Sovereign State VS Hedge Fund

It has been dubbed as the financial case of the decade, involving a Latin American sovereign state, the Republic of Argentina versus NML Capital LTD hedge fund, led by billionaire hedge fund manager Paul Singer.

The story goes something like this; you have a group of bond holders who reckoned that there was a killing to be made by purchased Argentinean sovereign debt just after it had collapsed in 2001.  This relatively risky investment strategy may sound wolf like but if it played out in your favor it could also be extremely lucrative for those cashed up and well connected.  The idea is to hunt for distressed debt and buy it (in this case sovereign Argentinean debt) on the secondary market at or near the point when the debtor is very weak or in imminent danger of default, at a huge discount, then sue the debtor for a larger amount than the purchase price.

So that is precisely what Mr. Singer and his pack of wolves did and they are now arguing that Argentina should cough up and pay back in full the 1.5 billion USD debt. But that isn’t the way the South American state sees it. On the other side of the fence Argentina is contending that NML Capital LTD, is immorally profiteering from a debtor in financial distress.  The country is arguing that NML Capital should have restructured the debt in 2005-2010 just like the other bond holders had done. Argentine President Cristina Fernandez, known for not mincing her words and always ready to tap into populace opinions is calling the hedge fund managers “vultures,” and flat right refusing to pay as a matter of principle.  But perhaps this could be partly due to the fact that if Argentina where to agree to pay NML it may also open the floodgates for the country to pay their other bond holders to the tune of 15 billion USD. This would certainly be an unwelcomed scenario for Argentina’s fragile economy, which it cannot afford.

Nevertheless, the US Supreme court has recently ruled in favor of NML Capital. Argentina’s final appeal has been refused by the Court, which has ordered Argentina to pay back the 1.5 billion USD within 14 days. Moreover, the US Supreme Court ruled 7-1 that bondholders could now force Argentina to reveal where it owns property around the world, making it easier to collect on the unpaid debts. This could even expose its embassies and military ships to seizure if the government doesn't pay, according to Justice Ruth Bader Ginsburg. Drumming the sound beats in favor of the US Supreme Court’s ruling a NML spokesman said: “America’s highest court has spoken. Now it is time for Argentina to honor its commitments to its creditors, which would benefit both Argentina’s economy and its international standing.”

Nevertheless, responding to the US’s highest court in the land ruling Argentine president Kirchner appeared on national TV stating, 'What I cannot do as president is submit the country to such extortion.' The financial consequence of such a stern posture by the head of the Argentine state was both immediate and predictable.  The cost of insuring Argentine bonds against default rocketed, and the value of Argentina's currency plunged to 12 pesos to the dollar on the black market and shares on Buenos Aires Merval stock exchange index fell by a whopping 6 percent and they were down again 4.92 percent on Friday, June 20.

There are now a number of options available for Argentina; it could obviously honor its commitment and pay the bond holders. But this is unlikely to happen since it would be keen to avoid a floodgate scenario with it’s other bond holders.

Alternatively, Argentina could try and renegotiate the debt. A likely obstacle here could be a piece of legislation called “the lock law”, which prohibits offering a better rate to the debt holders who did not accept the restructured rates.  Alternatively, Argentina could try and reroute payment to exchange holders outside the US, thereby circumventing US ruling, but as cited in the FT this would be logistically difficult to do.  The final option is that Argentina could default on its debt. This would not be a feeble matter, since the last time Argentina defaulted was in 2001 on 82 billion USD sovereign bonds, which happened to be the largest in history. The following events occurred; the Argentina President resigned; the peso was devalued, unemployment rocketed and riots broke out with more than 53 percent of Argentines falling below the poverty line. It took four years for the economy to recover. 

It’s worth noting that Argentina remains today cut off from the global financial markets. So an Argentina debt default may not be so damaging to the global financial markets this time around.  Furthermore, the likely amount of debt default of approximately a few USD billion is significantly less than last times non-payment of its 82 USD billion debt.

Bearing this in mind, the consequence of another Argentina default, while it may rattle Mr Singer and his pack, it is unlikely to result in a major global financial disruption. However, the US Supreme Court’s ruling could be a floodgate case for next time a country runs into financial difficulties and is unable to pay back its debts. Investors may have little or no incentive, or even be under a fiduciary obligation not to participate in any future debt restructuring scheme. While the court’s ruling is a boon for holdouts it has also made striking a debt restructuring deal a lot harder for debtors. Argentina’s next payment is due on June 30.

Train to Trade is it Necessary ?

Most people would be attracted to the idea of earning extra money in their spare time or of making their living from home or even on the move. One approach to achieving this dream is to trade financial markets successfully.

The people that try this will either have had some market experience and think they can transfer what they know to trading or will be people who have no market experience but attend a taster course and, perhaps, think that they now know enough.  Both could be dangerous to their wealth and they need to be dissuaded from moving ahead without more information and, in particular, training.

Trading the markets is a completely different approach to making money than investing for the medium to longer term and participants will require knowledge of the best approach to avoid the potential pitfalls.

Financial markets are ideal for trading as they are very dynamic and volatile and are very liquid.  Thus giving opportunity to pick up on trends without, usually, being caught out by a single market participant.  The most suitable in this regard is the foreign exchange (or forex or fx) market.  This market is global, is open 24 hours per day except weekends and is very liquid with approximately $5 trillion dollars traded every day.  It is, however, a market in which money can be made very easily but, for the untrained, can be lost even more easily.

Trading the forex market can be done by buying the physical currency with either your own funds or with money borrowed.  This requires more sophistication than most people would have.  It also requires the access to large sums of money and exposes the smaller investor to high transaction costs.  Most people who trade the forex market will do so by trading using a margin account through spread betting.  This is cheap, tax free and requires much smaller amounts of money than might otherwise be needed.  It does, however, open the untrained trader up to large losses as trading on margin gives the trader the opportunity to enjoy unlimited gains but to also suffer unlimited losses with their account being wiped out in very short order.

That is scary stuff but the trained trader will know not only the best time to enter and exit a trade but will also learn how to limit their potential losses on each trade.

Knowing the techniques for spotting a potential trade involves reading charts, being aware of any relevant news that could have the potential to move prices for or against the trader at that time.  Reading the charts is more than just buying low and selling high although that is one objective.  The trader can also sell high and buy low thus taking advantage of rising and falling markets so that they make money in either.  When is a currency low enough to buy and when is it high enough to sell? The techniques learned will help pin point the optimal time to buy and to sell. Nobody wants to buy at the top and sell at the bottom.

 

Another problem is that the techniques learned for buying or selling only gives the trader an indication that this is the right time. Not every trade will automatically succeed, indeed most traders will experience more losing trades than profitable trades.  So, you might ask, how can they make money?  The answer is to recognise quickly when a trade is going wrong and to limit the losses experienced to small amounts whilst running profitable trades for as long as is possible to maximise the profits.  Traders will enter a position knowing the potential loss and the potential profit before they click the buy or sell button.  The techniques needed for this can be taught by existing successful traders.

Another consideration has to be how to maintain the original funds intact while suffering early losses and waiting for that big and encouraging successful trade. The obvious starting point is to have sufficient funds as working capital to tide one over the early trades while a rhythm and profitable trend can be found and worked on. The untrained trader may well be carried away with the prospects of making their fortune quickly and retiring early to a Caribbean island.  That ‘certain’ trade will do it for them or maybe the next one if the first fails or maybe the next one.  This may well lead to no funds left before the first successful trade can be found, desolation and a very disillusioned trader.  The ‘trained’ trader will know, however, how to avoid this simple and all too often found mistake.  Trading involves hard work and dedication and the application of the correctly taught techniques.

Trading can be a very emotional pastime.  It is your money and the trader needs to ensure that it is money he is prepared to lose and which he can manage without should that happen.  Even though this may be the case, the trader will find it a very emotional activity the euphoria of making profits can all too easily be countered by the depression of losing.  Traders need to be prepared to lose and should plan their trades so that they know what they might lose and what they can expect to make.  The psychology of trading is very important for all traders to understand, This will include planning the trade and limiting the risk but it also includes knowing themselves and being aware of the pitfalls such as doubling up on a losing trade that one ‘knows’ will come good.

As with all worthwhile ventures being prepared before you starts is paramount.  That includes knowing you have the time and the funds and the desire but, perhaps most important is the need to be properly and professionally trained by a well tried and trusted professional training company.  The prospective trader should be reassured as to these attributes by attending taster courses and by meeting the traders that the company have and which have already found success.  These traders should be prepared to give of their time and their advice on an ongoing basis to help others on to this lucrative and satisfying route to making a very good living.

Darren Winters