While Greece suffers to the point of revolution and suicide, hedge funds made out like bandits on Greek sovereign debt.
Greece had reached its target of buying back enough bonds at a discount to retire 21 billion euros, or about $27 billion, of its debt. The bigger winners, though, were hedge funds, which pocketed higher profits than many had expected, in yet another Greek bailout financed by European taxpayers.
To some experts, this latest chapter in the long-running Greek drama is another reminder of how private investors have managed to outmaneuver European officials at various stages of the debt crisis. And they caution that each time it happens, future debt workouts in the euro zone will become even more costly.
When Europe wanted to give the Greek bond holders a hair cut, the hedge funds threatened collective action against a host of European countries. They wouldn't buy any European sovereign bonds in retaliation against the Eurogroup taking a hard line against them.
The warning was blunt: If Athens set off legal mechanisms in the bond contracts known as collective action clauses, forcing bondholders to accept lower prices, investors would stop buying the bonds of struggling European countries. That would be bad news for Spain and Italy — to say nothing of Portugal and Ireland when they return to global bond markets in 2013.
This isn't the first time hedge funds brought a nation to their knees by refusing to take a hair cut after buying up distressed sovereign debt.
Argentina lost a legal battle against a hedge fund wanting 100% payback on old defaulted Argentinian debt they now hold.
The fight is over how much Argentina will pay to cover its 2001 default of $82 billion in sovereign debt. Thomas P. Griesa, a federal judge in Manhattan, has ordered Argentina to pay $1.3 billion to investors who hold the defaulted debt and who refused to participate in the country’s subsequent debt restructurings. Argentina has declined to pay.
More shocking is the battle between Argentina and hedge fund Elliott Management Corporation held NML Capital Ltd. was in the United States courts. That's a private group of investors battling a sovereign nation in a foreign court system.
The U.S. Court of Appeals in New York on Oct. 26 ruled that Argentina must pay the holdouts if it goes forward with scheduled payments to holders of the exchange bonds, affirming rulings by Griesa. The appeals court noted Argentina’s “continual disregard” of the rights of its creditors and the authority of the U.S. courts considering the litigation.
It's so bad hedge fund Elliott Management subsidiary NML Capital tried to repossess Argentinean Naval sailing ship The Libertad, which managed to slip out of port. The symbolism of such a seizure shouldn't go unnoticed. Libertad means freedom and liberty in Spanish.
Now hedge funds are buying up Spanish bonds, a nation whose unemployment rate is over 26.2%.
Foreign investors have started to creep back into Spanish bonds, taking an estimated 25% of the debt issued in September.
Worse, the press worships and idealizes these hedge fund managers and their predatory profits, instead of focusing in on the pain of the people who are held hostage by those holding the sovereign bonds.
Hedge funds are everywhere these days, yet have little accountability:
hedge funds — which now number more than 7,000 and manage some $2 trillion in assets — increasingly are dealing with fiduciaries managing other people’s money, rather than investing for their own account or on behalf of wealthy individuals. Cliffwater, a consulting firm that tracks the industry, reported that more than half of the 96 state pension plans it surveyed had invested a total of $63 billion with hedge funds by the end of fiscal 2010 — more than double the amount invested only four years previously. The California Public Employees’ Retirement System, the country’s largest public pension fund, had a reported $5.2 billion invested in hedge funds by the end of last year.
Corporate pension plans, which control $1 trillion in assets, are also following suit.
Hedge funds and private equity holding nation-states hostage through distressed debt is so common they are called vulture funds and they have been preying on third world countries' distressed debt for years. The Jubilee Debt Campaign in the U.K. is an activist organization working to stop these predatory practices and have sovereign debt forgiven.
The U.K. Channel Island Jersey got serious about private equity and hedge funds swirling in on their courts to achieve rulings on foreign bond holdings and banned them.
Politicians in Jersey have voted to ban so-called vulture funds from using the island's courts to sue the world's poorest countries for historic debts.
Vulture funds, which buy up poor nations' debts on the cheap before suing them for up to 100 times the original amount, had attempted to take cases to Jersey after British law banned the practice.
In the latest case, multimillionaire speculator Peter Grossman used Jersey's courts to sue the Democratic Republic of the Congo (DRC) for $100m (£64m) over a decades-old debt that started out at $3.3m. Grossman, who runs the FG Hemisphere fund, was able to take the case to Jersey's courts because the island is a crown dependency not covered by all UK laws.
Astounding isn't it, we have private equity and hedge funds holding nation-states hostage after buying defaulted debt and our court system is enabling them to do it. We've enter a new age where private investors yield ungodly power over nations.
Below is a Financial Times interview with a former World Bank President discussing how the U.S. court ruling against Argentina could be ushering in a new era where the balance of power swings to creditors.
Hedge fund Elliot Management tried to seize Argentina's ship. The frigate Libertad is part of the Argentine navy. This is a hedge fund repossessing a nation's military to collect on a debt. While investors and Wall Street may look at the Libertad as just another very expensive asset being seized as part of a debt collection, it's much more than that. Hedge funds are trumping nation-states in finance and power, about the only thing they are missing to consolidate their power and control is a military.