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

Fri, Aug 1, 2014, 01:00

“He believes deeply in the rule of law and that free markets and free societies depend on enforcing it,” said a fellow hedge fund manager.

That conviction has helped drive the creative legal assaults that have scored big financial gains for Elliott, which has nearly $25 billion of assets under management. Since the firm’s founding in 1977, it has on average posted a return of almost 14 per cent a year. At one point in the Argentina dispute, Elliott got a court in Ghana to seize an Argentine naval vessel docking in the country. The boat was later released.

The origins of the Argentine dispute trace back to 2001, when Argentina, overwhelmed by its sovereign debt load, decided to default on its obligations. The country later offered to exchange their defaulted securities for new “exchange bonds,” that were worth much less the original bonds. Most investors participated in these swaps, but some decided instead to fight the government for full repayment. These so-called holdouts included many individual investors as well as a unit of Elliott called NML Capital and other hedge funds including Aurelius Capital Management.

In 2012, Elliott achieved a stunning breakthrough in the US District Court in Manhattan. Judge Thomas P Griesa ruled that whenever Argentina paid the exchange bonds, it also had to pay the holdouts. Argentina could not ignore the ruling and pay the exchange bondholders because Griesa also ruled that any financial firm that distributed payments to the bondholders would be in contempt.

Argentina placed $539 million with the Bank of New York Mellon in June to pay its bondholders but the bank did not transfer it.

It is not clear whether Elliott expected Argentina to meet its demands by now. The firm managed to obtain payments from Peru and Congo-Brazzaville in somewhat similar cases.

Elliott’s supporters assert that the bets that rely on suing governments and state-owned entities make only a small proportion of its portfolio, and they add that the firm does not pursue countries that are clearly unable to pay their debts. Argentina, they say, is a particularly recalcitrant debtor that clearly has the wherewithal to pay the holdouts.

In Buenos Aires, some were resigned to the consequence.

“It doesn’t matter if it is a judge in New York City or a president in Argentina, I feel that neither cares about people, and about the future of this country,” said Sol Bodnar (31), a film producer. “It’s as if these people who have power were laughing in the face of us common citizens.”

© 2014 New York Times News Service

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