Wow ! Just one investor can bring a country to its knees !
The idea that the root cause of this is that a group of investors come along, buy debt on the open market and then expect that debt to be paid seems overly simplistic.
The problem is that sovereign nations don't have clear bankrupt procedure and these hedge funds are holding country as hostage for their past mistakes despite the fact that majority of borrowers accepted debt restructuring that was arranged and accepted haircuts.
If the debt and its interest grows past what country gdp can ever grow, they can never pay back and they either became debt slaves forever or keep defaulting. This is attempt at debt slavery in national level. (if person can't pay his debt ever, should he and his family lineage be responsible for that debt forever?)
I think it's reasonable to expect that in these cases banks should accept haircuts and settle like wast majority of investors did. Upholding business deal is ethically less important than country of millions being able to continue their life. The logical cost of country not being able to pay for their dept should be higher interest rates in future, not shutting country down.
What impact does this have on contracts in general?
When I give my word, I keep it. When I sign a contract, I honor it. There's a social contract that assures me that the counter party will too. There's a court system setup to ensure they do. There is force behind that if it is taken even further.
If I should instead shape every contract with a 20% hedge that assumes the counter party will not keep their word, doesn't that introduce a significant amount of inefficiency in the entire system.
Isn't it long term better and in fact just that those who give their word, spend all of their money and then run out take the consequences of it?
For systemic risk to be properly moderated, the individuals or even individual counties must suffer the consequences of their actions. You can opt to not allow this, but you ultimately suffer as a whole when you do.
I see no better way through. Do you?
Elliot Capital's position is basically that of a broker buying junk bonds and then chasing after money through the courts when the company inevitably goes under. Sure, it could go your way, but they were well aware of the risks, and honestly the strategy of buying junk bonds on a defaulting country and expecting compensation through courts is not something that seems to be in "good faith".
The 2001 restructuring was reasonable; most of the bondholders agreed with it, and got a fair price for their bonds. The holdouts knew this when they bought the same bonds.
Imagine a court system that applies common sense and equitable principles and tries to interpret contracts in a way that's as fair as possible to everyone involved, rather than going by the strict letter of every contract document. This removes the ability to rip someone off when you spot a hole in their contract, which makes some things less efficient, but I can see it working better overall.
[1] So it's something like: there's a provision in the contract that says that certain guarantees are invalidated if this subsidiary is reabsorbed into its parent corporation and it's sold to a different company, and some other conditions. Which is obviously nonsense because there's no way those things would both happen. But it's also what the contract says.
Presumably, this is in place to keep colluding with judges who will interpret your claim "fairly", for a fee, to a minimum, as well as mitigate the hedge against those who defend contract discrepancies with "Well, that's what we meant", when in fact, that was neither what was meant or ever said.
The Halbig decision bears on this matter. There's a law, which is effectively a contract, and the IRS attempted to interpret it how they needed to to make the ACA work. What this means now is, right or wrong, that we have a group of Senators and Representatives who voted on a law to be enacted as it was written, and when that was no longer viable, they simply 'interpreted' the text of the law to mean something new so that it could work.
Ignoring who's right or who is wrong, some additional lawyering up front would have prevented this, but that was not done because it would not have been politically expedient. Contracts are a way of keeping people fair. If the contract is written in a way that isn't fair, then it would be unenforceable regardless of how well it was written, so that 'fairness' is built in to contract law already.
Of course it does and it should, because there is real risks involved. Banks make their money by evaluating risks correctly.
>For systemic risk to be properly moderated, the individuals or even individual counties must suffer the consequences of their actions. You can opt to not allow this, but you ultimately suffer as a whole when you do.
This would only work if the parties involved would be fully rational. As long as you have imperfect actors with limited information that have limited ability to learn lessons, optimum way to limit the risk for borrower is by bankruptcy laws and procedures so that everyone involved knows the risks.
There was solid international effort to deal with the situation during the Argentine Great Depression and IMF was involved in making the deal. Because there is no bankruptcy law for countries, it was impossible to negotiate bankruptcy deal for Argentine that would bind everyone. These hedge funds are exploiting this. Going forward, we should make example of them. If majority of debtors agree, better to take the deal. This would generate de facto bankruptcy procedure.
Argentina is capable of paying their debt right now - however, it would involve also paying those holdouts in full, and they're simply intentionally choosing to pay some debts but not others, despite having an agreement that those debts will have a priority - why shouldn't they be punished for that?
If someone pays back people they like, but doesn't pay those they dislike, that's not fair nor excusable - that's a default. This is not a fight about inability to pay as such, this is a fight about which creditors get their money first. And this is agreed by the courts now. Argentina is quite free and capable to pay the rest of their debts, but they won't have a veto to unfairly leave some creditors out, those creditors will be able to take their share of any payments made.
For me this comes down to whether the law is being enforced. And in this case it appears that the law is being followed.
It would be fair to say that those caused the 2001 default. Which was a real default, but not a catastrophe; defaults happen sometimes, Argentina negotiated a settlement with (most of) its creditors (who had known all along that their investments carried a certain risk), and life went on.
What we have now is a tragedy where the overwhelming majority of Argentina's creditors were reasonable, accepted the settlement, and want to get paid, and Argentina has the money and wants to pay them. But the "vultures" are using a legal technicality to stop that payment from going through, in the hopes of extorting more money from Argentina. And sadly the US legal system is abetting this.
It is perfectly reasonable for the creditors to do all they can to get paid. It isn't a failure of their risk management, because they probably figured this was risky all along.
If Argentina didn't want the bonds to be subject to the US legal system, they shouldn't have issued them governed by NY state law.
They could also have included clauses preventing holdouts, but they didn't. In hindsight, they clearly made mistakes issuing the debt, but that doesn't mean they should get off without paying for the consequences of those mistakes.
Just like in insurance contracts - if you buy a policy for $123 that covers A, B and C but excludes D and E, then you don't get to argue if C should be fairly excluded or D should be fairly included - if the contract would've been different, then the price would've been different, and you got the price that matched the exact terms as written, not some other terms.
Bondholders may reasonably have conflicting interests - for example, if some bondholders have significant other investments in that country, then they have motivations to settle cheaply that would conflict with other bondholders, and it's not fair if those other bondholders get less of their debt back.
If you sell a bond whose terms that includes specific protection against that (the lack of provision that minorities would have to agree if majority restructures), then it's not reasonable to withdraw that protection afterward; a bond with slightly different terms is a completely different bond, even if the amounts match.
In serious contracts, expecting "take-backsies" isn't reasonable; either term X is in the contract or it isn't - that's what the exact agreement was, and not the other way.
These funds, however, lent Argentina money, while the country promised to pay back all of it, plus interest. I wouldn't like to get back less than I was promised, or even less than I lent in the first place.
The hedge fund guys are just debt sharks. They're contributing nothing of value to anyone - possibly not even to themselves, because it's not so unlikely there will be international fallout that massively damages their other holdings.
Except if they didn't exist, then bonds like those sold by the Argentine government would require higher interest rates, because the original buyer would have to assume the entire risk of default, rather than having the option to transfer part of that risk in the future. That'd be bad for national governments trying to raise funds at low cost.
The point remains - giving vulture speculators the ability to hold entire populations hostage is political special pleading, not sound growth-based economics.
I guess, even with the haircut settlement, even then they would have earning a lot of money -- but they where very greedy.
Our financial system should not foster poor greed!
Vulture funds give nothing to society. They are definitely not a force of good. The comparison to patent trolls is apt.
They didn't agree to the restructuring amount, and kept the original bonds until selling them to the current bondholder; and as far as I understand, Argentina has not kept up the payments to those who refused the restructuring, that's the whole start of those court proceedings.
They are holdouts precisely because they didn't agree to a haircut. Argentina declined to write a collective action clause into their bonds so that they could sell them for a higher premium. This is the price associated with accepting that risk.