5 ms·

Wow ! Just one investor can bring a country to its knees !

by manishsharan 12y ago

deleted 12y ago
[deleted]
- turnip1979 12y ago
  Yup. It shows the power of creditors when they take to the courts. It seems odd that that all the other creditors accepted a haircut ... and the one who didn't is causing the present situation.
  - sp332 12y ago
    I think the original creditors also got a "haircut" when they sold to the current bond holders. It's the new owners, who paid about 1/3 of the nominal value, who are holding out for a huge return.
  - john_b 12y ago
    There is nothing odd about it. Argentina agreed to a debt contract without a collective action clause so that they could sell bonds at a higher premium. When they later needed a collective action clause to enforce the majority will on the minority, they complained that the agreement was unfair. But it was an agreement the country's leadership agreed to; the law in this case is fairly straightforward.
wslh 12y ago
These funds are like the patent trolls. The difference is that with patent trolls you are trapped in a inneficient patent system while in this case Argentina has a big part of the responsability in the way the government reestructured 93% of the debt.
- deleted 12y ago
  [deleted]
- tomp 12y ago
  Not exactly the same... patent trolls don't do anything, and more often than not their patents aren't really novel inventions. 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.
  - jpablo 12y ago
    As I understand this funds didn't lent Argentina anything, they bought the bonds in the open market at a huge discount.
    - TheOtherHobbes 12y ago
      Which is how debt collectors work. 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.
      - twoodfin 12y ago
        They're contributing nothing of value to anyone... 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.
        TheOtherHobbes 12y ago
        Minor flaw in your point - it's even harder for governments to budget rationally when some shark buys up all their old debt on the cheap and tries to bankrupt them, because money.
        twoodfin 12y ago
johnnyg 12y ago
Wouldn't it be more fair to say endemic corruption and decades of misguided plans that swung too hard to socialist, then capitalist and then again socialist policies created this? 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.
- nabla9 12y ago
  Defaulting is error on both sides, the borrower failed in risk analysis just like the debtor. 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.
  - PythonicAlpha 12y ago
    I see it similar. That is also the reason, that countries with high risk are paying much higher interest rates. Those rates are always defined as "payment" for the risk of loss. So it is a little weird, when funds now find a way to get out of the risk and earn 16x the money they spent, just because of their good arguing before some courts.
  - johnnyg 12y ago
    Nice reply! I love HN sometimes. 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?
jacquesm 12y ago
Investor is too kind a term. They did not exactly buy those papers at nominal value.
- PeterisP 12y ago
  Well, given all this hassle, the papers weren't worth nearly their nominal value - and they actually gave money to the original lender, while Argentina didn't; so on that regard they're more fair than Argentina's government at least.
  - lmm 12y ago
    Argentina did give money (or rather, replacement bonds) to the original lender. Not 100%, but an amount they agreed to (which could equally well describe the holdouts' purchases). And Argentina has kept up the interest payments to the original lenders, right up until the holdouts got this court injunction to stop them.
    - PeterisP 12y ago
      No, Argentina didn't give money, nor replacement bonds to the original lender - they're the holdout's we're talking about. 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.
    - john_b 12y ago
      > "Not 100%, but an amount they agreed to" 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.
- rayiner 12y ago
  So what? They're getting a discount for taking on the risk that they won't be able to collect from Argentina at all, and for the fact that they will have to file a lawsuit in order to collect. It's more efficient for everybody if a hedge fund buys up a bunch of bonds and tries to collect on them in a single lawsuit, instead of individual investors suing to collect the money piecemeal.
PeterisP 12y ago
Well, Argentina could've paid their debt to that investor yesterday, and it wouldn't be defaulting now. It was their intentional choice, they had an ability to pay but didn't want to pay to them.

Wow ! Just one investor can bring a country to its knees !

deleted 12y ago

[deleted]

turnip1979 12y ago
Yup. It shows the power of creditors when they take to the courts. It seems odd that that all the other creditors accepted a haircut ... and the one who didn't is causing the present situation.
- sp332 12y ago
  I think the original creditors also got a "haircut" when they sold to the current bond holders. It's the new owners, who paid about 1/3 of the nominal value, who are holding out for a huge return.
- john_b 12y ago
  There is nothing odd about it. Argentina agreed to a debt contract without a collective action clause so that they could sell bonds at a higher premium. When they later needed a collective action clause to enforce the majority will on the minority, they complained that the agreement was unfair. But it was an agreement the country's leadership agreed to; the law in this case is fairly straightforward.

wslh 12y ago

These funds are like the patent trolls. The difference is that with patent trolls you are trapped in a inneficient patent system while in this case Argentina has a big part of the responsability in the way the government reestructured 93% of the debt.

deleted 12y ago
[deleted]
tomp 12y ago
Not exactly the same... patent trolls don't do anything, and more often than not their patents aren't really novel inventions. 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.
- jpablo 12y ago
  As I understand this funds didn't lent Argentina anything, they bought the bonds in the open market at a huge discount.
  - TheOtherHobbes 12y ago
    Which is how debt collectors work. 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.
    - twoodfin 12y ago
      They're contributing nothing of value to anyone... 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.
      - TheOtherHobbes 12y ago
        Minor flaw in your point - it's even harder for governments to budget rationally when some shark buys up all their old debt on the cheap and tries to bankrupt them, because money.
        twoodfin 12y ago

johnnyg 12y ago

Wouldn't it be more fair to say endemic corruption and decades of misguided plans that swung too hard to socialist, then capitalist and then again socialist policies created this? 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.

nabla9 12y ago
Defaulting is error on both sides, the borrower failed in risk analysis just like the debtor. 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.
- PythonicAlpha 12y ago
  I see it similar. That is also the reason, that countries with high risk are paying much higher interest rates. Those rates are always defined as "payment" for the risk of loss. So it is a little weird, when funds now find a way to get out of the risk and earn 16x the money they spent, just because of their good arguing before some courts.
- johnnyg 12y ago
  Nice reply! I love HN sometimes. 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?

jacquesm 12y ago

Investor is too kind a term. They did not exactly buy those papers at nominal value.

PeterisP 12y ago
Well, given all this hassle, the papers weren't worth nearly their nominal value - and they actually gave money to the original lender, while Argentina didn't; so on that regard they're more fair than Argentina's government at least.
- lmm 12y ago
  Argentina did give money (or rather, replacement bonds) to the original lender. Not 100%, but an amount they agreed to (which could equally well describe the holdouts' purchases). And Argentina has kept up the interest payments to the original lenders, right up until the holdouts got this court injunction to stop them.
  - PeterisP 12y ago
    No, Argentina didn't give money, nor replacement bonds to the original lender - they're the holdout's we're talking about. 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.
  - john_b 12y ago
    > "Not 100%, but an amount they agreed to" 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.
rayiner 12y ago
So what? They're getting a discount for taking on the risk that they won't be able to collect from Argentina at all, and for the fact that they will have to file a lawsuit in order to collect. It's more efficient for everybody if a hedge fund buys up a bunch of bonds and tries to collect on them in a single lawsuit, instead of individual investors suing to collect the money piecemeal.

PeterisP 12y ago

Well, Argentina could've paid their debt to that investor yesterday, and it wouldn't be defaulting now. It was their intentional choice, they had an ability to pay but didn't want to pay to them.