The long running feud between bond investors and Argentina, which recently defaulted on its government bond obligations, the second such default in 13 years, continues to rage, but this time with a new wrinkle.
Two large hedge funds, Gramercy Funds Management LLC, with $3.9 billion under management, and Elliot Management Corp., with $23.3 billion under management, are taking very different approaches to solving the problem. Gramercy, who has been advising Argentina behind the scenes to restore the country’s international reputation, is cooperating with the South American nation so that it can once again access capital markets. Elliot, who has a long history of confrontation with Argentina over default on its debt, including attempting to repossess the Argentine president’s plane as it was refueling, has termed the Gramercy-led solution “beyond bizarre” and “impractical” in a letter to investors.
“The skirmish shows how a sovereign default can have repercussions for years to follow, with huge sums in the balance,” a Wall Street Journal article noted. “It also is a rare example of two multibillion-dollar funds taking directly opposing strategies on a big trade.”
Government bond default becoming more common story
Argentina is in some ways an advanced version Puerto Rico’s debt story, reported last week in ValueWalk. When faced with spending beyond its means, the government ultimately reaches a point where it can no longer practically make bond payments and is essentially cut off from cost-effective financing. Puerto Rico’s debt was recently downgraded to junk first by S&P then by Moody’s Corporation (NYSE:MCO), making it difficult to continue to borrow money to pay for the government’s daily expenses. As a result of default, Argentina’s peso dove in value relative to the U.S. dollar. In 2000 the peso was near par to the dollar but currently it takes eight pesos to trade for one dollar.
The dispute between the government of Argentina and Elliot dates back to the country’s 2001 default on $80 billion in privately held debt. After defaulting, in 2005 the government offered bond holders, including Elliott, a deal worth approximately 27 cents on the dollar with upside tied to future growth. Nearly three quarters of investors took the deal, but Elliott was among the holdouts and Argentina has vowed not to re-issue the offer.
Paul Singer’s harsh comments about Argentina reflect battle
“When a country such as Argentina thinks that it can save money and score political points with its citizens by eschewing the rule of law and paying whatever it wants to pay, to whomever it wants to pay it, and whenever it feels like paying, the inevitable result is that the society is harmed and ultimately impoverished to a much greater extent than any benefit derived from its defiance,” Paul Singer said in a letter to investors dated December 31, 2013. “Those citizens who are most ardent about the populist flavor of their government’s lawless behavior usually experience the greatest suffering in the aftermath.”
The war between Elliott and Argentina is nothing new. In addition to attempting to seize the plane of Argentina’s president, Cristina Fernandez de Kirchner, during a fueling stop, it impounded an Argentine Navy vessel. Elliott has been fighting the Argentine government in court in a battle over its fund’s $2.5 billion exposure. Gramercy, which in 2010 persuaded Argentina to re-open its 2005 bond offering, has $400 million in exposure, according to reports.