In 2012, authorities in Ghana impounded the Libertad, a three-masted Argentine naval ship manned by a three-hundred-person crew. A hedge fund based in New York made them do it. The ship was seized as the result of a court order sought by NML Capital, a subsidiary of a hedge fund called Elliott Management Corp. A year later, Argentina’s President commissioned a costly private plane for an international trip because she feared that something similar might happen to her official jet, the Tango 1.
The cause of her concern is a conflict dating to 2001, when Argentina defaulted on more than eighty billion dollars in privately held debt—at the time, the largest sovereign default in history. Argentina owes about two billion dollars, in bonds and overdue interest payments, to the Elliott subsidiary, and Elliott has been trying to collect for years. On Monday, the government of Argentina presented oral arguments in a Supreme Court case that is expected to determine whether Elliott can force banks to turn over information on the whereabouts of some Argentine assets. If Elliott knows where Argentina is stashing assets, it can tie them up in order to pressure the country into handing over what Elliott claims it is due.
Elliott is sometimes called a “vulture fund,” an unflattering term for funds that buy up the government debt of ailing countries in the form of bonds purchased at a fraction of their face value. Sometimes, the country has already defaulted on these bonds. In other cases, the country is on the verge of default. Either way, when it fails to pay up at the appointed time, the fund sues for the full value of the bonds plus past-due interest, which can amount to huge windfalls on the initial investments. One of Elliott’s earliest forays into sovereign debt was in 1996, when it bought $20.7 million of Peru’s debt at a discount, for $11.4 million, and then took the country to court to demand full repayment, eventually walking away with fifty-eight million dollars, according to an article in Condé Nast Portfolio. Elliott is not the only fund to do this sort of thing (and distressed debt represents only a small fraction of its dealings). Other so-called vulture funds have bought old loans—for example, a multimillion-dollar loan issued to Zambia for the construction of roads, in the seventies—that were collecting dust on the neglected books of unstable or impoverished governments, and then sued for repayment when the debtor country’s finances started to improve. By then, the debtor country could, ostensibly, afford to repay part of what it owed; it’s important to reconcile with existing creditors if a country wants to borrow more money in the international markets. Often, but not always, lawsuits end up in U.S. courts, since sovereigns issue their debt on the New York market and agree to submit to the jurisdiction of federal courts applying New York law.
Argentina is a special case, because the amount of money involved is enormous, and Argentina refuses to pay back some creditors. (The government says, in effect, that the cost of repayment is too steep, though Elliott and other creditors claim otherwise.) Just before Argentina defaulted on its debt, in 2001, the government devalued its currency; this was painful at first, but eventually the cheaper currency, and a global commodities boom, helped the government to improve its finances. During that period, Argentina begrudgingly made two deals, in 2005 and 2010, to restructure its private debt and give creditors a portion of what they were owed, which approximately ninety-two per cent of private creditors eventually accepted. But about eight per cent of creditors, including Elliott, have rejected those deals and pushed for a better one. Among them are hedge funds and several thousand small-time Italian retail bondholders.
Elliott has been more aggressive than the rest in the pursuit of its money. “A group like Elliott are the only guys that can do this,” Hans Humes, the chairman of a hedge fund called Greylock Capital and the former head of the Global Committee of Argentine Bondholders, said. Elliott is a twenty-billion-dollar fund; it can afford to be brazen.
As Argentina has wrangled with creditors, it has also struggled to gain access to capital markets. When Argentina does borrow money, it’s often at a high interest rate. This comes at a time when Argentina’s growth has stalled amid a drop in commodities prices worldwide and nagging inflation at home. “Settling all of its outstanding disputes is in Argentina’s best interest,” Elliott representatives told me when we spoke by phone. The current government, notorious for its populist tilt, has vowed never to pay the likes of Elliott. Argentine partisans bristle at the idea of “repayment in full,” which they feel is unfair: it’s not as though Elliott is asking only to recoup its losses; it wants more than it ever paid for those bonds, plus years of accrued interest. Elliott, in turn, insists that dollar amounts aren’t what this is about, since Argentina refuses to pay them anything at all, at this point.
These hard-fought and inconclusive disputes define the sovereign-debt world, where there are no firm rules of engagement. Countries cannot declare bankruptcy like individuals or corporations can, so there’s no way for them to expunge unpayable debt. Private creditors can seek recourse in court, but even if they win in courts outside the debtor countries they generally cannot enforce any judgments, because there’s no way for foreign judges to compel another country to pay. At best, they can pester and prod the sovereign toward a settlement.
“The entire battle over the meaning of sovereign debt as a contract is over enforcement,” Anna Gelpern, a law professor at Georgetown and a fellow at the Peterson Institute for International Economics, told me. “Even if Argentina disregards a court order, the goal is to make it more expensive for a sovereign like Argentina to live the economic life of a sovereign in the global economy. How well can you function as a country if the minute you stick your nose outside your borders you have to go to court?” she said, alluding to the impounded boat, among other things.
Later this spring, yet another issue in the high drama between Elliott and Argentina is up for the Supreme Court’s consideration—and it may even be more important than the substance of Monday’s oral arguments about Argentina’s assets. Argentina is asking the Court to consider a lower court’s ruling on an obscure clause in sovereign-bond contracts, generally called pari passu. The clause—Latin for “in equal step”—is famously ambiguous. Some say it means that a debtor can’t give preference to one class of creditor over another; others say it means that a debtor can’t make individual payments on a loan unless it’s current on all payments under that loan. Everyone basically ignored the clause until the late nineties, when Elliott made what at the time was an unconventional case in its lawsuit against Peru over the country’s debt. Elliott argued, in essence, that the pari-passu clause means that if a debtor makes a payment to some of its creditors on restructured bonds, the creditors who haven’t agreed to the terms of the restructuring must also be paid, and they must be paid what they’re owed under their initial agreement with the sovereign. The court agreed with Elliott’s interpretation and Peru eventually settled, though the Belgian parliament later passed a law nullifying the ruling. (Elliott maintains that it’s never made an argument about the broader meaning of pari passu, saying that it’s proffered only specific readings of the particular terms of its contracts with Peru and Argentina.)
In 2012, a federal judge in New York was also persuaded by Elliott’s pari-passu argument—and took it a step further. Argentina generally pays bondholders through their trustee, the Bank of New York. The judge said that the Bank of New York would be held in contempt of court if it made payments to those bondholders without Argentina paying back Elliott. Argentina might flout a federal ruling, but the Bank of New York would not. (The decision was later upheld by the Second Circuit Court of Appeals, which has stayed the ruling while Argentina appeals to the Supreme Court. Argentina has been making payments on the restructured bonds all the while.)
Now Argentina is asking the Supreme Court to weigh in, in the hope that it will overturn the lower courts’ decisions. Understandably, the creditors who agreed to the restructuring deals fear that Elliott’s challenge will disrupt the payments they’ve been receiving ever since they came to an agreement with Argentina.
More broadly, the resolution of the pari-passu question could forever change how sovereign-debt restructurings work. Until now, creditors have held out on accepting restructured-debt deals at their own risk: they could amass astonishing sums in sovereign I.O.U.s, but there was never a guarantee that they’d be paid. This is where the so-called holdouts and the other creditors typically part ways. The holdouts take their chances, while the other creditors agree to be repaid part of what they’re owed (a “haircut,” as it’s called). If courts can insure that holdouts get to block payments on restructured bonds—unless they themselves are paid, in full, at the same time—why would other creditors accept a discounted rate of repayment? Creditors agree to be paid back at a discount only because that agreement provides certainty they’ll be repaid something. Now there’s no longer such certainty. This worries the governments of the United States, Mexico, France, and Brazil; each has filed an amicus brief in support of Argentina’s petition, with some requesting that the Supreme Court take up, and reverse, the Second Circuit’s ruling.
This concern is widely held, but it is not exactly a consensus position. According to Charles Blitzer (we are not related), a former senior staffer at the I.M.F., most bondholders participate in a restructuring agreement if, he said, “it’s deemed a fair offer and they expect everyone else is going in.” Holdouts, on the other hand, want to be the last creditor to settle; by then, a country might accede to a higher rate of repayment just to clear away stragglers.
Moreover, Blitzer and Hans Humes, of Greylock, voice an argument that Elliott representatives made to me as well. They maintain that the courts’ recent rulings on this matter are narrowly drawn, and that they pertain only to Argentina, which has a unique, decades-long history of recalcitrance. It was Argentina, not Elliott, Humes told me, that “completely changed the dynamic of restructurings” by “changing the question from what a sovereign can pay to what it’s willing to pay.” The Second Circuit, he says, echoing Elliott, emphasized that it was steering clear of setting a sweeping precedent. Lawyers for Argentina told me that this was disingenuous. Gelpern agreed: “If sovereign debt goes from unenforceable to enforceable, that represents a nuclear change” in the sovereign-debt landscape, she said.
The pari-passu argument advanced by Elliott is already cropping up in other cases. Last year, the Export-Import Bank of Taiwan, having sued Grenada on an old loan, asked a court to order Grenada to pay it back in full when the country makes payments on other restructured debt. (A judge has put the case on hold while Grenada further restructures its debt.) People in the Elliott camp are dismissive: it’s one thing to file copycat lawsuits, but it’s another to win in court, they told me. That’s a bit flippant. There’s no telling what may happen, after Argentina, if the Supreme Court lets the lower courts’ pari-passu judgments stand. At the very least, the outcome will breed greater uncertainty about how sovereign-debt battles are fought. If one thing is clear, it’s that the vultures will never stop circling.
Above: Aerial view of Buenos Aires; July 25, 2013. Photograph by Gustavo Muòoz/LatinContent/Getty.
The cause of her concern is a conflict dating to 2001, when Argentina defaulted on more than eighty billion dollars in privately held debt—at the time, the largest sovereign default in history. Argentina owes about two billion dollars, in bonds and overdue interest payments, to the Elliott subsidiary, and Elliott has been trying to collect for years. On Monday, the government of Argentina presented oral arguments in a Supreme Court case that is expected to determine whether Elliott can force banks to turn over information on the whereabouts of some Argentine assets. If Elliott knows where Argentina is stashing assets, it can tie them up in order to pressure the country into handing over what Elliott claims it is due.
Elliott is sometimes called a “vulture fund,” an unflattering term for funds that buy up the government debt of ailing countries in the form of bonds purchased at a fraction of their face value. Sometimes, the country has already defaulted on these bonds. In other cases, the country is on the verge of default. Either way, when it fails to pay up at the appointed time, the fund sues for the full value of the bonds plus past-due interest, which can amount to huge windfalls on the initial investments. One of Elliott’s earliest forays into sovereign debt was in 1996, when it bought $20.7 million of Peru’s debt at a discount, for $11.4 million, and then took the country to court to demand full repayment, eventually walking away with fifty-eight million dollars, according to an article in Condé Nast Portfolio. Elliott is not the only fund to do this sort of thing (and distressed debt represents only a small fraction of its dealings). Other so-called vulture funds have bought old loans—for example, a multimillion-dollar loan issued to Zambia for the construction of roads, in the seventies—that were collecting dust on the neglected books of unstable or impoverished governments, and then sued for repayment when the debtor country’s finances started to improve. By then, the debtor country could, ostensibly, afford to repay part of what it owed; it’s important to reconcile with existing creditors if a country wants to borrow more money in the international markets. Often, but not always, lawsuits end up in U.S. courts, since sovereigns issue their debt on the New York market and agree to submit to the jurisdiction of federal courts applying New York law.
Argentina is a special case, because the amount of money involved is enormous, and Argentina refuses to pay back some creditors. (The government says, in effect, that the cost of repayment is too steep, though Elliott and other creditors claim otherwise.) Just before Argentina defaulted on its debt, in 2001, the government devalued its currency; this was painful at first, but eventually the cheaper currency, and a global commodities boom, helped the government to improve its finances. During that period, Argentina begrudgingly made two deals, in 2005 and 2010, to restructure its private debt and give creditors a portion of what they were owed, which approximately ninety-two per cent of private creditors eventually accepted. But about eight per cent of creditors, including Elliott, have rejected those deals and pushed for a better one. Among them are hedge funds and several thousand small-time Italian retail bondholders.
Elliott has been more aggressive than the rest in the pursuit of its money. “A group like Elliott are the only guys that can do this,” Hans Humes, the chairman of a hedge fund called Greylock Capital and the former head of the Global Committee of Argentine Bondholders, said. Elliott is a twenty-billion-dollar fund; it can afford to be brazen.
As Argentina has wrangled with creditors, it has also struggled to gain access to capital markets. When Argentina does borrow money, it’s often at a high interest rate. This comes at a time when Argentina’s growth has stalled amid a drop in commodities prices worldwide and nagging inflation at home. “Settling all of its outstanding disputes is in Argentina’s best interest,” Elliott representatives told me when we spoke by phone. The current government, notorious for its populist tilt, has vowed never to pay the likes of Elliott. Argentine partisans bristle at the idea of “repayment in full,” which they feel is unfair: it’s not as though Elliott is asking only to recoup its losses; it wants more than it ever paid for those bonds, plus years of accrued interest. Elliott, in turn, insists that dollar amounts aren’t what this is about, since Argentina refuses to pay them anything at all, at this point.
These hard-fought and inconclusive disputes define the sovereign-debt world, where there are no firm rules of engagement. Countries cannot declare bankruptcy like individuals or corporations can, so there’s no way for them to expunge unpayable debt. Private creditors can seek recourse in court, but even if they win in courts outside the debtor countries they generally cannot enforce any judgments, because there’s no way for foreign judges to compel another country to pay. At best, they can pester and prod the sovereign toward a settlement.
“The entire battle over the meaning of sovereign debt as a contract is over enforcement,” Anna Gelpern, a law professor at Georgetown and a fellow at the Peterson Institute for International Economics, told me. “Even if Argentina disregards a court order, the goal is to make it more expensive for a sovereign like Argentina to live the economic life of a sovereign in the global economy. How well can you function as a country if the minute you stick your nose outside your borders you have to go to court?” she said, alluding to the impounded boat, among other things.
Later this spring, yet another issue in the high drama between Elliott and Argentina is up for the Supreme Court’s consideration—and it may even be more important than the substance of Monday’s oral arguments about Argentina’s assets. Argentina is asking the Court to consider a lower court’s ruling on an obscure clause in sovereign-bond contracts, generally called pari passu. The clause—Latin for “in equal step”—is famously ambiguous. Some say it means that a debtor can’t give preference to one class of creditor over another; others say it means that a debtor can’t make individual payments on a loan unless it’s current on all payments under that loan. Everyone basically ignored the clause until the late nineties, when Elliott made what at the time was an unconventional case in its lawsuit against Peru over the country’s debt. Elliott argued, in essence, that the pari-passu clause means that if a debtor makes a payment to some of its creditors on restructured bonds, the creditors who haven’t agreed to the terms of the restructuring must also be paid, and they must be paid what they’re owed under their initial agreement with the sovereign. The court agreed with Elliott’s interpretation and Peru eventually settled, though the Belgian parliament later passed a law nullifying the ruling. (Elliott maintains that it’s never made an argument about the broader meaning of pari passu, saying that it’s proffered only specific readings of the particular terms of its contracts with Peru and Argentina.)
In 2012, a federal judge in New York was also persuaded by Elliott’s pari-passu argument—and took it a step further. Argentina generally pays bondholders through their trustee, the Bank of New York. The judge said that the Bank of New York would be held in contempt of court if it made payments to those bondholders without Argentina paying back Elliott. Argentina might flout a federal ruling, but the Bank of New York would not. (The decision was later upheld by the Second Circuit Court of Appeals, which has stayed the ruling while Argentina appeals to the Supreme Court. Argentina has been making payments on the restructured bonds all the while.)
Now Argentina is asking the Supreme Court to weigh in, in the hope that it will overturn the lower courts’ decisions. Understandably, the creditors who agreed to the restructuring deals fear that Elliott’s challenge will disrupt the payments they’ve been receiving ever since they came to an agreement with Argentina.
More broadly, the resolution of the pari-passu question could forever change how sovereign-debt restructurings work. Until now, creditors have held out on accepting restructured-debt deals at their own risk: they could amass astonishing sums in sovereign I.O.U.s, but there was never a guarantee that they’d be paid. This is where the so-called holdouts and the other creditors typically part ways. The holdouts take their chances, while the other creditors agree to be repaid part of what they’re owed (a “haircut,” as it’s called). If courts can insure that holdouts get to block payments on restructured bonds—unless they themselves are paid, in full, at the same time—why would other creditors accept a discounted rate of repayment? Creditors agree to be paid back at a discount only because that agreement provides certainty they’ll be repaid something. Now there’s no longer such certainty. This worries the governments of the United States, Mexico, France, and Brazil; each has filed an amicus brief in support of Argentina’s petition, with some requesting that the Supreme Court take up, and reverse, the Second Circuit’s ruling.
This concern is widely held, but it is not exactly a consensus position. According to Charles Blitzer (we are not related), a former senior staffer at the I.M.F., most bondholders participate in a restructuring agreement if, he said, “it’s deemed a fair offer and they expect everyone else is going in.” Holdouts, on the other hand, want to be the last creditor to settle; by then, a country might accede to a higher rate of repayment just to clear away stragglers.
Moreover, Blitzer and Hans Humes, of Greylock, voice an argument that Elliott representatives made to me as well. They maintain that the courts’ recent rulings on this matter are narrowly drawn, and that they pertain only to Argentina, which has a unique, decades-long history of recalcitrance. It was Argentina, not Elliott, Humes told me, that “completely changed the dynamic of restructurings” by “changing the question from what a sovereign can pay to what it’s willing to pay.” The Second Circuit, he says, echoing Elliott, emphasized that it was steering clear of setting a sweeping precedent. Lawyers for Argentina told me that this was disingenuous. Gelpern agreed: “If sovereign debt goes from unenforceable to enforceable, that represents a nuclear change” in the sovereign-debt landscape, she said.
The pari-passu argument advanced by Elliott is already cropping up in other cases. Last year, the Export-Import Bank of Taiwan, having sued Grenada on an old loan, asked a court to order Grenada to pay it back in full when the country makes payments on other restructured debt. (A judge has put the case on hold while Grenada further restructures its debt.) People in the Elliott camp are dismissive: it’s one thing to file copycat lawsuits, but it’s another to win in court, they told me. That’s a bit flippant. There’s no telling what may happen, after Argentina, if the Supreme Court lets the lower courts’ pari-passu judgments stand. At the very least, the outcome will breed greater uncertainty about how sovereign-debt battles are fought. If one thing is clear, it’s that the vultures will never stop circling.
Above: Aerial view of Buenos Aires; July 25, 2013. Photograph by Gustavo Muòoz/LatinContent/Getty.
«If one thing is clear, it’s that the vultures will never stop circling.»