This ain't no vulture fund; and we all know about Argentinian "diplomacy".
This fund invested in Argentina, because it believed in its economy - it went long. Like many other funds who invest in US treasuries, German bunds, JGBs, etc.
We all know the Argentinian government is no example for a well-run government, and this fund is taking a stance (i) against the mal-practice/mis-management of the Argentinian finances, and (ii) not accepting a smash-and-grab of 30 cents on the dollar settlement.
All this fund is doing is collecting its debt. It just happens that one of the assets it is after is pretty unique.
Clarifications:
If a country/company defaults != investors do not automatically agree to settle at e.g. 30c/$ (investors need to agree to a settlement price, and in a large syndicate a minority group of investors will never settle or will settle at a higher price). If an investor doesn't settle, it has every right to claim 100c/$ + interest. Some comments imply otherwise.
Going long is no different when buying at 101 cents on the dollar or 1 cent on the dollar - e.g. Greek 10Y bonds are currently being sold/bought at 20c/$, that is no "vulture activity" but providing liquidity to the market. If there are no buyers the Greek bond (or any other bond for that matter) would technically collapse to zero. Some comments imply otherwise.
Elliott capital does not work this way. Google them.
They don't go long on anything. They buy debt from funds that did for pennies on the dollar when it doesn't look like that debt will be repaid. They then try to collect on it aggressively and turn a handsome profit in most cases.
It's been a very successful strategy for them - that's how their founder is now a billionaire.
Argentina reestructured its debts and it was a successful early 2000s campaign. These funds make money buying debt for pennies. They are similar in some way to patent trolls.
Not read this message as a support to the Argentinian government. What Argentina did with its debt is a case study.
Maybe. I'm sure it's a calculated risk, but you might want to be careful who you cross when you deal with sovereign nations and seizing their assets. Private lenders don't have standing armies, after all.
For private borrowers who can’t make their payments and probably never will, there is bankruptcy law, which lays out a orderly procedure where the borrower asks for relief, the lenders make their claims, and a judge decides who ends up with how much. It’s not a perfect system by any means, but anyone who loans money understands the risk that the borrower will declare bankruptcy, and the credit markets still function.
For sovereign countries, unfortunately, there is no such procedure. If a government borrows money on the international credit market, its taxpayers can be on the hook for perpetuity. I would like to see those taxpayers have at least as much protection as private-sector borrowers—especially when the taxpayers of a democratic government are on the hook for the debts of its authoritarian or corrupt predecessors.
> For sovereign countries, unfortunately, there is no such procedure.
Poor sovereign countries... Instead of having their assets wiped out and possibly facing years of payments (even if reduced), they have to deal with unbearable consequences, like a lot of finger waving and maybe a boat detained on request of someone not willing to finance political careers half way around the world. Dreadful. It may even come to the point that creditors will find some of those countries not trustworthy in the future and won't lend their governments more money.
When the loan originates from another government (or IMF), it goes into the accounts of preferred companies for building the infrastructure (eg Halliburton), often explicitly specified in the terms. The sovereign countries are just the channel through which the public-private lenders (eg JP Morgan at the Fed window) pay themselves.
edit: see Confessions of an Economic Hitman by John Perkins for a first-person account.
All countries—especially small and/or underdeveloped countries—need foreign trade in order to develop their economies, and it’s really really hard to engage in foreign trade without credit. And “if you stiff your current borrowers it may be harder to borrow in the future” is a risk that civilians have right now; creating a sovereign bankruptcy code won’t change that.
I forgot to mention that such a code would actually help borrowers, in the following way: For countries in a debt crisis, the lenders holding 90% of the debt may realize that they aren’t going to get paid back in full, and therefore would agree to a settlement where at least they get something back. But the ones holding the remaining 10% can pound the table and say “no, we want payment in full, and we’re legally entitled to it”... which leads the 90% bloc to say “well, if they’re still entitled to payment in full, we’re not going to be suckers and settle for less”... which leads the indebted country to say “we can’t possibly pay you all in full, so screw you all, we’re defaulting”.
No, they bought defaulted bonds for cents, and then try to get paid full price. But of course its highly doubtful it will ever happen, and this only makes them bad press, cuz its also doubtful that they can get away with this.
Yeah, I'm really sorry the Argentinian government didn't let the country go to the vultures in detriment of a few rich people... we should just let the FMI take over and run the country so a few funds don't lose money.
Seriously? You are telling me that a government protecting it's citizens interests is wrong? I'd like to see you repeat that argument when the Chinese start kidnapping American citizens to get their money back.
I'm having a bit of trouble understating the problem with vulture firms.
Is it the fact that they bought a lot of risky debt at low prices? That is how risk works; I feel like objections along these lines are focusing on specific cases where the vultures got lucky and are ignoring the big picture.
Is it the fact that they are demanding money out of bankrupt countries? This seems odd to me; wouldn't the original debtors want repayment too?
The second article there mentions vultures discouraging real investment in the countries. This seems like a serious issue but I don't understand how vultures specifically would have that effect.
As I understand it, the problem is that the debtor states are often unable to repay the debt, at least not without taking money away from areas like public health and education.
The loans are often quite old. Presumably the original lenders often decide that the loans are never going to be repayed, and the debtor states budget on that assumption. Years later they find themselves pursued for debts they believed were lapsed.
I have to think that in that case it's the original lender that resurrects the loan, it just took a reminder. A vulture wouldn't buy a loan that was truly dead.
I guess you can blame vultures for incentivizing old lenders to resurrect loans but that's a pretty indirect thing to be upset about.
As sethg pointed out, there's a difference between privete companies and sovereign countries.
When you lend money to a company and that company can't pay you back, bankruptcy law gets in the game. But when you lend money to a state, you know that there's a calculated risk that they won't be able to pay you and you won't be able to do anything to force them to pay your money back. You protect yourself by adjusting the interest rate. But if the risk is just too high and you lend anyway, it's up to you to take that bet...
If that country can't afford their debt, they can try to renegotiate with you, so you can get paid at least something. If it were a private company and the creditor does not accept the new terms, they could ask for a bankruptcy. As you can't do that with a country, if you reject the new terms, then the sovereign state can say "screw you" and never pay you anything. You had your chance to get something, and you lost it.
Some vulture funds buy this kind of bonds, and then try to reclaim the money... As I said earlier... good luck with that.
Even the U.S. Supreme Court and the US Government agrees with this [1].
That's why they are now trying this kind of weird actions, in some place where they managed to make a judge put his signature to their service... But it's mostly a media show.
> Is it the fact that they bought a lot of risky debt at low prices? That is how risk works;
The risk was already taken by the original lender, it was risk of default and was the reason for charging interest. The ability to default by declaring bankruptcy is a legal principal which distinguishes our society from a barbarous past full of relentless loan sharks.
So The risk assumed by debt collectors is less legitimate, and a collector's claim is on shakier legal basis (even less consensus in international law, of course). Societal norms change, children no longer inherit the debt of their parents. IMO, personal bankruptcy ought to default student loans (in the US, it no longer does due to a recent law). Hatred of debt collectors goes back to biblical times, and for good reason.
> The risk was already taken by the original lender, it was risk of default and was the reason for charging interest. ... So The risk assumed by debt collectors is less legitimate, and a collector's claim is on shakier legal basis
Not so fast.
The price that I'm willing to pay for something, the risk that I'm willing to take, depends on whether I'm able to sell my interest to someone else.
Curiously enough, other people aren't very willing to buy worthless things.
If debt collectors have "less legitimate" claims than the original lenders, they're not going to pay as much as they will if their claims have the same legitimacy. As a result, original lenders are going to demand more interest and protection for their interests.
If you want people to make risky loans, you must protect the rights of folks who buy loans that have fallen on hard times.
> If you want people to make risky loans, you must protect the rights of folks who buy loans that have fallen on hard times.
Maybe lenders shouldn't be making such risky loans. Perhaps that could have averted the housing bubble. Maybe college tuition in the US wouldn't be rocketing sky-high past inflation. Its hard to know who is real benefactor of such willingness to lend. Far from clear that its the borrower..
You want lenders making risky loans - that's where the growth and innovation comes from. Plus, risky loans are how poor people, companies, and countries make it.
Safety leads to narrow margins, and they're a serious problem. If you're running on a 10% margin, a 1% hickup is no big deal. If you're on a 1% margin, 1% wipes you out.
The housing bubble was a combination of regulation (insisting on subprime loans plus subsidies of fannie/freddie) and govt agencies screwing up everyone's risk assessment (fannie and freddie lied about their portfolio, so everyone's risk assessment models were broken).
College tuition lending is the same sort of disaster. Govt guarantees and (now) govt loans - what could possibly go wrong....
On the other hand any loan to a small business is automatically risky, looking at the failure rate. I would hate for small businesses to be unable to get money.
Sure, the risk was originally on the primary lender. But later on they can sell their stake to get rid of the remaining risk. There's nothing wrong with buying a lot of debt that is likely to default. I agree though that if the country actually defaults then the vulture shouldn't get anything.
This fund invested in Argentina, because it believed in its economy - it went long. Like many other funds who invest in US treasuries, German bunds, JGBs, etc.
We all know the Argentinian government is no example for a well-run government, and this fund is taking a stance (i) against the mal-practice/mis-management of the Argentinian finances, and (ii) not accepting a smash-and-grab of 30 cents on the dollar settlement.
All this fund is doing is collecting its debt. It just happens that one of the assets it is after is pretty unique.
Clarifications:
If a country/company defaults != investors do not automatically agree to settle at e.g. 30c/$ (investors need to agree to a settlement price, and in a large syndicate a minority group of investors will never settle or will settle at a higher price). If an investor doesn't settle, it has every right to claim 100c/$ + interest. Some comments imply otherwise.
Going long is no different when buying at 101 cents on the dollar or 1 cent on the dollar - e.g. Greek 10Y bonds are currently being sold/bought at 20c/$, that is no "vulture activity" but providing liquidity to the market. If there are no buyers the Greek bond (or any other bond for that matter) would technically collapse to zero. Some comments imply otherwise.