Hedge fund forces default by Argentina

Having bought bonds well below their originial value, Elliot Management stands to make a killing if Argentina pays the bonds in full

Paul Singer, billionaire founder and president of Elliott Management.   Photograph: Jacob Kepler/Bloomberg

Paul Singer, billionaire founder and president of Elliott Management. Photograph: Jacob Kepler/Bloomberg

Fri, Aug 1, 2014, 01:00

The hedge fund firm of billionaire Paul E Singer has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, into a position where it now has to contemplate surrender.

Argentina on Wednesday failed to make scheduled payments on its government bonds. The country has the money to pay the bonds. But a federal court in Manhattan has ruled that unless Argentina settles its debt dispute with Singer’s firm, Elliott Management, it is barred from paying its main bondholders.

After more than five hours of meetings on Wednesday, the sides failed to reach an agreement and the court-appointed mediator said that Argentina would “imminently be in default”. Because a $539 million interest payment was not made, ratings agency Standard & Poor’s said Argentina was in default on those bonds.

The government of Argentina now faces a stark choice: restart negotiations with investors it has repeatedly called “vultures”, who have for years refused to accept anything other than full repayment. Or remain ensnared in a default that could unsettle global markets.

After the talks collapsed, the economy minister of Argentina, Axel Kicillof, characterised the negotiations as extortion.

This campaign shows how deep-pocketed hedge funds can sometimes wield influence outside of markets they bet in.

George Soros’ successful wager against the pound in 1992 affected Britain’s relationship with Europe for years. Several hedge funds placed bearish bets that helped turn the tide against America’s most recent housing boom.

While Singer’s firm has yet to collect any money from Argentina, some debt market experts say that the battle may already have shifted the balance of power toward creditors in the enormous debt markets that countries regularly tap to fund their deficits.

“We’ve had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system,” said Joseph E Stiglitz, the economist and professor at Columbia University. “We don’t know how big the explosion will be – and it’s not just about Argentina.”

As a hedge fund, Elliott’s pursuit of Argentina is motivated by a desire to make money. Having bought its Argentine bonds for well below their original value, the firm stands to make a killing if Argentina pays the bonds in full. Legal filings indicate that the face value of its Argentine government bonds was about $170 million, but the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than $1.5 billion, which includes years of unpaid interest.

Still, there is also something of a crusade about the battle that reveals the worldview of Singer (69). A Republican donor with libertarian leanings, he has spoken out when he thinks that governments and companies have damaged the rights of creditors.

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