How one hedge fund made $2 billion from argentina’s economic collapse – the washington post gas up asheville


financial world. And, according to industry experts, the case could serve as a template for similar investors in the years to come. By relentlessly pursuing Argentina in courts around the world, and even taking their battle to the U.S. Supreme Court, Elliott and the other creditors have shown the power that hedge funds can wield in poor countries, critics of their strategy say.

“A resolution on this issue will stabilize Argentina’s financial relationship internationally in a way that can accelerate many of the other issues that are of great concern,” Obama said at a press conference last week during the first high-levels talks between the two nations in 20 years.

The hedge fund fight dates back to 2001 when Argentina defaulted on $80 billion of debt. Most of the country’s creditors, 93 percent, agreed to walk away with just 30 percent of what they were owed. But the remainder, including Elliott, other hedge funds and some small independent creditors, refused the deal.

The hedge funds argued that Argentina could afford more than it had offered and that creditors shouldn’t be forced to take a bad deal. “The case of Argentina was and remains unique in its unilateral and coercive approach to the debt restructuring,” Moody’s Investor Service said in a 2013 research note.

Elliott, founded by Singer in 1977, became the public face of the hedge funds in the fight. The firm is best known on Wall Street as an activist investor that buys shares in often lagging companies and then pushes its management team to make changes. The billionaire Republican fundraiser also developed a taste for tangling with foreign governments, including Peru and Congo-Brazzaville, over the value of government bonds.

The hedge fund’s tactics in the Argentine case drew international attention and the country launched its own campaign against what it called the “vultures” and “financial terrorists.” The country took out full-page ads in The Washington Post and other publications and found some supporters on Capitol Hill. Argentina argued that giving the hedge funds what they wanted would expose it to a cascade of claims that it could not afford to pay.

But after years of legal wrangling, Argentina agreed to settle earlier this year. Last week, the Justice Department filed an amicus brief asking the Second Circuit Court of Appeals to lift an injunction put in place years ago that made it impossible for one of the largest economies in South America to issue bonds or raise money.

When the deal is approved, Boston-based Bracebridge Capital, which purchased bonds worth about $120 million, will receive about $1.1 billion, according to court documents filed by Argentina’s undersecretary of finance. Aurelius, another hedge fund, will walk away with about $759 million for the $299 million in bonds it purchased. Bracebridge could not be reached for comment and Aurelius declined to comment.

“The only reason they [Argentina] settled, I think, is because they need access to the markets again and would not have much of a chance without settling,” Charles Geisst, a finance professor at Manhattan College, said in an e-mail. “They are among the most frequent defaulters in the markets and have been for years, it seems only a matter of time before they will do it again. That is the only precedent I see here.”

Argentina’s bonds, for example, did not include a collective action clause, which would have forced all bond holders to go along with a settlement if the majority of them agreed. Those types of clauses have become common in recent years, but there are still many bond deals without such protections, said Eric LeCompte, executive director of the anti-poverty organization Jubilee USA, who has tangled with Singer and other debt holders in the past.

In 2012, a Manhattan court ruled that Argentina must first pay the hedge fund holdouts before paying its other bondholders. When Argentina refused, the Standard & Poor’s declared the country in selective default, meaning that it has the wherewithal to pay its creditors but will not agree to.

Already, he said, there are signs that some countries, weary of a protracted legal battle, are more readily agreeing to unfavorable terms with creditors than they would have before. And the size of the payouts is likely to encourage more hedge funds to try similar aggressive tactics, said LeCompte.