The Washington PostDemocracy Dies in Darkness

How one hedge fund made $2 billion from Argentina’s economic collapse

A woman walks by a mural in Buenes Aires that reads in Spanish “vultures” in reference to the dispute in between the Argentine government and U.S. hedge funds, known locally as “vulture funds.” (Associated Press)

NEW YORK –When Paul Singer’s Elliott Capital launched a 15-year battle to wrestle billions out of Argentina for lapsed debt payments, it wasn’t the first time the hedge fund had taken on a foreign government.

But few engagements have turned into such a high-profile international scuffle.

In order to collect the decade-old debt, Singer’s fund tried to claim money deposited by the country’s central bank in the U.S. and Europe. And it sought to seize two satellite launch contracts between Argentina and SpaceX.

Elliott Capital’s arguably most audacious scheme came in 2012, when the Argentine navy’s proud three-masted tall ship pulled into the port of Tema in Ghana with more than 250 crew members on board, recent graduates of the Escuela Naval de Argentina participating in an annual training session. The Libertad was worth a fraction of what the hedge fund claimed that it was owed, but the 100-meter ship quickly became a chip in an international fight over billions in old debt.

Elliott Capital persuaded a Ghanaian court to seize the vessel so it could collect on its debt. Argentinian officials would lash out at Elliott as “unscrupulous financiers” and after more than two months the ship was released.

Four years later, though, Elliott Capital and several other hedge funds and creditors are about to get their satisfaction.

The Argentine government agreed to a settlement that would allow Singer’s fund to walk away with $2.4 billion for bonds that the government had failed to pay on, according to court documents. The bonds had a face value of $617 million, but had been purchased for about $117 million, according to an analysis of court records by Martin Guzman, a postdoctoral research fellow at Columbia University Graduate School of Business. Argentina’s Senate is scheduled to sign off on the deal this week.

It would be a handsome, and historic, payoff for one of the most well-known brawlers in the New York

financial world. And, according to industry experts, the case could serve as a template for similar investors in the years to come. By relentlessly pursuing Argentina in courts around the world, and even taking their battle to the U.S. Supreme Court, Elliott and the other creditors have shown the power that hedge funds can wield in poor countries, critics of their strategy say.

The deal comes as President Obama declares a new era of cooperation between the United States and Argentina.

“A resolution on this issue will stabilize Argentina’s financial relationship internationally in a way that can accelerate many of the other issues that are of great concern,” Obama said at a press conference last week during the first high-levels talks between the two nations in 20 years.

The hedge fund fight dates back to 2001 when Argentina defaulted on $80 billion of debt. Most of the country’s creditors, 93 percent, agreed to walk away with just 30 percent of what they were owed. But the remainder, including Elliott, other hedge funds and some small independent creditors, refused the deal.

The hedge funds argued that Argentina could afford more than it had offered and that creditors shouldn’t be forced to take a bad deal. “The case of Argentina was and remains unique in its unilateral and coercive approach to the debt restructuring,” Moody’s Investor Service said in a 2013 research note.

Elliott, founded by Singer in 1977, became the public face of the hedge funds in the fight. The firm is best known on Wall Street as an activist investor that buys shares in often lagging companies and then pushes its management team to make changes.  The billionaire Republican fundraiser also developed a taste for tangling with foreign governments, including Peru and Congo-Brazzaville, over the value of government bonds.

The hedge fund’s tactics in the Argentine case drew international attention and the country launched its own campaign against what it called the “vultures” and “financial terrorists.” The country took out full-page ads in The Washington Post and other publications and found some supporters on Capitol Hill. Argentina argued that giving the hedge funds what they wanted would expose it to a cascade of claims that it could not afford to pay.

“Argentina is committed to a solution in which all bondholders are treated equally,” Argentine Ambassador Cecilia Nahon said in a 2013 letter to members of Congress, adding that the hedge funds were making “unscrupulous claims.”

But after years of legal wrangling, Argentina agreed to settle earlier this year. Last week, the Justice Department filed an amicus brief asking the Second Circuit Court of Appeals to lift an injunction put in place years ago that made it impossible for one of the largest economies in South America to issue bonds or raise money.

“The United States has significant foreign policy interests in supporting a swift resolution to this long running litigation,” the brief says.

Unlike some of the creditors who walked away more than a decade ago, Elliott and other large U.S. hedge funds stand to make a substantial profit on their bonds, about 75 percent of what they were owed.

“We are pleased to have reached an agreement with Argentina. We are hopeful that the completed negotiations…have cleared the way for other plaintiffs to reach satisfactory resolutions as well,” Elliott said in a statement.

A spokesperson for Argentina’s Ministry of Finance and Public Finance could not be immediately reached for comment. But Argentina’s new president, Mauricio Macri, is widely credited with pushing the deal through.

When the deal is approved, Boston-based Bracebridge Capital, which purchased bonds worth about $120 million, will receive about $1.1 billion, according to court documents filed by Argentina’s undersecretary of finance. Aurelius, another hedge fund, will walk away with about $759 million for the $299 million in bonds it purchased. Bracebridge could not be reached for comment and Aurelius declined to comment.

The hedge funds’ profits could be even bigger  than they appear since they purchased the distressed bonds at a discount, several experts said.

“The only reason they [Argentina] settled, I think, is because they need access to the markets again and would not have much of a chance without settling,” Charles Geisst, a finance professor at Manhattan College, said in an e-mail. “They are among the most frequent defaulters in the markets and have been for years, it seems only a matter of time before they will do it again.  That is the only precedent I see here.”

But some are worried that some precedents set in this case could be used to bully poor nations in the future.

Argentina’s bonds, for example, did not include a collective action clause, which would have forced all bond holders to go along with a settlement if the majority of them agreed. Those types of clauses have become common in recent years, but there are still many bond deals without such protections, said Eric LeCompte, executive director of the anti-poverty organization Jubilee USA, who has tangled with Singer and other debt holders in the past.

“The way that this case was settled is going to encourage this type of predatory behavior around the world,” said LeCompte.

In 2012, a Manhattan court ruled that Argentina must first pay the hedge fund holdouts before paying its other bondholders. When Argentina refused, the Standard & Poor’s declared the country in selective default, meaning that it has the wherewithal to pay its creditors but will not agree to. 

Already, he said, there are signs that some countries, weary of a protracted legal battle, are more readily agreeing to unfavorable terms with creditors than they would have before. And the size of the payouts is likely to encourage more hedge funds to try similar aggressive tactics, said LeCompte.

“Why would a bondholder take a haircut when they could hold out and get big returns?,” said Martin M. Guzman, a postdoctoral research scholar at Columbia Business School.