Bond Battles

Argentina's 11-Year War With Hedge Funds


Crew members work on the hull of Argentina's frigate, ARA Libertad, at the Seaport World Trade Center in Boston

Photograph by Lisa Poole/AP Images

Crew members work on the hull of Argentina's frigate, ARA Libertad, at the Seaport World Trade Center in Boston

Since it defaulted on its debt more than a decade ago, Argentina’s economy has engaged in a Cold War of sorts with international investors. Buenos Aires stuck bondholders with a take-it-or-leave-it exchange offer of 30¢ on the dollar, the harshest sovereign debt haircut in at least half a century.

Companies delisted. Foreign investors bolted. Argentina, meanwhile, was demoted from the league of “emerging markets” to that of less-developed “frontier” economies, alongside Bangladesh and Kenya—among which the South American nation has been struggling to remain. To inflict injury on these insults, late President Néstor Kirchner and the wife who succeeded him, Cristina Fernández de Kirchner, have nationalized $24 billion in private pensions and assumed control of the country’s top energy company, which was majority owned by Spain’s Repsol (REP:SM). The government also instituted bizarre regulations, such as one that requires car importers to match their imports with exports of equal value.

However, a hardy group of “holdout” creditors, including U.S. institutional investors and a handful of elderly Argentinian pensioners, refused to participate in the nation’s 2005 and 2010 debt restructurings, wagering that they could band together to get better terms out of Buenos Aires. Last month’s scorched-earth volley: A court in Ghana, of all places, detained an Argentine frigate at the request of a hedge fund that says Buenos Aires owes it $300 million on old debt. Argentina just escalated the affair to the United Nations. All this at a time when the defiant Kirchner has rekindled nationalism over the Falkland Islands, over which Argentina went to war with the U.K. more than 30 years ago.

Now, the battle for the economic soul of the nation of 41 million—amid a raging international debate about the limits of creditor rights (Greece, anyone?)—is taking place in, of all places, New York. In courtrooms there, the aforementioned aggrieved hedgie, Paul Singer, is spearheading a campaign to wrest better payment on the debt he owns. Last week, U.S. District Judge Thomas Griesa ordered Argentina to deposit $1.33 billion to pay the Singer-led holdouts. On Wednesday, an appeals court gave Argentina more time to fight the ruling.

The nervously awaited outcome could either sink Argentina’s economy or make it ever more hostile to the global capital markets. Or neither. Or both. Probably some titration therein. Fitch Ratings was sufficiently spooked by the standoff to say an Argentine default is now “probable.” It’s not just a matter of Argentina facing off with its creditors: Bondholders who agreed to the haircut don’t necessarily want to see the renegades made whole, especially if it threatens their own payments. Accordingly, Bush v Gore super lawyer David Boies has entered the crowded fray. It gets better: Theodore Olson, Boies’s Supreme Court opponent in Election 2000, could well end up arguing opposite Boies again. (At least they agree on something.) The boom in Argentina-related billable hours is an international incident unto itself. According to law firm White & Case, since Argentina’s default, jilted bondholders have filed at least 180 civil lawsuits against the country in the Empire State.

Confused? So is everyone else. This explainer, by Ohio State international financial law professor Steven Davidoff, is a must-read.

How, you ask, can Argentina possibly still wield any financial suasion abroad? Well, 1) Look at it on a map. 2) Try its steak. The geographically blessed nation has undeniable breadbasket appeal, with its abundance of soybeans, livestock, and minerals in a China-dominated world that wants ever more of those things.

Witness how very well Brazil, Colombia, and Peru have done during Argentina’s pariah decade. For all its faults, Argentina remains the continent’s No.2 economy. (Colombia is disputing that.) So even as its Merval stock index has been whittled to near-irrelevance by the delistings and falling international interest, it has more than quintupled since the nation’s financial meltdown.

“My view is that Argentina will stand more defiant than ever but at the same time, it will do whatever it can to make sure to keep servicing their debt and show the world community that they are the victims and that the ‘vulture funds’ are the bad guys,” says Santiago Maggi, managing partner with Latmark Asset Management in Miami.

“Without accessing capital markets, we have been punctually paying since 2005 with our own resources and we are going to continue to do so because we are going to honor our obligations as corresponds to a country that has recovered its self-esteem,” Kirchner said in a speech earlier this week.

Can she hang on long enough to be kept to her word? On top of legal and frigate-forfeiture problems, Argentina is mired in a deep recession marked by growing labor unrest, high inflation, and declining infrastructure.

Which, depending on Kirchner’s read, could call for more sticking it to los capitalistas.

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Farzad is a Bloomberg Businessweek contributor. Follow him on Twitter @robenfarzad.

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