Thursday, February 21, 2013
By Heike Buchter
It’s a long story that brought Maria Teresa Muñoz out of her kitchen in Buenos Aires into the room of the distinguished Warwick Hotel in New York. It started at the end of the 1990s when she lost her job as a bilingual secretary after more than 40 years. Her bank advised her to invest the severance pay – preferably in Argentinean government securities. “That seemed secure to me,” she says, “After all, this is my home country.” In 2001, however, the unthinkable happened: Argentina was on the brink of a state bankruptcy. What followed was at that the biggest debt rescheduling ever at more than USD 80 billion. The conditions that Argentina demanded from its creditors were draconian. They were to waive 70 percent of the original bond amount. For small investors like Muñoz, this meant that they would lose just about all of their savings. A shock – and in her eyes it was also unfair.
Until today – she is meanwhile 76 years old and lives from a small pension – she is among the small minority who continues to insist on full repayment. A hopeless endeavor – were it not for the powerful Wall Street funds with the same demand. The funds also among the members of the organization American Task Force Argentina, which Muñoz and a dozen of other small shareholders from Argentina flew to New York for a press conference.
The appearance of small investors is part of one of the fiercest battles in finance history. Thousands of lawsuits were filed, and seizure notices were issues for government planes and naval ships. Now the fight is entering the last round. It’s up to an appeals court in Manhattan’s financial district to decide whether and how Argentina has to serve the debt rescheduling holdouts after all. The decisive hearing takes place this coming Wednesday. The judge’s decision will have repercussions on credit markets worldwide. Debt rescheduling could become more difficult, governments will have to rethink their practices for issuing bonds and investors will have to examine their portfolios. In contrast to the situation a few years ago, the debate on government debt is also of topical interest for Europe and industrial countries: last year, Greece replaced Argentina as record holder with its debt rescheduling amounting to EUR 100 billion.
The debt crisis has drawn attention to a corner of the financial market that has gone largely unnoticed until now. Among the large investors in this area is Elliott Management: the New York hedge fund, which is worth USD 20 billion, is also Argentina’s most stubborn and most powerful opponent in the dispute involving the servicing of old creditors. A subsidiary fund called NML filed the lawsuit – together with other funds and several private investors – that will now be decided on.
Elliott’s founder Paul Singer is considered even on Wall Street to be one of the most hard-nosed hedge fund managers. And as one of the most successful. Singer, a lawyer who also studied psychology, launched the fund in 1977 with USD 1.3 million – money that he collected from family and friends. Since then, Elliott has earned an average of 14 percent returns annually.
Elliott’s specialty is non-performing bonds, regardless of from companies such as Chrysler, banks such as Lehman or from countries such as Argentina. In one of his seldom interviews (he also turned down an interview with the “Zeit”), he said, “Our goal is to find insolvency proceedings for which we can influence the process and thus create value.”
In the case of Argentina, it worked like this: Elliott’s subsidiary NML bought Argentinean bonds for hundreds of millions shortly before and, according to reports, shortly after the insolvency for mere cents. Then NML sued Argentina for repayment at 100 percent. Since then the battle has been raging between the debtor country and creditor funds. Last February, a judge in New York surprisingly ruled in favor of the plaintiffs. The bonds contain a common pari passus clause, according to which Argentina has to give equal treatment to all bondholders. The judge explained that Argentina therefore has to serve old creditors who insist on full payment just like bond investors who participated in the rescheduling. This put the Argentinean government in a bad situation: if its sticks to its refusal to serve old creditors, they also can’t serve the rescheduled securities. As a result, Argentina would be insolvent. An economic catastrophe. The judgment was first suspended to give Argentina time to propose a solution. If Elliott wins, the country would have to pay around USD 1.3 billion to the funds and other plaintiffs.
Elliott was also able to make a lot of money in Peru with a similar strategy. In the mid 1990s, the New Yorkers bought bonds of collapsed Peruvian banks. After a long legal dispute, the country finally paid USD 58 million. Elliott is said to have multiplied its investment by around 400 percent in this way.
For activists, who campaign for debt relief for poor countries, such actions are typical for certain funds. “Vulture funds* suck up resources that are to help the poorest in the world,” writes a call for action by Jubilee USA, an organization that wants to stop the funds by means of legislation. The activists use the shocking example of Zambia. In 1979 the African country bought tractors from Romania on credit. The debt remained open until the vulture funds bought it in 1999 and now sued for several times the original amount. Elliott has consistently argued that they only deal with governments that are actually able to pay, but are unwilling to do so. Argentina, for example, has enough funds because of the raw materials boom to pay its creditors.
Rolf Koch thinks that Singer is “a genius.” The retiree from the state of Hesse has been trying for years to collect the money for his Argentine bonds. German courts sided with him, but it was close to impossible to seize any assets. Koch does not think much of the criticism that the funds are exploiting poor nations. After all, the governments signed contracts. “What about the trusting investors who need to pay for their retirement?” And NN is also thankful to Elliott. The lawyer from xx represents 150 clients, possibly the largest group of investors in Argentine bonds. Hundreds more were involved initially, a lot of them have quit.NN was also successful for his clients at German courts. But the execution has not been successful to date. He was able to seize the exhibits at a dinosaur showing in Rosenheim, but the Bavarian ministry of cultural affairs stopped the activities. Without vulture funds it is hard for normal investors to fight against governments. “These funds have the necessary means to persevere during these proceedings and to come up with new legal manoeuvers.” Using Elliott as an example, NN filed a suit two weeks ago at the regional court in Frankfurt, where he also asks for adherence to the pari passus clause.
Vulture funds are frequently the only ones that insistently ask that the rules of the game are upheld. But most government bonds nowadays contain a clause, which makes restructuring obligatory if the majority of creditors approve it. EU member states are only allowed to issue those types of bonds. This should serve to slow down vulture funds in particular. If Elliott is now successful, creditors would be much less willing to support a restructuring. For that reason, the decision in New York is of major importance, according to Anna Gelpern, professor of finance at American University in Washington. “This is likely to lead to more legal disputes and increased uncertainty in the case of government bonds.”
Vulture funds: The term characterizes hedge funds that specialize in acquiring securities from insolvent companies or governments – at a fraction of the nominal value. Vulture funds are sometimes the last hope: they buy when nobody else is willing to buy. Many of the funds that are active today were founded in the late eighties; their return target is set a minimum of ten percent.