March 04, 2016
Rumor has it that Senator Marco Rubio’s presidential campaign is set to name hedge fund manager Paul Singer as its national finance chairman. The potential move may represent a belated attempt by the Republican establishment to rally behind Rubio in order to derail Donald Trump’s presidential bid, as Politico’s Mike Allen has suggested. It also draws the Florida senator ever closer to his second largest financial backer – who has incidentally just emerged victorious from a decade-long campaign to extract an exorbitant return from Argentina after its financial crisis of 2001.
Almost three years after Argentina defied a New York court ruling that would have forced the country to choose between default and certain bankruptcy, Argentine President Mauricio Macri reached a settlement on Monday with a small group of holdout creditors led by Singer’s Elliott Management. The deal still needs to be approved by the Argentine National Congress, which is set to vote on repealing two laws that currently prevent the country from paying these vulture funds.
Despite having already settled with 93 percent of its creditors through two debt restructurings in 2005 and 2010, paying them 30 percent of the face value of the debt, Argentina still faced Singer’s group of vulture funds, who had no intention of settling under those terms. This week’s settlement will see the country pay out $4.65 billion, amounting to 75 percent of principal and interest, to Singer and company.
The vulture funds’ victory is the predictable outcome of a prolonged campaign aimed at extracting every dollar out of Argentina by all available means. Elliott Management used a Ghanaian court order to detain an Argentine navy ship in Ghana for 10 weeks in 2012. It has also channeled funds into American Task Force Argentina (ATFA), a lobby group pushing for the full repayment of Argentine debts. Part of ATFA’s efforts include an international smear campaign against the Argentine government, which it has accused of antisemitism, ties to drug traffickers and covering up Iranian involvement in the bombing of the AMIA building in Buenos Aires in 1994. ATFA has spent more than $7 million on these campaigns since 2007.
Singer then turned to a New York court, scoring a major victory when Judge Thomas Griesa ruled that Argentina could not make payments to the 93 percent of bondholders who had accepted restructuring until it had paid the 7 percent of holdouts in full. Argentina could afford to pay off both parties under the agreed terms. However, if it repaid Singer’s group in full, bondholders who accepted the restructuring would also demand to be repaid in full. That could end up costing the nation some $120 billion – which it could not possibly afford.
As we have documented, Argentina’s original default in 2002 was a necessary step in order for its economy to recover. Despite having limited access to international financial markets, Argentina was able to deviate from the IMF’s neoliberal remedies and instead drastically increase social spending to stimulate the economy, with impressive results: it emerged from economic depression within three months and returned to pre-2001 GDP levels within three years, such was its rate of growth. Those who accepted the restructuring in 2005 were given extra payouts when GDP growth exceeded a certain threshold, meaning the economic recovery allowed bondholders to obtain a nice profit.
Faced with default despite being willing and able to continue servicing its debt, Argentina’s only option was to defy the court order. Although the state had deposited $539 million with the Bank of New York to repay the holders of the restructured bonds, these funds were being held hostage by Singer and his affiliates, with the blessing of Judge Griesa. But these creditors had never lent Argentina money in the first place. Instead, they had simply bought Argentine bonds from their previous holders at sharply discounted rates for the sole purpose of speculation and litigation, exploiting an economically distressed country to reap massive financial returns – the very definition of a vulture fund.
This latest settlement sets a worrying precedent: in return for their ruthless persistence, the vulture funds are being rewarded with gains of up to 900 percent on principal investment – without even accounting for interest, which amounts to 101 percent per year, multiplied by 10 years. The real return is likely even higher, as Argentine debt was in many cases bought for mere cents on the dollar. Using a combination of court cases, relentless lobbying and smear campaigns, the investors have firmly established that mobilizing all available legal and financial resources over a prolonged period is enough to guarantee a handsome windfall, especially with the accumulation of interest. Following Singer’s example, emboldened investors will now have little reason to accept restructuring when perseverance, it appears, will earn them the returns that they want.
It seems hardly a coincidence, then, that Marco Rubio, the recipient of $124,420 from Elliott Management over five years leading up to 2014, has been at the forefront of efforts to discredit the previous Argentine government of Cristina Fernández de Kirchner. While questioning Noah Mamet, now ambassador to Argentina, he launched a scathing indictment of Fernández’s administration in which he openly disputed its democratic institutions and whether it truly constituted an “ally” of the United States. Last May, he introduced a Senate resolution that notably took issue with “Iran’s terrorist network in Argentina, the United States, and all of the Western Hemisphere” while – apparently without irony – accusing President Fernández of inventing “imaginary conspiracies” at the same time.
With Fernández now gone, and her right-wing successor Macri wasting no time in agreeing to terms with Elliott Management, Rubio’s mission in Argentina appears accomplished.