Argentina has been taking up a fair portion of the world media spotlight over the past few weeks owing to the economical problems the country is experiencing thanks to the infamous “fondos buitres” or vulture funds.In layman’s terms, when Argentina entered into a serious economic crisis following the country’s huge collapse in 2001, it signed off millions of dollars in debt to a range of economists and financial players. Since that time, it has twice entered into what is known as “a default,” meaning that it has been unable to make the scheduled repayments. The first time was in 2005 and the second in 2010.
As a result, Argentina finds itself in yet another tricky situation, owing roughly 4000 million dollars, the equivalent of 7 percent of the capital which it wasn’t able to repay in 2005 and 2010. It has, therefore, been facing the need yet again to enter into another default, something which President Cristina Fernández de Kirchner desperately wants to avoid.
What are the “fondos buitres” exactly?
The “fondos buitres” are administrators of risk capital, dedicated to the buying up of public debt at very low costs when economies find themselves in problematic situations with little or no escape. This is what happened to Argentina in 2001. The “fondos buitres” bought a number of government bonds for relatively little money, so that later on they could reap the returns by charging Argentina high interest on the debts incurred.
What’s all the fuss about?
Two of the “fondos buitres” — namely NML Capital Limited (NML) and Elliot Capital Management (EM) — have been the root cause of the recent disputes.
NML owner, Paul Singer, is a world renowned financial expert from the US and who manages more than 15 billion dollars of capital risk. He has a long and some would say dirty history of making incredible amounts of money out of failing economies all over the world. For decades he has been buying up the debt of Peru — which currently stands at a 5 million dollar payout from Singer in exchange for receiving 58 million dollars in recuperated funds. Singer also bought 2.3 million dollars of debt from Congo, and walked away in the end with more than 100 million dollars in repaid debt.
EM’s director, Kenneth Dart, is an incredibly unpopular figure in South America. US born, he is a permanent resident of The Cayman Islands, where he fled to in order to avoid paying 200 million dollars in US taxes. He generated a great deal of public unrest during the 90s in Brazil. He bought 375 million dollars of debt and recuperated 605 million dollars after all repayments were made. Even Bill Clinton publicly admitted that Dart is “one of the most hated businessmen in South America,” and that even though Argentina remains bankrupt, half of its population lives under the poverty line, and Dart paid the equivalent of small change to buy up the debt, he seems to be on a “mission to make sure Argentina pays the nominal value of all the bonds in his name.”
What is Cristina Fernández de Kirchner angry about?
Argentina’s President, Cristina Fernández de Kirchner, is angered by the actions of both Singer and Dart, as well as being angered by the decisions taken by Judge Thomas Griesa, which have so far gone in favour of the two debt collectors.
Singer and Dart were not the only businessmen to swoop in on Argentina (“buitre” means “vulture” in Spanish) during the economic crash of 2001. There were many other investors who saw the advantage of the situation and made the decision to buy up some of Argentina’s debt. However, Singer and Dart are the only two who are making waves in light of Argentina’s present inability to meet repayment deadlines.
Essentially, Argentina presented all owners of “fondos buitres” with a proposal to accept payments for just a portion of the money owed. Argentina has entered into further economic difficulties this year. Inflation is high and the country has fallen into yet another recession. 90 percent of the debt collectors agreed to Argentina’s offer of a reduced repayment. Singer and Dart did not. As a result, the case went to trial, overseen by US Judge Thomas Griesa, and he sided with the debt collector. For a while, Argentina was concerned about the possibility of falling into a default.
The president wants to pay back a portion of what’s owed and then reassess the situation in January. She has been fighting for her corner without any sign of backing down, but the pressure is on and time is running out.
What are the most recent developments?
At the end of July, 27 financial entities which form part of the Private Venture Capital Bank Association (Adeba) made an offer to Singer and Dart — promising them 250 million dollars of the 1500 million dollars due to be paid. The financial offer is meant to act as a peace offering. In exchange, Singer and Dart are to agree to the payment extensions Argentina has asked for and which all other debt collectors have agreed to. Essentially, Adeba’s offer is intended to by Argentina the time it needs to gather the funds and repay its debt.
At the time of writing, no decision has been made. We don’t yet know if Singer and Dart will be happy enough to accept these conditions and to ask Judge Thomas Griesa to grant Argentina the time its needs until January 2015 before returning once again to matters of repayment.
There are two possible theories as to why Adeba has suddenly stepped up in support of the government at this time. The first theory is that by saving the country from entering into default, Adeba also protects its own interests. Adeba also owns some of Argentina’s debt bonds. If Argentina entered into a default, the value of these bonds could plummet drastically. The second theory is based on a political analysis, rather than an economical one.
Jorge Brito, president of Banco Macro, who rallied up the troops from the 27 financial entities involved in the offer, has been under the spotlight recently for corruption. By collaborating with the government on the “fondos buitres” matter, Brito almost guarantees the support of the Argentine president before any kind of investigations into corruption charges which might crop up in the future. In layman’s terms, Brito buys impunity.
The next step is to see whether or not Singer and Dart will accept the financial offer put forward by Adeba and whether or not Judge Thomas Griesa will grant Argentina with an extension so as to be able to take up new talks regarding the country’s debt repayments in January 2015.
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