How a Hedge-Fund Billionaire and an Octogenarian Judge Pushed a Whole South American Country Into Default

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Cristina Kirchner, the president of Argentina. Photo: Charly Diaz Azcue/LatinContent/Getty Images

For the eighth time in its history, Argentina is in default. This episode is a particularly complicated one involving court rulings, debt arrangements, a naval ship called Freedom (in Spanish), a crumbling economy ,and a three-way tango between a judge, a president, and a billionaire. But for your cocktail-party edification this weekend, here are the very basics. 

Who? In our CliffsNotes version of this long, complicated saga, there are three main characters: American hedge-fund billionaire Paul Singer; Thomas Griesa, a New York district court judge; and Cristina Kirchner, Argentina’s president.

Paul Singer, hedge fund billionaire and exacting Argentinian creditor. Photo: Steve Marcus/Reuters/Corbis

What happened? This default is daisy-chained to Argentina’s 2001 default, which followed an economic collapse. Buenos Aires was incapable of paying its debts. It negotiated with its bondholders, convincing more than 90 percent of them to swap out their bonds and accept new ones for just dimes on the dollar. Singer and a few others held out, demanding to be paid in full. Argentina has refused. Griesa ruled that Argentina could not pay the bondholders who took the haircut unless it also paid the holdouts. Ergo, as of this week, Argentina is in default.

Why doesn’t Argentina just pay the bondholders who took the haircut? It would like to! But Griesa has warned financial institutions off of helping the Argentinians move money around.

Why? Griesa has been trying to get Argentina to come to a deal with the holdouts. Kirchner has thus far refused, calling them “vultures” and casting herself as a populist standing up to these one-percenter bullies. The hedgies’ motivations are straightforward, too: They’re in it for about $1.5 billion.

The Libertad, an Argentinian frigate seized by the Ghanaian government on behalf of New York hedgies. Photo: PatricioMurphy/NewsFree/LatinContent/Getty Images

How crazy has this whole thing gotten? A lot crazier than you would think a legal fight over sovereign debt could be. In perhaps the most insane turn, a financial firm tied to Singer managed to get Ghana to detain an Argentinian naval vessel, the Libertad, or Freedom, as collateral. A United Nations body ended up stepping in and ordering Ghana to release the boat.   

How much will this cost Argentina? Nobody is sure right now, but the number will certainly have at least ten digits. Falling into default is going to weigh on Argentina's already-weak economy, lifting its borrowing costs well into the future. One former International Monetary Fund executive estimated that a deal with the holdouts would slash Argentina’s so-called “risk premium” by about 5 percentage points, reducing interest on private and public debt by about $5 billion a year.

Does this matter for other emerging markets? Yes and no. It’s a highly unusual legal situation. Argentina is capable of paying its debts. Nobody anticipates an economic catastrophe like the one that struck last decade. But Argentina is a regional power, and its economy will hurt because of this. Analysts expect other emerging market countries to see some spillover.

Does it matter for me? Are you Argentinian? Yes. Are you an Argentinian bondholder? Yes. Are you Paul Singer? Yes. Are you an American without investments in South America? Less so. But still, this whole debacle has put a deep chill on relations between the two countries.

Who comes off worst? It’s hard to say. There’s been more than enough criticism to go around for Singer, Kirchner, and Griesa.

Is there a relevant hashtag I should know about to seem hip and cool when discussing this on the internet? I never thought you’d ask! It’s #griefault. Go forth!