserves, potentially affecting Argentina’s ability to pay other debt holders. Not paying the vulture funds could result in another default, which would presumably lead to similar difficulties in obtaining access to international financing.
So in a way, ATFA is right; the holdouts are not forcing Argentina to do anything. They are simply putting the country between a rock and a hard place. As mentioned above, Argentina has successfully negotiated with almost all of its creditors. It recently reached an important agreement with the “Paris Club” of creditor nations regarding the repayment of $9.7 billion of debt. Still, the vulture funds have played hardball with Argentina. Not only have they refused to accept anything less than full payment with accrued interest, they have used some unscrupulous tactics in their attempts to collect on the debt.
In October 2012, Singer got a Ghanian court to briefly impound an Argentine naval vessel and attempted to extract a $20 million ransom from the country for its release. Days later, the Wall Street Journal revealed that ATFA was listing groups who had never even heard of the lobbying organization as “members.” In 2013, ATFA ran advertisements fearmongering about Argentina’s growing relationship with Iran as part of its multi-million dollar campaign to demonize the Latin American country.
Despite the propaganda, Argentina’s neighbors have voiced strong support for the nation’s position with regards to the vulture funds. On July 3, 2014 the Organization of American States adopted a resolution in support of the country citing the “manifest will of the Argentine Government to negotiate in good faith and to honor its commitments.”
The way this saga plays out has signifiant implications, not only for Argentina, but for the international financial system in general. This case could set a precedent for permitting vulture funds and holdouts to torpedo sovereign debt restructuring agreements accepted by large majorities of creditors, which could make future sovereign debt crises more difficult to solve in an orderly manner.
While AFTA and Singer are wont to paint the Argentine government as a “bad actor,” the country’s citizens are the vulture funds’ real victims. Tax revenues that could be productively spent on infrastructure, education or healthcare to spur economic growth and development seem destined to instead wind up in the hands of wealthy North American hedge fund managers who waged a lengthy and expensive legal and public relations battle in order to profit off of economic turmoil in a developing nation.
Unfortunately, Argentina is not the first place where the vulture funds have scored a victory, and it is unlikely to be the last.