Episode 689: A Hedge Fund, A Country, And A Big Sailboat : Planet Money Argentina decided that it could take on the world. They had a bunch of debt and said, 'we're not paying.' Then a group of hedge funds took the entire country to court.

Episode 689: A Hedge Fund, A Country, And A Big Sailboat

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This is a story about a country that realizes it cannot pay its debt and tries something drastic.


The country is Argentina, and it really had no choice. It happened in 2001, and these were some dark economic times.

MARTIN MORATONA: The restaurants were empty. The bars were empty. The main avenues of Buenos Aires were eerie because there was practically no traffic in the middle of rush hour.

SMITH: This is Martin Moratona. He was working for the city of Buenos Aires at the time. The country was imploding economically. It was the usual mix of bad luck and some really bad decisions.

MORATONA: And then, one day it all blew up. People started sacking supermarkets. And I remember there was this truck transporting cattle, and people, you know, blocked the highway and then they overturned the truck and took the cows and then they practically (laughter) slaughtered the cows right there in the middle of the highway because they were so desperate.

SMITH: David, I didn't believe this at first, but Martin sent us the video. And it is just - it's horrifying. I mean, people were grabbing the cows, hacking away at them with knives. There's one woman carrying meat away saying she has no work - that she's hungry.

UNIDENTIFIED WOMAN: (Speaking Spanish).

SMITH: The government did not know what to do about this. It was deeply in debt. It couldn't pay for anything, and the politics were just a mess.

KESTENBAUM: The president of Argentina stepped down - so did the next one and the next one. In fact, they had five presidents in one month.

SMITH: Until one of them stood up in front of Congress and said - enough. We are going to start over in Argentina. We are going to wipe the slate clean. And - oh, by the way, all you people around the world who lent us a $100 billion, we are never going to pay you back.

Hello and welcome to PLANET MONEY. I'm Robert Smith.

KESTENBAUM: And I'm David Kestenbaum.

SMITH: Today on the show - the biggest screw-you in economic history.

KESTENBAUM: Argentina decided it could fight the world. And it has been this epic battle - the world saying you have to pay us back, Argentina saying no. We are a country. We can do whatever we want.

SMITH: This saga has been going on for 14 years, David, and I swore that I was going to be covering Argentina's woes until the day I died. But just last week, it finally ended. The story has an ending.

KESTENBAUM: And if you've ever dreamed of just running away from it all, there is a lesson in here for you.


JAMES AND LEWIS: (Singing) Ready to fly, ready to fly. Ready - ready to fly.

KESTENBAUM: They say that bonds are the most boring thing in the world, which they are -until you decide not to pay them.

SMITH: Bonds are a way of borrowing money. And in the 1980s and 1990s, Argentina was really, really good at borrowing. Miguel Kiguel was the man in charge of finding the money.

MIGUEL KIGUEL: Argentina built the whole electricity network at the time, and it worked very well. We built telephones. They were another highways in Argentina that are still working.

KESTENBAUM: This was totally normal. It's the way a lot of places build roads and utilities.

SMITH: And a lot were willing to lend the money. When you walk around Buenos Aires - and I have been there - it is like European capital - its gorgeous buildings, these broad promenades. David, you would love the subways because they have these upholstered, velvety seats.


SMITH: One of their tourist attractions is this beautiful water pumping station, the Palacio de Aguas Corrientes - the Palace of Running Water. So when Argentina said, hey, everybody, can we borrow some more money? The world was, like, sure - why not?

KESTENBAUM: Juan Cruces is an economist in Argentina.

JUAN CRUCES: Many university endowments, insurance companies, mutual funds - purchased our bonds - also, institutional investors like TIAA-CREF in the United States.

SMITH: Wait a minute - TIAA-CREF is my retirement fund. Does that mean that I lent money to Argentina?

CRUCES: Indeed, you did. If you really were very shy of Argentina risk, you shouldn't have purchased it in the first place.

KESTENBAUM: We sometimes talk about trade binding the world together - you know, countries selling stuff back and forth. But more than that, I think, there is debt, you know. I mean, you and I, somehow through our retirement account, are tied to some highway or electric grid in Argentina. And it's not just us.

SMITH: Yeah. These ties remain invisible as long as the debts get paid. You don't even think about it. And for the most part, these debts do get paid. Most countries pay their debts.

KESTENBAUM: Things started to go bad in Argentina in 2001 - for a bunch of reasons. The country went through a recession. They had a harder and harder time coming up with money to pay all those debts. It just got worse and worse, which is when that panic started - the riots, the cows, five different presidents in one month.

SMITH: Paul Blustein is a historian who wrote about this moment. This is the moment when that president stood up and decided that he was going to do something.

PAUL BLUSTEIN: A man name Adolfo Rodriguez Saa - and he got up in the Hall of Congress and declared a suspension of payment on the government's debt. And all the deputies were standing up and cheering him on chanting - (in Spanish) Argentina, Argentina - like that. And he declared, quote, "the gravest thing that has happened here is that priority has been given to foreign debt while the state has an internal obligation with its own people." And you can just sort of hear the thunderous chanting going on in the background - (in Spanish) Argentina, Argentina.

SMITH: In other words, he was saying to the world, we are not going to pay all that money we owe. We can't do it.

KESTENBAUM: Now, if Argentina were a person or a company, the rules for what would happen next would be clear. If you stop paying your mortgage, the bank can take the house. If a company - like a furniture store - can't pay its bills, there's bankruptcy court.

SMITH: But a country - a country is sovereign. That's what the word means. It can do whatever it wants. If they owe you money, what are you going to do, David. You going to send an army? You're going to ban Argentinian children from going to Disneyland? We have no options.

KESTENBAUM: There is no official system for resolving this. There are no rules.

SMITH: So the people who lent Argentina money? They were on their own.

HANS HUMES: My name is Hans Humes. I am the CEO of Greylock Capital.

SMITH: Hans had bought Argentina's bonds. He lent the money way back when. And as surprising as it was to people around the world, Hans says that this sort of thing does happen. He started to tick off all the times he's had to deal with governments saying - oh, we can't pay our money back.

HUMES: Philippines, Yugoslavia, Ecuador, Russia, Togo, Liberia, Ivory Coast, Algeria, Grenada, Belize - I think it's 34 countries in some fashion.

KESTENBAUM: Hans says the world has found a kind of informal way to deal with these situations.

SMITH: Yeah, we got step one - the country that borrowed the money yells and screams and says we are never going to pay this back. And then step two - the lenders yell back. They say you have to pay, or we're going to ruin your credit rating. And then, after a while, they get to step three - everybody gets into a room and they hammer out a deal.

KESTENBAUM: Because it is in everyone's best interest. The lenders want to get some money, and the country wants to be able to borrow money again in the future. So they negotiate.

SMITH: But something was different with Argentina. Hans says he and the other lenders did what they usually did. They waited. They got together. They formed a committee, and they went to Argentina and said - all right, yelling's over - time to talk. And the Argentines said no. We don't recognize your committee.

HUMES: I actually did a quiet trip down to Buenos Aires to talk to the debt negotiator and say, hey, listen. You know, the optics can be that it's confrontational, but it probably makes sense to look for, you know - what do we have in common? What's a middle ground? What are your - you know, what are your motivations and what are your priorities in this thing? And if we can figure out where there's enough of an overlap, we can find a deal that works for both sides. The guy kicked me out of his office. He's, like, you have to leave right now.

SMITH: Hans was stunned. There eventually was one face-to-face negotiation in Buenos Aires, and that didn't go well either.

HUMES: You know, we choreographed meeting to some extent. OK, you guys say a nice thing. We'll say a nice thing, then this - and then we'll, like, deal with some of the issues, you know, with some of the financial advisers.

SMITH: And by nice thing you mean, like - what? - the weather here is beautiful (laughter)?

HUMES: Whatever. You know, if it's been contentious, just clear the deck.

SMITH: But the plan didn't work. The meeting blew up five minutes later. The Argentines started to personally insult the lenders, and that was it.

KESTENBAUM: Without a bankruptcy judge to make things happen, these sorts of disputes are usually resolved basically because of fear. The lenders are afraid they're not going to get their money back, and the country is afraid that if they don't reach some deal, they won't be able to borrow money again in the future. But something strange was happening in Argentina. Argentina was not afraid. They had defaulted on these bonds - just walked away. And nothing had happened. In fact, their economy got better. It was doing well. They had the upper hand.

SMITH: Miguel Kiguel, the guy who sold the bonds in the first place, says the country had no incentive to sit down at the table.

KIGUEL: They thought that the way to negotiate was to basically make offers and say take it or leave it.

SMITH: Argentina's offer? We will pay everyone back around 30 cents on the dollar. If you lent us 1,000 bucks, you can have about 300 bucks back.

KESTENBAUM: Take it or leave it. Most of the lenders threw up their hands and said OK, we'll take it. Hans Humes held on for four more years and then gave in.

HUMES: Just fatigue. I think a lot of people took it. It was just, like, yeah, I mean - what's the point of fighting?

SMITH: But not every bondholder took the deal. Some bondholders wanted to keep on fighting. And this is the thing about playing hardball. All the reasonable people leave. They take the settlement. And so what was left were the most stubborn of investment firms who were willing to play even harder ball in Argentina.

KESTENBAUM: They were called the holdouts, the people holding out for an even better deal.

SMITH: The Argentines had another name for these people.

KIGUEL: Fondos buitures - the vulture funds.

SMITH: The vulture funds. A bunch of hedge funds had picked up Argentine bonds dirt cheap. Remember - for a while there, they seemed totally worthless. And these firms were not interested in settling for pennies on the dollar. They said - hey, your economy's doing better now. We want the full amount paid back with interest.

KESTENBAUM: And remember how if someone stops paying their mortgage, the bank can come seize the house? The hedge funds tried that strategy. They couldn't march into the country. They didn't have an army, but they noticed this Argentine ship called the Libertad that was sailing around the world.

CRUCES: Yeah, it's an old naval training ship from, like, the 1920s or something. It's a sail ship, by the way.

SMITH: Juan Cruces, the economist, says the Libertad is one of those sentimental things to Argentines. It's docked right there in the harbor of Buenos Aires. I have seen it. It's gorgeous - big sails. But at the time, it was going around the world, and it was docked in Ghana - in Africa. And the hedge funds thought - listen. We are going to detain this ship. They got a court order to seize the boat and said we are not going to give it back to you, Argentina, until you pay us.

CRUCES: This was a substantial shame to the national pride. I mean, imagine if something like the Statue of Liberty gets confiscated by a foreign court (laughter).

SMITH: Argentina still (laughter) did not pay. The U.N. tribunal for the law of the sea said come on, guys - knock it off. And Argentina got its ship back.

KESTENBAUM: But the hedge funds had one more trick up their sleeve. They'd been reading through all the fine print of the bonds.

SMITH: You know, I haven't seen it, but I'm sure it's all fine print (laughter). It's probably hundreds of pages of fine print.

KESTENBAUM: When Argentina had borrowed the money, it had agreed that if anything went wrong, a court could settle the argument. And this is key - the court is specifically mentioned. Here, we have the actual language.

SMITH: The republic has irrevocably submitted to the jurisdiction of any New York state or federal court sitting in the borough of Manhattan, the city of New York.

KESTENBAUM: So the hedge funds, in some case run by billionaires, took a foreign country's government to a little courtroom here in New York. The judge assigned to the case was Thomas Griesa. And if there is one person on earth more stubborn than Argentina and the hedge funds, it might this guy.

SMITH: Griesa is 85 years old, and he's been hearing all this back and forth between Argentina and hedge funds for more than a decade. And he said to Argentina - listen, I know you're country, but you signed a contract. If you can negotiate something else with the holdouts - great, but if not, you do have to pay this money.

KESTENBAUM: Now the judge didn't have an army to enforce this, but he realized he could do something. A lot of Argentinian money flows through the New York banking system, so he said - if you're not going to pay these holdouts, I'm not going to let you pay anyone else either.

CRUCES: The judge's decision gave the holdouts, essentially, an atomic bomb to put under their arm against the debtor.

SMITH: And they used it. They forced Argentina to negotiate with them. And just this month, Argentina caved. There's a new president, and he said - look, we are willing to do what we vowed we would never do. We are going to settle with the holdouts. We are going to pay back the money we borrowed more than 15 years ago.

KESTENBAUM: There are still some details to work out, but the deal is remarkable. The holdout hedge funds are going to make a ton of money. Remember, they bought these bonds when they were really cheap. One of the hedge funds Elliott Management is owned by the billionaire Paul Singer. That one is expected to make $2.4 billion dollars on this deal.

SMITH: I think, to a lot of people, this whole story just feels bad.

KESTENBAUM: Like, you don't know who to root for (laughter), right. Like, who's the good guy? Is there a good guy?

SMITH: Yeah. On one side you have Argentina which behaved horribly, especially at the beginning. And on the other side, you have hedge funds. I mean, nobody loves a hedge fund, but especially hedge funds that are shutting down a foreign government from a courtroom in New York. They're not the heroes.

KESTENBAUM: All the reasonable people in this story - they got the worst deal.

SMITH: Here's Hans Humes. He's the bondholder who got tired of fighting and settled early.

HUMES: If you look at the public offer that Argentina did, they make it very clear that the people who are getting treated the best are the ones who have been the most aggressive.

SMITH: The most stubborn.

HUMES: The most litigious. It's not even a matter of stubborn. It's the most proactive in terms of suing. So the guys who've got the sharpest teeth are transparently getting the best treatment.

KESTENBAUM: Also a terrible takeaway - you just need to have sharper teeth.

SMITH: There is one thing that I did learn (laughter), which is - this whole thing has taken a very, very long time. And we still don't have a good answer to the question of what happens when a country says it can't pay. In a way, this whole mess occurred because there's no system in place. And there are various proposals to set up some kind of arbitration mechanism - a bankruptcy court for countries. But so far, there's been no progress on this.

KESTENBAUM: We are very good at lending money when times are good. We are less good at sorting things out when everything goes bad.

SMITH: And so the lesson for someone who thinks that they can just wipe the slate clean - can get away with it all...

KESTENBAUM: Yes. What is that lesson?

SMITH: You can run, but you cannot hide a giant three-masted sailing ship (laughter) in a harbor in Africa. That is the best possible lesson. You can't hide. You can't get away from it.


SMITH: Let us know what you thought of today's show. You can email us - planetmoney@npr.org or Twitter or Facebook. We are @planetmoney.

KESTENBAUM: Show today was produced by Jess Jiang and Nick Fountain. Thank you.

SMITH: And I want to thank Paul Blutein who wrote the book, "And The Money Kept Rolling In (And Out)." It is the definitive account of what went horribly, horribly wrong in Argentina. I'm Robert Smith.

KESTENBAUM: And I'm David Kestenbaum. Thanks for listening.


JAMES AND LEWIS: (Singing) Don't wait - wait until summer. Don't read - stuck on the outside. We'll be here for one another. We're ready...

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