Argentina’s Unending Debt (New Yorker.com)
In 2012, authorities in Ghana impounded the Libertad, a three-masted Argentine naval ship manned by a three-hundred-person crew. A hedge fund based in New York made them do it. The ship was seized as the result of a court order sought by NML Capital, a subsidiary of a hedge fund called Elliott Management Corp. A year later, Argentina’s President commissioned a costly private plane for an international trip because she feared that something similar might happen to her official jet, the Tango 1.
The cause of her concern is a conflict dating to 2001, when Argentina defaulted on more than eighty billion dollars in privately held debt—at the time, the largest sovereign default in history. Argentina owes about two billion dollars, in bonds and overdue interest payments, to the Elliott subsidiary, and Elliott has been trying to collect for years. On Monday, the government of Argentina presented oral arguments in a Supreme Court case that is expected to determine whether Elliott can force banks to turn over information on the whereabouts of some Argentine assets. If Elliott knows where Argentina is stashing assets, it can tie them up in order to pressure the country into handing over what Elliott claims it is due.
Elliott is sometimes called a “vulture fund,” an unflattering term for funds that buy up the government debt of ailing countries in the form of bonds purchased at a fraction of their face value. Sometimes, the country has already defaulted on these bonds. In other cases, the country is on the verge of default. Either way, when it fails to pay up at the appointed time, the fund sues for the full value of the bonds plus past-due interest, which can amount to huge windfalls on the initial investments. One of Elliott’s earliest forays into sovereign debt was in 1996, when it bought $20.7 million of Peru’s debt at a discount, for $11.4 million, and then took the country to court to demand full repayment, eventually walking away with fifty-eight million dollars, according to an article in Condé Nast Portfolio. Elliott is not the only fund to do this sort of thing (and distressed debt represents only a small fraction of its dealings). Other so-called vulture funds have bought old loans—for example, a multimillion-dollar loan issued to Zambia for the construction of roads, in the seventies—that were collecting dust on the neglected books of unstable or impoverished governments, and then sued for repayment when the debtor country’s finances started to improve. By then, the debtor country could, ostensibly, afford to repay part of what it owed; it’s important to reconcile with existing creditors if a country wants to borrow more money in the international markets. Often, but not always, lawsuits end up in U.S. courts, since sovereigns issue their debt on the New York market and agree to submit to the jurisdiction of federal courts applying New York law.