Judgement Left Intact: Vulture Funds

[EdRooney]

Nice summary MDZ.

A couple of other points:

1. As per usual, everything is personalised here, so all we hear in the news media is how great or awful the K's are in handling this, but it really has very little to do with them.

2. It should be noted that regardless of what happens with Argentina now, this ruling is a horrible precedent for the entire third world (and elsewhere). There are many countries that would like to be able to reach an amicable restructuring with their creditors, but because of this ruling they will not be able to do so unless they can get 100% of the creditors on board with the agreement. So for example, Ethiopia owes about $10 billion (50% of its GDP) which is a huge drag on its ability to finance investment projects. If they want to restructure this debt to improve their country risk, they would not be able to do so if there is even just one borrower holding a $1000 government bond who decides to hold out.

3. Anyone who is in the slightest happy about this ruling really needs to understand how debt functions. Argentina having to pay northward of $15 billion would mean having to make cuts in education, healthcare, infrastructure, etc. in order to transfer the money to hedge fund managers in the Cayman Islands. Most third world countries have paid off their principal long ago, but are deeply mired in paying compound interest. The simple example is: you buy a $1000 refrigerator on your credit card in 1992, and you make minimum monthly payments for 20 years. You've paid out something like $12,000 by 2002, but even so, your balance owed on that original $1000 is now $16,000. Thus the whole point is (with the help of corrupt rulers) to transfer wealth from the undeveloped south to the developed north. Argentina is a mild example; most of Africa is a case study, and is the one hardest hit by this ruling.

4. Lastly, I've seen a lot of talk about "why don't they just pay the piper and cough up the 100% to the Vulture Funds". On this point the whole problem is not the Vulture Funds; it's a clause in the bond agreements ("pari passu") that this particular Fund's lawyers were able to get a very radical interpretation of, under which the court is saying all creditors must be treated equally. So if Argentina pays the $1.8 billion to these bond holders, they would then have to re-open the restructurings they did in 2008/2010, and have to pay out about $15 billion.

 

[camberiu]

we didnt use our submarines or our aircraft carreer. I

Actually you did. The ARA San Luis was actually the most advanced non-nuclear submarine in the world at the time and it was actively used, firing its torpedoes several times at the British task force. The brits killed several wales trying to sink the San Luis, but they could not find it. The problem is that the Argentines did not setup the german torpedos correcly (the wires were inverted) so the guidance system would go crazy and the torpedoes would miss the targets. Had the Argentines known how to properly setup the torpedoes, the San Luis alone could have sunk half of the british task force.

 

[thorsten]

So you are saying if a bond on a market is traded at one point in time at say 50% of his value, the debtor can just say "ok, i will pay you just the 50% as the bond is obviously not worth the face value anymore"? Interesting theory... You realize that if this would be true, there would be no bonds at all, right?

 

[dennisr]

EdRooney:

Most sovereign debt now have CAC clauses: 75% settle, binding for everyone.
http://en.wikipedia.org/wiki/Collective_action_clause

 

[MDZ]

So you are saying if a bond on a market is traded at one point in time at say 50% of his value, the debtor can just say "ok, i will pay you just the 50% as the bond is obviously not worth the face value anymore"? Interesting theory... You realize that if this would be true, there would be no bonds at all, right?

No that is not what I said.

 

[thorsten]

Then make a clear point: when exactly becomes a face value of the bond irrelevant?

 

[MDZ]

EdRooney:

Most sovereign debt now have CAC clauses: 75% settle, binding for everyone.
http://en.wikipedia....e_action_clause

The bonds held by the vulture funds do not have CAC clauses, though.

 

[Chet]

The question is pretty simple. Would you buy an Argentine Bond?
(actually if you had the money would you buy any sovereign bond?)

 

[dennisr]

The bonds held by the vulture funds do not have CAC clauses, though.

No s*** Sherlock.

 

[EdRooney]

The question is pretty simple. Would you buy an Argentine Bond?
(actually if you had the money would you buy any sovereign bond?)

1. Since the Fed began it's Zero Interest Rate policy (and now Europe has followed with a Negative Interest Rate Policy), investors (like Elliot) have easy access to money to invest, but bond yields are too low to make it worthwhile. That's why so much money has flooded into developing economies of late. The problem is, with higher yield comes higher risk-- the risk that the country might default. That is the reason why investors take the risk to buy these bonds, because of the high yields compared to say German bonds, and it's also why it's sort of silly to hear anyone arguing about the morality of a default. You get what you pay for.

2. It makes sense for funds like Elliot to take out loans like these because they do so budgeting in how much they are going to have to spend on legal fees to fight all the way to the end, and also because they can afford to buy a default hedge (sort of a default insurance) so that they'll make money no matter what happens. Obviously, small investors without resources for a huge team of attorneys and lobbyists would be poorly advised to be as risky.

And Dennis:

Good point about the CA clauses, but note that they don't cover all Pari Passu cases, as happened when Elliot got huge winnings in cases against Peru and Zambia. The Peru case in particular was a total coup for their lawyers (and this cements it) because it sets the bar at 100% of holders.