June 19, 2014

ARGENTINA: Hedge Funds Aren't Crying for Argentina; Argentina Fears New Crisis As Vultures Circle After US Supreme Court Ruling, Time To Pay Back Bondholders

The Wall Street Journal
written by Matt Wirz
Thursday June 19, 2014

Some hedge funds that clashed over investments in Argentina are now in position to begin counting their winnings.

Gramercy Funds Management LLC this year sold at a profit most of the Argentine government bonds it purchased starting in 2007, said a person familiar with the fund.

The sales came before the U.S. Supreme Court on Monday sent the market for Argentine debt into its latest convulsions by declining to hear the government's appeal of an order to pay firms that held bonds but didn't consent to a restructuring after Argentina's 2001 default.

The government indicated in court in New York on Wednesday that it would negotiate with the holdout creditors. But in a later statement Wednesday night, Argentina's Economy Ministry said a U.S. appeals court's decision to lift a stay on a lower-court ruling in the case made it "impossible" for Argentina to make a bond payment in New York coming due at the end of the month.

The court developments vindicated Elliott Management Corp. and Aurelius Capital Management LP, which have made significant paper profits on their Argentine investments by suing the government to be repaid fully and have frequently butted heads with Gramercy on the matter.

Argentina had previously ruled out negotiating with the holdouts. President Cristina Kirchner said Monday that the hedge funds' attempts to collect were akin to "extortion."

Greenwich, Conn.-based Gramercy held bonds with a value of at least $400 million in February before the sales began, according to court documents. Elliott's claims on Argentina amount to about $2.5 billion and Aurelius's to about $1.5 billion, according to court documents. About $1.5 billion of bonds owned by holdout creditors are affected by the Supreme Court ruling.

The developments highlight the different strategies investors have used to make money in Argentina, whose 2001 default on about $100 billion of debt was the largest sovereign default on record. The episode also underscores the long time funds can wait to harvest any gains on investments.

"If you get the deal that Elliott is going to get, you'd make a lot more, but it's not like others who bought in years ago haven't also made money," said Varun Gosain, co-founder of Constellation Capital Management LLC, who has been trading Argentine debt since the country defaulted in 2001. Argentine bonds traded at prices as low as 18 cents on the dollar after the default, he said.

On Wednesday, bonds maturing in 2033 rose as high as 75 cents on the dollar, from 71.5 cents earlier, according to traders. Those bonds yielded 11.9%, from as much as 12.6% earlier Wednesday, as bond yields move inversely to prices.Elliott and Aurelius are holding out for 100 cents on the dollar plus several times that amount in past-due interest.

The two funds stand out in the rough-and-tumble world of distressed-debt investing because they are willing to take countries to court that fall behind on bond payments.

The fact that so few investors are willing to take those risks allows Elliott and Aurelius to buy defaulted sovereign bonds at deep discounts. It can take years for them to get paid back, and they don't always recover the full value of their claims.

Elliott, which is owned by Paul Singer, began buying Argentine bonds in 2004, betting that the firm could eventually recover far more.

The country persuaded 76% of bondholders in 2005 to swap into new bonds valued at less than half of what they were previously owed. Owners of about $18 billion, including Elliott, refused to participate. The fund then began to sue Argentina in U.S. court to force it to pay up.

Gramercy entered the market in 2007 and rather than litigating, the fund founded by Robert Koenigsberger cozied up to the government of the populist President Kirchner.

The fund helped organize another bond exchange that converted $10 billion of original bonds into new debt, tendering about $3 billion of its own bonds into the deal. Once again, Elliott held out, as did Aurelius, which began buying Argentine bonds in 2007.

Mark Brodsky, Aurelius's founder, worked at Elliott for nine years before founding Aurelius in 2005. In 2011, the former lawyer battled the Irish government over defaulted bonds he bought in Allied Irish Banks PLC, which Ireland nationalized and restructured. Aurelius settled its case after a two-week trial, and it is unclear whether the fund profited.

Elliott pioneered the strategy in the late 1990s when it refused an offer by Peru to restructure some of its debts into new bonds. The fund fought the Andean nation in a New York state court, ultimately winning a $58 million judgment in 2000.

Elliott and Aurelius won a similar ruling against Argentina in New York court in 2012 but were unable to act on it until the Supreme Court rejected Argentina's appeal on Monday.

As the appeals proceeded last year, Gramercy launched a campaign to neutralize the threat that the holdouts might block payments on the restructured bonds owned by Gramercy and other hedge funds, like ICE Canyon LLC. That effort ultimately failed. Monday's court move was a clear legal victory for Messrs. Singer and Brodsky, but they are waiting to celebrate until Argentina actually pays up, people familiar with the matter said.

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The Guardian, UK
written by Uki Goni in Buenos Aires
Wednesday June 18, 2014

Argentinians, battered by decades of apparently cyclical economic crises, fear a new one following a US supreme court ruling this week that could make the country liable for up to $15bn (£11bn) owed to so-called "vulture funds".

The vultures, led by a US billionaire, are mainly hedge fund investors who snapped up Argentinian bonds at rock-bottom prices following the country's $95bn default on its foreign debt in 2001. The court in Washington DC has ordered that they be repaid in full – and that ruling threatens a new default, possibly within weeks.

Argentina descended into chaos after the 2001 financial crisis, then the largest in world history. "My husband and I were never the same afterwards," said María Inés Ochoa, a schoolteacher from the small city of Funes in the central province of Santa Fe.

Violence erupted across the nation after Argentina declared itself unable to meet its payments in the last week of December 2001. The widespread rioting, supermarket looting and the death of young social volunteers by police fire took their toll on Ochoa. "That's when I had my first panic attacks, which completely affected my life afterwards and even today."

Argentina had lived through hyperinflation up to 12,000% in 1989. There had been economic collapse in 1975 and decades of military rule. But what happened in 2002 was unique, even in comparison to those catastrophes. Bank accounts were frozen and withdrawals banned. Barter clubs sprouted like mushrooms after rain everywhere. Old clothes were exchanged for vegetables, psychology sessions for cuts of meat.

"The 2001 crisis hit me with four kids already," recalls Ochoa. "I met with the parents of other kids outside school to locate nearby barter clubs, count our coins to get there and find whatever we could find, but something at least."

Like many other workers and employees, journalist Italo Daffra found himself thrown out of his job. "I went through an enforced sabbatical in 2002 and 2003," Daffra says. "I was the editor of three magazines and our publisher crashed overnight. I burnt through all my savings and my unemployment insurance."

Well-off middle-class families were affected as essential services, including phones and electricity, were cut off for lack of payment.

Although the situation in Argentina today is a far cry from that dismal crash 12 years ago, recent supermarket lootings that left 11 dead, caused by the economic slowdown of the last year, have triggered painful memories for those who lived through the 2001 default.

On Wednesday the government tried to deflect attention from those reminders and its handling of the debt crisis by papering the city of Buenos Aires with large posters against the vulture funds, which it claims are bent on destroying Argentina. "To those who say we should negotiate with the vultures, I say the vultures are vultures because they don't negotiate," economy minister Axel Kicillof said defiantly.

But with the heady days of an annual 8% growth definitely behind Argentina now, Central Bank reserves dwindling, inflation by some estimates close to a yearly 40%, consumption collapsing and Argentina's peso steadily losing value against the US dollar, strong words from the government of President Cristina Fernández de Kirchner left the survivors of 2001 unimpressed.

"We never trusted our savings to a bank account again," says Ochoa. "Over 10 years have gone by but nothing makes us suppose our political class have learned anything from what happened. Their arrogance and our classical apathy create a lethal combination for it to repeat itself all over again."

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