Hedge Funds Bringing An Entire Country To Its Knees

Right now Argentina is in danger of a calamity, the likes of which the world hasn't seen since 2001, and it's all because of one hedge fund manager's tried and true strategy to make money off of distressed debt.

That's right, bringing a country to its knees is a "strategy."

According to a U.S. court's ruling, if Argentina does not pay a group of hedge fund managers over $1.3 billion worth of bonds by July 30, the Republic could go into default. If it goes into default - investors lose faith its capacity to pay, interest rates on its bonds surge, and the country is forced to print money to pay creditors - its economy could tailspin.

Then again, if Argentina does pay this group of hedge fund managers over $1.3 billion worth of bonds by July 30, it opens itself up to lawsuits from other investors who also own those bonds - lawsuits that could cost the country up to $15 billion. That's over half the money it has in its central bank.

So what's a country to do? And how did it get to this desperate point?

The bonds in contention in this case are Argentina's sovereign bonds issued in 2001, just as the country was collapsing.

That collapse, to hedge fund manager Paul Singer, looked like an opportunity to use a common strategy: distressed debt investing.

Here's how it works.

But not Paul Singer. No sir. And that's where this got complicated.

Singer is the man leading the group of hedge funds (known collectively as NML) in their effort to collect 100 cents on the dollar for Argentina's debt where other investors have taken a 70% haircut on their payout. To the Republic, that makes NML "vultures." Creatures that wait for other animals to hunt and eat the carrion left behind. It's not a nice thing to call someone.

But Singer couldn't care less; he has done this before. In fact, he's the king of this strategy.

In 1995 Singer bought Peruvian bank debt for $20 million and then sued until he got a $58 million payout. In 2002 and 2003 Singer made over $100 million in interest alone from buying $30 million worth of debt owned by Congo-Brazzaville.

Compared to Argentina, both those investments were a cake walk for Singer.

No one kicks or screams louder or harder than President Cristina Fernandez de Kirchner. She is a master of political theater - "they'll come to understand the strength of our national posture," she once said in a speech, "we will not pay by any means necessary."

That, combined with the horrific memory of Argentina's past defaults, makes this very sensitive to Argentines.

So for the past decade and change Singer has had to sue the country into oblivion, citing a pari passu clause in Argentina's bond agreement and arguing that it had a right to go after Argentina's money wherever it may be according to the Foreign Sovereign Immunities Act.

Here's what that means:

And that is how an investor can take a country to the brink of disaster.