The United States is broke. The federal government has to borrow 40% of each dollar it spends. We send billions to lending institutions, most of all, the World Bank, to which the American taxpayer is the biggest contributor. Yet this debt load may be on the verge of increasing. The government of Argentina currently is demanding a $3 billion loan from the World Bank. Argentina makes for an unreliable debtor. Burdened by decades of corruption, nationalization and devaluation, Argentina has a long history of refusing to pay its debts.
How bad a credit risk is Argentina? It’s bad enough to have defaulted on $81 billion in bonds back in 2001, touching off worldwide legal battles that rage on to this day. In the U.S. courts, literally a hundred judgments have been entered against this deadbeat nation, ordering it to pay its debts. Yet Argentine officials have ignored these judgments. And they have done so by expressing contempt for our legal system and stirring up anti-Americanism at home. Click here to watch a video of Argentina’s lawyers defying American judges.
In 2011 the U.S. announced that it would oppose any new loans to Argentina by the World Bank based on its treatment of creditors and refusal to abide by international obligations. Other countries in Europe, including the United Kingdom have followed suit. It isn’t just the U.S. courts at which Argentina is thumbing its nose. It’s also ignored dozens of claims filed at the International Centre for Settlement of Investment Disputes (ICSID), which is the World Bank’s own arbitration body. The Financial Times reports that Argentina has by far the most claims filed at ICSID of any nation in the world.
Like the alcoholic who has run out of credit at every bar in town, Argentina still needs a drink. So now it is trying to settle some outstanding claims at the ICSID in hopes that the resultant publicity will help it pry loose the World Bank loan. Never mind that only five of 50 claims are being settled. And there is a hint of cozy dealings. What wasn’t reported until recently was that an American hedge fund – Gramercy – had purchased three of the five claims that were being settled.
The name Gramercy rang a bell here at NLPC. It came up recently in the course of our review of the integrity of state pension funds. As we reported in September that Gramercy had failed to disclose to New Mexico’s Educational Retirement Board (NMERB), which ultimately invested $125 million in the fund, that it was the subject of a multi-year regulatory action by the Brazilian government. Additionally, the New York Times reported, “According to federal and state court filings, Gramercy Advisors arranged deals involving distressed Brazilian debt that the Internal Revenue Service later ruled to be sham transactions.”
Last month, we posted a presentation that Gramercy made to New Hampshire’s retirement fund in 2012 that we obtained via that state’s Right-to-Know law.
As you can see, page 22 of the presentation foretells of the ICSID settlements, and of Gramercy’s intended role in settling them (point 1).
What did Gramercy make from the settlement of these claims? NLPC located information related to one of the settlements. An October 21, 2013 press release by Vivendi, one of the ICSID claimants, stated that Vivendi would receive as part of the settlement “about US$64 million.” Referring to the ICSID Tribunal Award dated August 20, 2007, Vivendi’s claim size was roughly US$234 million ($105 million award + $708,000 litigation costs + 6% interest compounded annually). Assuming 15% principal haircut and 45% interest haircut cited in news reports, the settled claim apparently would be US$160 million, with US$64 million apparently going to Vivendi, according to a company spokesperson. Depending on the current market value of the claim, that would appear to be quite payday for Gramercy – evidently US$80-90 million.
All of this should raise questions about Gramercy’s relationship with the Government of Argentina, and how and why it is in the position to facilitate these negotiations. It also begs for explanation why the settlement of this handful of ICSID claims should be the sole basis for a new loan to Argentina from the World Bank.
It appears the Argentine Congress is asking questions about Gramercy. After a Gramercy-led bondholder exchange in 2010, a hearing in the Argentine Chamber of Deputies raised questions about “influence peddling” and “insider trading” by banks or individuals who loaded up on Argentine bonds and then played a key role in facilitating the exchange offerings. The body specifically named Gramercy as “handling negotiations” and turning a US$29 million purchase of Argentine bonds into “US$3,000 million.” That’s quite a return for Gramercy and its investors, but given the increasing scrutiny, it may undermine the story that Argentina “has taken positive steps” through settlement of these ICSID claims.
Perhaps the World Bank should be taking a closer look at all of this and rethink any notion of making a $3 billion loan to Argentina. You can bet Members of Congress will be asking why.
State Pension Funds and Big Investment Firms: What Could Possibly Go Wrong? (Part 2)
State Pension Funds and Big Investment Firms: What Could Possibly Go Wrong?