Argentina’s long march back to international debt markets may finally have reached its end. Late Sunday night, the government and “vulture” hedge fund creditors struck a deal that would allow the South American nation to borrow once again for the first time in nearly 15 years. The longest debt holdout in recent memory reinforces the ethos of the vulture fund: Use maximum leverage for maximum return on a cheap investment in a troubled country. Paul Singer and his hedge fund pals have played this so well that they’re even making their enormous payday look like a loss.
The home of tango and 32-ounce grass-fed steaks decided to default on $132 billion in debt after an economic crisis in 2001, closing off access to credit markets. Unexpectedly to purveyors of the neoliberal consensus, growth followed under President Nestor Kirchner amid a commodity price boom. Cleaning up the aftermath, Argentina engaged in two debt restructurings in 2005 and 2010. Roughly 93 percent of all bondholders participated in these exchanges, which entitled them to 30 percent of face value of the debt.
But holdouts saw an opportunity. NML Capital’s Singer, his former protégé Mark Brodsky of Aurelius Capital, and a handful of other hedge funds scooped up Argentine debt at fire-sale prices and refused to settle. Years of hardball wrangling, which included Singer trying to commandeer an Argentine naval ship in Ghana as partial repayment, culminated with the vulture funds using U.S. courts to force Argentina’s hand.
The Argentine bonds, which were governed by New York law, had to be repaid pari passu, or with equal treatment. Judge Thomas Griesa ruled that Argentina could not repay the 93 percent of exchange bondholders who took the deal unless they also paid out the 7 percent who did not. But paying the holdouts in full would trigger a “Rights Upon Future Offers” (RUFO) clause, and compel full reimbursement to every bondholder, nullifying the debt restructuring and putting Argentina back in the hole by $100 billion.
So Argentine leaders played their only card: They refused to follow the U.S. court order, instead not paying anyone after August 2014, their second default in 13 years. This immiserated the Argentine economy, harmed the exchange bondholders who accepted the reduced terms, and exposed the inability of U.S. courts to sanction sovereign nations.
The only relief for this standoff was an election. Mauricio Macri, the right-leaning mayor of Buenos Aires running against the Kirchner-dominated movement that ruled Argentina for a decade, won the presidency last December, on a vow to impose business-friendly policies and end the creditor standoff. Because the RUFO clause expired in 2015, Macri could negotiate with the holdouts without having to apply their deal to other bondholders. Judge Griesa helped negotiations along by dropping the injunction on paying all creditors who accepted the earlier deals.
Without further leverage, Singer and company settled. But the deal is quite lucrative: $4.65 billion for four hedge funds (NML, Aurelius, Davidson Kempner, and Bracebridge Capital), including about 75 percent of the $5.9 billion in principal and interest owed, plus legal fees and a special payment for claims outside the New York-law jurisdiction.
Singer, who personally participated in the negotiations for weeks, tried to downplay the deal, calling Argentina’s negotiator “tough but fair” and that “a settlement is, by definition, a compromise.” But weep not for the vultures. First of all, a 25 percent haircut is far better than the 70 percent haircut accepted by bondholders in the 2005 and 2010 debt exchanges. Second, Singer paid $48.7 million for his bonds, which had an $832 million face value, according to Forbes. A 25 percent haircut leaves him with $624 million, or a 1281 percent return on investment.
But it could be far more than that, as the interest on some of the bonds accrued at the level during the Argentine default, which was 101 percent per year. This arguably explains why Singer held out for a decade; 101 percent interest can add up quickly. When you add in all the interest, the final judgments that Singer owns reportedly total $1.7 billion. Even a 75 percent haircut on that would be an astronomical payday.
It’s hard to get exact figures on just how much Singer and company paid for the bonds, and how much they will extract from Argentina; hedge fund exemptions from disclosure requirements inhibits a full accounting. And some of these bonds were purchased as far back as 2002, so the long wait should be factored into calculations of annualized returns. Still, whatever the precise math, the fact is that, while Singer goes around moaning about a compromise, he is being rewarded handsomely merely for having the insight to buy up the bonds of a country in trouble and the determination to remain as stone-faced as possible while waiting for a big return.
The Argentine government is certainly happy to crawl out from under the rock of default, and to unlock international credit markets to refresh depleted foreign reserves. A fresh infusion of capital will help with a treacherous inflation situation, and stabilize the country’s economy.
Of course, the first set of borrowing will go directly to paying off the holdouts, not Argentine public services or investment. That the holdouts succeeded this much, with the help of the U.S. judiciary no less, always represented to me a kind of punishment for Argentina rejecting the IMF-led consensus. They defied the world and lived to tell about it. The holdouts gave the international community a chance to punish the country for its intransigence, and only let them out of the vice grip when they elected a pro-business president.
Meanwhile, the precedent for this working out so well for the vulture funds is terrifying. A principle has been firmly established, that you can go around looking for sick countries and corporations and use all necessary means to use their pain for profit. It can be applied to Puerto Rico, where another similar tragedy is playing out. The ability to renegotiate debt, a standard tool in practically all borrowing relationships, will be hurt by the example of stubbornness winning out.