After Supreme Court loss, ‘vulture funds’ circling Argentina’s billions

BUENOS AIRES – The wave of joy that spread through Argentina following its 2-1 World Cup victory over Bosnia on Sunday was short-lived.

Less than 24 hours after Lionel Messi scored a masterly winning goal against the Bosnian side, Argentines suddenly found themselves at the edge of an economic cliff after the U.S. Supreme Court ruled the country must pay what could amount to billions of dollars to holders of repudiated bonds from Argentina's 2001 default.

Argentina’s fiery President Cristina Fernández de Kirchner angrily dismissed the ruling as "blackmail" by the international "vulture funds" that hold about eight percent of the country's outstanding 2001 debt.

"It is something absurd and impossible for a country to assign 50 percent of its reserves to a single payment to creditors," Fernández said in a televised address to the nation Monday night. The U.S. Supreme Court left Argentina on the verge of collapsing "like a house of cards," Fernández said.

The ruling gives Fernández scant breathing space, all but forcing Argentina to reach a settlement with the creditors who refused Argentina's offer to pay 30 cents to the dollar on outstanding bonds. Argentina doesn't have much time; the next bond payment comes due June 30.

The U.S. Supreme Court ruled that Argentina must pay the NML investment fund in New York — which holds about 1 percent of the country's 2001 default on its $95 billion foreign debt — some $1.5 billion, Fernández said.

Extending the ruling to holders of the other 7 percent of the debt held by holdout creditors, Argentina might be facing claims of up to $15 billion, the president warned.

Matters could become much worse for Argentina if debt holders of the remaining 92 percent of the 2001 default who accepted the debt reduction should decide to open lawsuits in the United States demanding to receive the same full return that the Supreme Court just awarded, Fernández warned.

With annual inflation just below 40 percent, Central Bank reserves already below $30 billion and the peso quickly losing value against the dollar, Argentina's options are limited.

"It is a very sensitive moment that demands great patriotism and the marshaling of all sectors of production, labor and politics," Buenos Aires Gov. Daniel Scioli told the press in Argentina on Tuesday. A staunch Fernández ally, Scioli is the main contender to lead the president's Peronist FPV party in next year's presidential elections, when Fernández ends her second term.

But the president's political opponents fear she might refuse to negotiate with NML, as the Supreme Court has decided she must, regarding the $1.5 billion that falls due before the end of the month. In the past, she has pledged she would never negotiate with what she calls the "vulture funds" that sued Argentina to obtain 100 percent return on their bonds.

Sergio Massa, the mayor of the Buenos Aires suburb of Tigre and a former Fernández minister who is running neck and neck with Scioli in presidential polls for 2015, said he is discouraged by the president blaming the international finance market for the country's economic woes. "Trying to find culprits for the judicial ruling in the U.S. is a mistake," Massa told the press.

"Time has run out," said Buenos Aires mayor and 2015 presidential hopeful for the PRO conservative party Mauricio Macri, who is running third in the polls. "Things should not be made worse. The only way to minimize the damage is to follow the path of dialogue and negotiation."

The lawsuit against Argentina that resulted in the Supreme Court's ruling on Monday is led by the NML hedge fund, controlled by U.S. billionaire Paul Singer, founder of the Elliott hedge fund, of which NML is a unit.

"Paul Singer could be branded as the inventor of vulture funds," wrote Argentina's Foreign Minister Héctor Timerman in a column in The Huffington Post when the lawsuit against Argentina starting grating nerves in the Fernández administration in late 2012.

"These investment ventures, marketed as 'distressed debt funds,' purchase debt of countries on the brink of default for a fraction of the bonds' worth, hoping to recoup the full value through legal challenges in foreign courts," Timerman said. "Needless to say, this is money that should be going to build roads, schools and other poverty reduction programs."

Argentina "never wanted to negotiate with us," Jay Newman, senior portfolio manager at Elliott, was quoted as saying in an interview in the Argentine business magazine Apertura. "This could have been resolved in months instead of years," Newman said. “We're not asking the country to pay a debt if it can't. If the government came and said, ‘We can pay part in cash, part in bonds,’ that would be the start of a good conversation."

If an agreement can't be reached, Monday's ruling could also open the door for NML to seize Argentina's assets abroad — a tactic NML already tried when it seized the Argentine Navy's training ship Libertad after it docked in Ghana in 2012, creating a deeply embarrassing situation for the Fernández government.

A court in Ghana finally ordered the return of the ship to Argentina, but the precedent has raised fears that the ruling could empower NML to seize airplanes of the Aerolineas Argentinas national air carrier or Argentina bank accounts in the U.S. should a settlement fail to materialize.

With rising inflation, falling consumption and soaring crime rates, Fernández must also deal with calls from left-wing parties who are dead set against repaying any of Argentina's massive foreign debt.

"We propose repudiating this usurious foreign debt," said Left Front (Frente de Izquierda) leader Jorge Altamira, calling for "an international mobilization against the whole world debt, which stands in excess of one thousand billion dollars. This world debt operates as a powerful factor of industrial crisis and of the hundreds of millions unemployed the world over."

In the days ahead, while Argentines will likely remain mesmerized by Messi's team in Brazil, Fernández and her government will have to decide if they will finally accept doing something they pledged they would never accept: sitting down and negotiating with the "vulture funds."

"If Argentina beats Paul Singer and others, the consequence may well be a world where vulture funds' actions against developing countries are history," Foreign Minister Timerman once wrote. But Monday’s U.S. Supreme Court ruling left it clear that, for now at least, Fernández has lost her battle against the debt holders she despises.