Argentina debt holdouts wait for ship to come in
Elaine Moore and Miles Johnson
Argentina's creditors have gone to extraordinary lengths over the years in attempts to extract payment from the South American country, from detaining a 103-metre-long sailing ship to repossessing the Argentine president's plane.
Now their threats have been realised.
Following the US Supreme Court's decision not to hear Argentina's case earlier this year the country was left with a choice: pay out more than US$1bn plus interest to holdout creditors led by Elliott Management or stop payments on all bonds and default.
As midnight passed on July 30 Argentina went into default.
Yet in spite of the official declaration, many things remain strikingly unchanged. Argentina's president is still playing to the gallery, calling distressed debt investors vultures who seek unearned gains and insisting the country is not in default.
Argentina's stock market has fallen and borrowing costs have increased, but remain below the levels reached in 2013 during a broader emerging market sell-off. Moreover, commentators appear convinced some sort of resolution can still be reached between the hedge fund investors and the government.
Holdout creditors, or vulture funds, are so called because they buy the debt of countries in financial distress at a heavy discount then hold out for a deal.
Elliott Management, founded by Paul Singer in the late 1970s, has garnered attention for its aggressive and legalistic approach to investment, epitomised by its willingness to chase sovereign governments for unpaid debts.
While suing third world governments makes up a relatively small part of the US$25 billion hedge fund's portfolio, such activity, which has included campaigns against Peru, Vietnam and Congo-Brazzaville, has made Mr Singer's investors large amounts of money.
A classic Elliott trade came in 1997 when it bought up US$20m of distressed loans backed by the government of Peru, refusing the conditions of its debt restructuring and holding out for full repayment. By 2000 Elliott won a ruling for Peru to pay it US$56m, along with a claim on cash Peru was going to use to pay interest on its restructured 'Brady bonds'. Facing default, Peru paid out and Mr Singer more than doubled his investment.
Such hardball tactics have also attracted opprobrium by critics, who argue Elliott engages in a type of blackmailing of third world states that, if successful, results in money that could be used for development being used to settle debt.
Before Argentina there was Greece, where investors with more than €6 billion of bonds held out against a restructuring. Before Greece there was Ecuador, which bought back bonds held by 'holdout' creditors at higher prices than those offered to investors who accepted the first buyback.
Investing in distressed sovereign debt is a niche activity. Payouts can take years to materialise and investors cannot easily trade their illiquid holdings in the meantime.
Charles Blitzer, a former IMF official, says the aim of holdout creditors is not to scupper a debt restructuring deal. There will always, he says, be holdouts, and they will always be in the minority. However, the success of investors in fighting Argentina in US courts could, it is feared, give creditors less incentive to agree to deals in the future.
The International Capital Markets Association has suggested rewriting sovereign debt contracts so that all investors must take part in restructuring deals if the majority agree. But as one banker pointed out, this will not prevent hedge funds buying up a large position and preventing a deal from going ahead.
Mr Singer's defenders argue he is benefiting well-run and honest governments by forcing those who have defaulted to pay up.
If, so the argument goes, states believed they could default with no consequence, the cost of borrowing for governments that need money for spending on infrastructure and development would go up and their populations would suffer.
Far from being jolted by Argentina's technical default, most observers appear to still be betting Elliott will emerge with at least some of what it wants.
Dan Loeb, a New York hedge fund manager and friend of Mr Singer, told the investors in his Third Point fund last month he had begun to buy stakes in Argentina companies such as oil group YPF in anticipation the battle with Elliott would soon be settled.
"We believe the holdout creditors and the government are finally likely to arrive at an agreement by year-end," wrote Mr Loeb.
(c) 2014 The Financial Times Limited