Some hedge fund managers walk onto an Argentinian navy ship
ftalphaville.ft.comLink bait title - the ship was seized in Ghana by a court-ordered injunction. Highly unlikely that the investors walked on the boat.
Nevertheless, really interesting. In general, we expect a debt holder to try to seize assets after the loan defaults. But I've never heard of a private investment group going after a government.
Here is the response from the Argentine government:
The vulture funds have crossed a new limit in their attacks on the Argentine Republic. The Frigate Libertad has been held in the Republic of Ghana over a recourse presented by NML Group before the courts of that country. The Argentine Foreign Ministry has already taken steps with the African nation’s government to clear up the deception that the unscrupulous financiers have mounted. That measure is in violation of the Vienna Convention on diplomatic immunity.
The vulture fund NML has its headquarters in the Cayman Island, a fiscal lair that it’s worth recalling is a colony of Great Britain, from which those who don’t submit themselves to the laws of any jurisdiction operate and they’ve been denounced both by the G-20 and the United Nations.
The NML Group belongs to international speculator Paul Singer and he is the main financier of the lobby that operates in the courts and the Congress of the United States with the name “ATFA” (Task Force Argentina) to damage our country. Also, they disseminate false information for the use of some Argentine monopolistic press media, with the goal of extorting Argentina in order to obtain usurious profits from buying Argentine bonds for pennies during the 2001 crisis and refusing to join the 93% of the investors that agreed to the debt restructuring.
That group of lobbyists are the same that tried to harass the President during her recent trip to the United States passing out aggressive fliers against the presidential investiture. Another of its actions was to place a gigantic rat in the doorway of the Argentine embassy in Washington when the anniversary of our independence was being celebrated.
The Foreign Ministry reiterates that it is the decision of President Cristina Fernández de Kirchner to not bow before the international and local attempts at extortion that have been brought forth by the vulture funds and will continue to denounce them in various forums such as the G-20, the United Nations, CELAC, UNASUR and MERCOSUR, FATF and the other multilateral organizations.
The Argentine government is getting desperate at the moment. They've started fiddling their inflation figures, [1] and they've had to take steps to stop people converting all their savings into dollars. On top of that, they've added in some populist sabre rattling over the Falklands to try and distract everyone.
[1] http://www.rssenews.org.uk/2012/02/economist-magazine-drops-...
Not exactly, it's long, but here I go...
Malvinas/Falklands has always been a national claim, that has been brought to every possible international forum, for decades before the war in 1982, and of course, also after the war... So, that's not news.
The current overall economic situation is not as terrible as it may seem from outside. The main problem is that because of the high inflation, people try to have their savings in other currencies, but the government put restrictions on the amount of foreign money that can be bought. Sadly, tax evasion is commonplace here, so, it's hard to prove the origin of the money, and thus making it an impediment to buy US dollars.
But the overall situation is very complex. I have always said that the main problem in Argentina is that culturally, Argentine businessmen always try to make money selling a few products at a high price, instead of selling a lot of products at smaller prices (scale economy). And there's no focus on trying to change that mentality. That makes the local industry totally noncompetitive, and thus, the government has to rely in protectionist policies to prevent importers from flooding the local market with chinese products, that would simply destroy the local jobs (it has happened before, in the '80s, then again in the '90s).
As an example, you have some plain stupid policies, like having the electronics factories in the furthest possible place (Tierra del Fuego, the island just at the end of the continent!), far away from the consumption centers, making the prices go up as they have to move the manufacturing parts from Buenos Aires, to Tierra del Fuego, and then, the manufactured goods back to Tierra del Fuego/Cordoba. That's 3100 miles by road!
This kind of policies render the commendable idea of helping the local industry develop, totally useless because those industries will never be competitive.
On the other hand, historically, the main source of wealth in this country has always being agriculture. But sadly, since the 1800's, almost 80% of the country has been in the hands of a few families. Currently, 2000 families own almost all of the fields. And sadly, in the last 10 years, they stopped producing a lot of products (wheat, fruits, livestock), replacing most of the production with soybeans. That resulted in a huge increase in prices, something unthinkable in a food-producing country like this.
That, added to the fact that historically those families operate usually operate this way: They sell the products through a shell company in some tax heaven country, thus declaring much lower earnings here (evading local taxes). Of course, this kind of behavior is possible because of the ever-existing corruption. Anyways, the money that they do bring here, is usually moved anyway to offshore bank accounts (generally luxemburg, switzerland or uruguay). Capital flight then becomes a common practice.
A few years ago, the government paid its debt to the IMF, and because it would have to eventually pay most of the debt to the remaining creditors, and its debt is adjusted by the inflation index they declare, they started forging that index. They did it by printing money, used to internal payments to government employees. Internally, as salaries were raised anually at the same level of inflation, it didn't change much to the average people. But in the long run, it affects business, as companies stop trusting the country, so they stop investing here.
As the government had to afford some payments this year to finally complete payments from the 2001 crisis (Boden 2012), they tried to stop this capital flight, but instead of doing it gradually, they did it in a shockingly fast way.
That generated a lot of social discontent in the middle classes. And of course, people are just sick high levels of the corruption and impunity. Some judges, just act as lackeys of the government, absolving government employees involved in public corruption scandals, even when there's a lot of evidence to make them go to prison.
And finally, Media conglomerates that have an enormous amount of power are fighting its own war against the government, that again, even when they are trying to implement an understandable law to replace one from the time of the last dictatorship, the small amount of time given to split the "monopolies", escalated everything.
Interestingly, even with all of this, the overall economic situation is not that bad, people still have their jobs, there are not massive layouts as seen in Europe, salaries grow at the same rate as inflation, compensating it. People is still consuming and is expected that in 2013 the economy is growing more, as Brazil gets better.
But the manner of this government is what makes people sick. They have a very authoritarian way of imposing their agenda. It's like if for them, the end justifies the means. Other parties, even when they could share some of the objectives, prefer other ways to do things, but the opposition is totally fragmented, so the officialism has all the way clear to act as they please.
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To summarize:
- Noncompetitive industry.
- Wrong way of thinking about business (gain by product instead of by scale).
- Unpatriotic landowners, masters in tax evasion
- Widespread corruption.
- Plain Stupid Policies
- Flawed legal system, with corrupted judges
Makes a once-great country, a languishing country that every time it seems to be about to stand again, it falls to the floor and ignites... just to start from scratch again, like a recurring fenix.
Hope it helps to understand us a little bit more :)
As an anecdote, after the 2001 crisis, this country was literally broke, there were no reserves, no money left, while, at the same time, the IMF was trying to prove some 'new theories' and Argentina became the perfect experiment. After rejecting a debt-exchange, default was the only option.
That's where this kind of vulture funds get in the picture. Their modus operandi is simple: buy debt for cents (in this case, defaulted bonds), knowing that a large country like Argentina, very rich in natural resources would eventually recover, and then try to get paid the full price. Good luck with that.
Thanks for such an informative reply. I hope one day Argentina gets a government worthy of them :-)
I also hope to go fishing in Patagonia one day, but that's another story...
As an aside, are those wealthy families that own all the land of Spanish or Welsh origin? I've heard there are a lot of Welsh immigants in Argentina.
No problem, glad to be of help.
Most of them are from Spanish origin, "familias patricias" - "patrician families" that were here and were somewhat powerful at the time when we were still a colony, our independence in 1816 or in the following decades, during the War of the Triple Alliance [1], and later at the Conquest of the Desert[2].
However, during the last two decades, there's being a new wave of landowners, mostly from USA, Italy, Chile, England, Israel, etc.
Benetton and Douglas Tompkins are two cases of foreigners buying LARGE amounts of land. It has become a big problem, because they bought lots of strategic locations (periglacial lands, river sources, estuaries, etc), and then blocked access to water and other resources to people downriver, turning those lands sterile, and then buying them at vile prices.
This was so severe, that a new law was made on February 2012 [3], limiting the amount of land owned by foreign people/companies to 15% of the country.
You can see the amount of land owned by foreigners in this picture (spanish annotations, sorry): http://hosting11.imagecross.com/image-hosting-46/1669TIERRAg...
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[1] A war between Paraguay vs an alliance of Argentina, Brazil and Uruguay that resulted in the death of 90% of the Paraguayan people at the time. Very Sad. http://en.wikipedia.org/wiki/Paraguayan_War
[2] Our equivalent to the Wild West Conquest, when Patagonia was finally dominated. That's where your image of the Argentine "Gauchos" comes from ;) http://en.wikipedia.org/wiki/Conquest_of_the_Desert
[3] Spanish, use translator: http://www.prensa.argentina.ar/2012/02/29/28494-se-reglament...
"I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody" -James Carville
A vulture fund doing its things. ARA Libertad is a school vessel and is used for diplomacy. I doubt they can do something useful with this
This ain't no vulture fund; and we all know about Argentinian "diplomacy".
This fund invested in Argentina, because it believed in its economy - it went long. Like many other funds who invest in US treasuries, German bunds, JGBs, etc.
We all know the Argentinian government is no example for a well-run government, and this fund is taking a stance (i) against the mal-practice/mis-management of the Argentinian finances, and (ii) not accepting a smash-and-grab of 30 cents on the dollar settlement.
All this fund is doing is collecting its debt. It just happens that one of the assets it is after is pretty unique.
Clarifications:
If a country/company defaults != investors do not automatically agree to settle at e.g. 30c/$ (investors need to agree to a settlement price, and in a large syndicate a minority group of investors will never settle or will settle at a higher price). If an investor doesn't settle, it has every right to claim 100c/$ + interest. Some comments imply otherwise.
Going long is no different when buying at 101 cents on the dollar or 1 cent on the dollar - e.g. Greek 10Y bonds are currently being sold/bought at 20c/$, that is no "vulture activity" but providing liquidity to the market. If there are no buyers the Greek bond (or any other bond for that matter) would technically collapse to zero. Some comments imply otherwise.
No.
Elliott capital does not work this way. Google them.
They don't go long on anything. They buy debt from funds that did for pennies on the dollar when it doesn't look like that debt will be repaid. They then try to collect on it aggressively and turn a handsome profit in most cases.
It's been a very successful strategy for them - that's how their founder is now a billionaire.
The message being: Governments, pay your debts.
Argentina reestructured its debts and it was a successful early 2000s campaign. These funds make money buying debt for pennies. They are similar in some way to patent trolls.
Not read this message as a support to the Argentinian government. What Argentina did with its debt is a case study.
Argentina reestructured its debts
Apparently, not all of it.
Maybe. I'm sure it's a calculated risk, but you might want to be careful who you cross when you deal with sovereign nations and seizing their assets. Private lenders don't have standing armies, after all.
Unless you work for Elliott Management you know nothing about their investment strategy, other than it makes profit.
Eh?
For private borrowers who can’t make their payments and probably never will, there is bankruptcy law, which lays out a orderly procedure where the borrower asks for relief, the lenders make their claims, and a judge decides who ends up with how much. It’s not a perfect system by any means, but anyone who loans money understands the risk that the borrower will declare bankruptcy, and the credit markets still function.
For sovereign countries, unfortunately, there is no such procedure. If a government borrows money on the international credit market, its taxpayers can be on the hook for perpetuity. I would like to see those taxpayers have at least as much protection as private-sector borrowers—especially when the taxpayers of a democratic government are on the hook for the debts of its authoritarian or corrupt predecessors.
> For sovereign countries, unfortunately, there is no such procedure.
Poor sovereign countries... Instead of having their assets wiped out and possibly facing years of payments (even if reduced), they have to deal with unbearable consequences, like a lot of finger waving and maybe a boat detained on request of someone not willing to finance political careers half way around the world. Dreadful. It may even come to the point that creditors will find some of those countries not trustworthy in the future and won't lend their governments more money.
When the loan originates from another government (or IMF), it goes into the accounts of preferred companies for building the infrastructure (eg Halliburton), often explicitly specified in the terms. The sovereign countries are just the channel through which the public-private lenders (eg JP Morgan at the Fed window) pay themselves.
edit: see Confessions of an Economic Hitman by John Perkins for a first-person account.
All countries—especially small and/or underdeveloped countries—need foreign trade in order to develop their economies, and it’s really really hard to engage in foreign trade without credit. And “if you stiff your current borrowers it may be harder to borrow in the future” is a risk that civilians have right now; creating a sovereign bankruptcy code won’t change that.
I forgot to mention that such a code would actually help borrowers, in the following way: For countries in a debt crisis, the lenders holding 90% of the debt may realize that they aren’t going to get paid back in full, and therefore would agree to a settlement where at least they get something back. But the ones holding the remaining 10% can pound the table and say “no, we want payment in full, and we’re legally entitled to it”... which leads the 90% bloc to say “well, if they’re still entitled to payment in full, we’re not going to be suckers and settle for less”... which leads the indebted country to say “we can’t possibly pay you all in full, so screw you all, we’re defaulting”.
No, they bought defaulted bonds for cents, and then try to get paid full price. But of course its highly doubtful it will ever happen, and this only makes them bad press, cuz its also doubtful that they can get away with this.
Ps: sorry for the typos, writing from my phone
What they are doing is legal, yeah, but it is pretty much textbook "vulture fund" behavior.
Yeah, I'm really sorry the Argentinian government didn't let the country go to the vultures in detriment of a few rich people... we should just let the FMI take over and run the country so a few funds don't lose money.
Seriously? You are telling me that a government protecting it's citizens interests is wrong? I'd like to see you repeat that argument when the Chinese start kidnapping American citizens to get their money back.
For those not familiar with the term "Vulture Fund", there is some background at the following links:
Cashing in on the crash http://www.economist.com/node/9687782
Vulture funds – how do they work? http://www.guardian.co.uk/global-development/2011/nov/15/vul...
I'm having a bit of trouble understating the problem with vulture firms.
Is it the fact that they bought a lot of risky debt at low prices? That is how risk works; I feel like objections along these lines are focusing on specific cases where the vultures got lucky and are ignoring the big picture.
Is it the fact that they are demanding money out of bankrupt countries? This seems odd to me; wouldn't the original debtors want repayment too?
The second article there mentions vultures discouraging real investment in the countries. This seems like a serious issue but I don't understand how vultures specifically would have that effect.
As I understand it, the problem is that the debtor states are often unable to repay the debt, at least not without taking money away from areas like public health and education.
The loans are often quite old. Presumably the original lenders often decide that the loans are never going to be repayed, and the debtor states budget on that assumption. Years later they find themselves pursued for debts they believed were lapsed.
I have to think that in that case it's the original lender that resurrects the loan, it just took a reminder. A vulture wouldn't buy a loan that was truly dead.
I guess you can blame vultures for incentivizing old lenders to resurrect loans but that's a pretty indirect thing to be upset about.
As sethg pointed out, there's a difference between privete companies and sovereign countries.
When you lend money to a company and that company can't pay you back, bankruptcy law gets in the game. But when you lend money to a state, you know that there's a calculated risk that they won't be able to pay you and you won't be able to do anything to force them to pay your money back. You protect yourself by adjusting the interest rate. But if the risk is just too high and you lend anyway, it's up to you to take that bet...
If that country can't afford their debt, they can try to renegotiate with you, so you can get paid at least something. If it were a private company and the creditor does not accept the new terms, they could ask for a bankruptcy. As you can't do that with a country, if you reject the new terms, then the sovereign state can say "screw you" and never pay you anything. You had your chance to get something, and you lost it.
Some vulture funds buy this kind of bonds, and then try to reclaim the money... As I said earlier... good luck with that.
Even the U.S. Supreme Court and the US Government agrees with this [1].
That's why they are now trying this kind of weird actions, in some place where they managed to make a judge put his signature to their service... But it's mostly a media show.
[1] Supreme Court Rejects Elliott's Argentina Appeal http://www.finalternatives.com/node/20864
And some more extra info, even mentioning US Administration's support to Argentina's claim: http://marceloballve.wordpress.com/2012/06/27/who-pays-when-...
So the 'screw you' should transfer along with the debt and vultures aren't a legitimate problem?
If you have a useless paper, and you sell it to someone else, it's still a useless paper...
They are more of an inconvenience, and if they have deep pockets (like in this case), they can keep trying to fight legal battles, over and over for years. Making the other spend money in lawyers. Depending on the amount, it may be cheaper to just pay them and forget the whole thing, just like what happens in some patent cases with the hated patent trolls.
But when there's a huge sum at stake, sovereign states will fight in court. Until now, this fund has lost every case, but they keep appealing the verdicts. A few months ago, the US Supreme Court ended some of the demands, but they have opened a few more.
You get the idea... the kind of lawyers that make their profession look so bad.
> Is it the fact that they bought a lot of risky debt at low prices? That is how risk works;
The risk was already taken by the original lender, it was risk of default and was the reason for charging interest. The ability to default by declaring bankruptcy is a legal principal which distinguishes our society from a barbarous past full of relentless loan sharks.
So The risk assumed by debt collectors is less legitimate, and a collector's claim is on shakier legal basis (even less consensus in international law, of course). Societal norms change, children no longer inherit the debt of their parents. IMO, personal bankruptcy ought to default student loans (in the US, it no longer does due to a recent law). Hatred of debt collectors goes back to biblical times, and for good reason.
> The risk was already taken by the original lender, it was risk of default and was the reason for charging interest. ... So The risk assumed by debt collectors is less legitimate, and a collector's claim is on shakier legal basis
Not so fast.
The price that I'm willing to pay for something, the risk that I'm willing to take, depends on whether I'm able to sell my interest to someone else.
Curiously enough, other people aren't very willing to buy worthless things.
If debt collectors have "less legitimate" claims than the original lenders, they're not going to pay as much as they will if their claims have the same legitimacy. As a result, original lenders are going to demand more interest and protection for their interests.
If you want people to make risky loans, you must protect the rights of folks who buy loans that have fallen on hard times.
> If you want people to make risky loans, you must protect the rights of folks who buy loans that have fallen on hard times.
Maybe lenders shouldn't be making such risky loans. Perhaps that could have averted the housing bubble. Maybe college tuition in the US wouldn't be rocketing sky-high past inflation. Its hard to know who is real benefactor of such willingness to lend. Far from clear that its the borrower..
You want lenders making risky loans - that's where the growth and innovation comes from. Plus, risky loans are how poor people, companies, and countries make it.
Safety leads to narrow margins, and they're a serious problem. If you're running on a 10% margin, a 1% hickup is no big deal. If you're on a 1% margin, 1% wipes you out.
The housing bubble was a combination of regulation (insisting on subprime loans plus subsidies of fannie/freddie) and govt agencies screwing up everyone's risk assessment (fannie and freddie lied about their portfolio, so everyone's risk assessment models were broken).
College tuition lending is the same sort of disaster. Govt guarantees and (now) govt loans - what could possibly go wrong....
On the other hand any loan to a small business is automatically risky, looking at the failure rate. I would hate for small businesses to be unable to get money.
Sure, the risk was originally on the primary lender. But later on they can sell their stake to get rid of the remaining risk. There's nothing wrong with buying a lot of debt that is likely to default. I agree though that if the country actually defaults then the vulture shouldn't get anything.
It's not a matter of doing something useful with the ship, it's all about making enough pain for the lender until they payup.
Aside: There seems to be a strange (one-way) attraction between creditors and sailing ships these days. Another example:
http://en.wikipedia.org/wiki/Sedov
"Sedov has regularly been targeted by unpaid creditors of the Russian Federation such as Nissim Gaon (of now defunct Swiss group NOGA, an anagram of Gaon) and also by French holders of defaulted Russian bonds; in 2002 Sedov was forced to precipitously and unexpectedly leave Marseilles in the dead of night[1] to avoid being served a writ by AFPER (French association of holders of Russian Empire bonds) the following morning.
For over a year French holders of defaulted Russian bonds have been warning they were going to reorganize and export their claim to Anglo-Saxon jurisdictions, more friendly to private citizens than the French."
I was curious AFBER because of the Russian Empire thing. It is indeed the association of holders of Tsarist Russian bonds. They are trying to get paid back two successor governments and 100 years later.
Fascinating. Maybe they figured the Sedov was around back then so their claim would look a bit more legit...
No clue! According to Wikipedia, Sedov was taken from Germany after World War 2.
I've got some experience with this, from being in the industry.
Not surprising most of these distressed debt funds are managed by lawyers and bond traders. They started in earnest in the early 80s when "junk" bonds became the latest trading fad.
The traders saw that they could buy up this debt cheap as most banks wanted it off their books and the lawyers figured that they could negotiate better terms than the previous owners would.
These types of funds can provide valuable services in a number of ways: - getting toxic debt off the balance sheet of other firms - creating some liquidity for existing holders - getting the most money possible for existing holders.
The downside is that if you are a target of one or more of these funds you'd better have better negotiators and lawyers than they do :)
Not surprisingly the returns on these types of funds tend to fluctuate a lot causing the industry to move to a few large funds and many small funds. The smaller funds tend to have out sized returns for a couple of years and then blow up spectacularly.