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.
[1] http://www.rssenews.org.uk/2012/02/economist-magazine-drops-...
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.
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.
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.
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.
Ps: sorry for the typos, writing from my phone
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.
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...
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.
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."
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.
