I have no dog in this fight, but the small Wall Street "vulture" funds fighting Argentina have become a serious headache for world finance. They are fighting now for the eleventh year to be fully paid for the Argentina sovereign bonds they have bought, representing the 7% "holdouts" that never accepted the 2001 debt restructuring at 75% loss. Clarin says that Argentina, in a show of good will, is now offering the holdouts a window to allow them to accept the original arrangement. It is a pathetic delaying tactic and no vulture worth its name will accept it. Argentina's lawyers are argueing that if the hooldouts win the appeal, then all former debt restructurations (Greece, Portugal, Iceland) will be reopened and all future debt arrangements will become impossible. Who will accept to paid less than the 100% if those who hold out enough will be fully repaid? It is the end of the sovereign debt restructuring business. The Federal Reserve has registered itself as an interested party in the case. Saturday, December 29, 2012
Those Eternal Troublemakers
I have no dog in this fight, but the small Wall Street "vulture" funds fighting Argentina have become a serious headache for world finance. They are fighting now for the eleventh year to be fully paid for the Argentina sovereign bonds they have bought, representing the 7% "holdouts" that never accepted the 2001 debt restructuring at 75% loss. Clarin says that Argentina, in a show of good will, is now offering the holdouts a window to allow them to accept the original arrangement. It is a pathetic delaying tactic and no vulture worth its name will accept it. Argentina's lawyers are argueing that if the hooldouts win the appeal, then all former debt restructurations (Greece, Portugal, Iceland) will be reopened and all future debt arrangements will become impossible. Who will accept to paid less than the 100% if those who hold out enough will be fully repaid? It is the end of the sovereign debt restructuring business. The Federal Reserve has registered itself as an interested party in the case. 
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5 comments:
Not for widows and orphans.
Anon.
By the way, pictured are what I think are lappet-faced vultures. There are a variety of different types of vulture, adapted differently to ripping out the meat from different parts of the kill, eg long necks for the internal meat and organs, etc.
Perhaps there are different types of vulture funds specializing in different types of distressed debt?
Anon.
Lesson: never lend to a sovereign.
#3 is correct. The essence of lending is collateral and the existence of an enforcement mechanism (court system) that will enable you to realize on the collateral and collect your debt. Sovereign debt lacks both elements unless you have some 3rd party (the US Marines) on the ground to collect some income stream (customs duties). Absent that you are relying on "faith" . They literally use this word - government debt is back by the "full FAITH and credit" of the the issuer. Faith belongs in a church, not a financial transaction. Usually lenders are lured by greed because the issuer has offered a high interest rate.
K
As Vulture vs Argentina case shows, it is not all faith or the Marine Corps. We are living in a globalized world where there are supra-national bodies with executive powers. The Hague Court of Justice is one: it has jailed more than one. The fact that Ghana could detain an Argentine ship shows that there is some kind of international justice system. The Interpol is working very well, criminals are being extradited. American justice has very long hands and you only have to read Argentina papers to see how alarmed they are. Today's paper says that Argentina is offering the vultures payment of 60% in new bonds and 30% in some other kind of obligations and cannot offer more only because of the pari passu condition, that is, they cannot favour one bond holder over other. I bet the vultures will quietly get paid - Argentina seems want to pay and they have the best lawyers to structure a deal.
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