THE CHEAT SHEET. Paying off the vultures

Is gourmet carrion a thing? Only if it’s worth $1.3 billion. That’s what Argentina needs to pay its vulture fund creditors.

They don’t seem to be very savoury characters, do they? Vulture funds are the demonised entities of the financial world infamous for buying distressed investments, like dirt cheap sovereign debt or equity in companies nearing bankruptcy, and returning for their pound of flesh, in full measure, a long time later when you’ve all forgotten about them.

So how did Argentina get caught up in this? Argentina suffered its version of the Great Depression from 1998 to 2002, one among the several fallouts of the period being massive default of the country’s foreign debt. Under a restructuring deal over the last decade, 92 per cent of unpaid bondholders agreed to write off two-thirds of the bond’s original value and accept the remaining payment after the Latin American country rebuilt its economy.

And the remaining 8 per cent are the vultures? These investors bought Argentine bonds secondhand at deep discounts and didn’t join the restructuring exercise. They refused Argentina’s offer to pay 30 cents to a dollar, terms accepted by the majority of creditors, and want to be repaid in full. Little wonder then that Argentina took a full-page ad recently in The New York Times,The Washington Post and The Wall Street Journal to lash out against the ‘voracity’ of these ‘vulture funds’. “Paying the vulture funds,” the ad said, “is a path leading to default.”

So they’re suddenly demanding repayment? No. This seems to be the culmination of a 12-year legal battle that Argentina has been fighting in the US courts against investors who spurned the debt restructuring agreement. A US appeals court in New York, last August, ruled in favour of the funds. And last week, the Supreme Court turned down Argentina's appeal.

Is Argentina refusing to pay them at all then? Not at all. In fact, President Cristina Fernandez de Kirchner’s government says it would rather negotiate with the vulture funds than fight this in court. The advertisement noted that “Argentina wants to carry on paying its debts, as it has been doing since 2005… (But) what I cannot do as President is submit the country to such extortion.” de Kirchner, later in a public ceremony, also said the country would rather settle its debt obligations in a manner that treats all creditors equally.

So Argentina is worried that its other creditors will return to demand full payment too if it makes an exception now? Reports suggest that this possibility seems to have crossed de Kirchner’s mind.

How bad is this for Argentina? Paying off the vultures is likely to exhaust more than half the country’s foreign reserves, placing the country on yet another economic cliff if it does pay.

Now, what's the way out? NML hedge fund, controlled by US billionaire Paul Singer, which won the lawsuit, has also gained the right to use the US courts to force Argentina to reveal its foreign assets. NML had, in the past, seized an Argentine Navy ship docked in Ghana which was returned to its home country only because a Ghana court ordered it. Some say Argentina’s foreign bank accounts or its airplanes can be at risk of being seized.

The country, for its part, is caught between the devil and the deep blue sea. The economy will probably be doomed if it does drain reserves to repay in full; if it doesn’t, and Argentina defaults again, it’s doomed as well.

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