Hedge funds now targeting Argentina’s gold reserves abroad
Mon Oct 07 2024
In July, Argentina was revealed to have transferred a large portion of its central bank gold reserves abroad. Now, two hedge funds that previously won lawsuits against the country are looking to seize the country’s sovereign bullion as payment.
According to an Oct. 5 report published by the Buenos Aires Herald, Bainbridge Fund and Burford Capital have each submitted filings to a New York court demanding information about the central bank gold transfers, arguing that the gold should be legally subject to seizure to pay for the rulings they won.
The two hedge funds “requested information from Judge Loreta Preska about the country’s Central Bank, intending to seize gold reserves after they were sent abroad,” the report said. “The funds’ proceedings revolve around the argument that Argentina’s Central Bank is an ‘alter ego’ of the state — a legal term meaning that it does not constitute a separate entity.”
The Bahamas-based Bainbridge Fund won a $95 million lawsuit against the South American nation in 2023 for its 2001 default on debt securities. On Oct. 2, the fund submitted a written request for information on the country’s gold reserves.
“The Republic had previously stated that the gold reserves belong solely to the Central Bank and that it had no information about the reserves other than what the Central Bank made publicly available,” Bainbridge’s letter to the judge stated, noting the recent news reports that Argentina’s gold reserves had been transferred abroad.
The hedge fund also requested information on ‘Letras Instransferibles,’ which are “securities that the country’s Treasury places with the Central Bank in exchange for liquid dollars from international reserves,” claiming that Argentina failed to disclose information on them.
The Herald quotes an unnamed source who told them that Argentina is preparing to respond to Bainbridge’s letter by October 9.
The second hedge fund targeting Argentina’s gold reserves is Burford Capital, which won a $16.1 billion lawsuit against the country in 2023 for the expropriation of energy company YPF. The fund has “requested information on state-owned companies such as airline Aerolíneas Argentinas, Banco Nación bank, energy company ENARSA, and satellite manufacturer ARSAT,” the report said.
In April of 2024, they asked Preska to “grant them all of Argentina’s YPF shares as payment, as well as information on the Central Bank,” along with “government documents from current and former senior officials and advisors, including former customs head Guillermo Michel, Milei’s advisor Santiago Caputo, and former and current economy ministers Sergio Massa and Luis Caputo.” Santiago Caputo is Luis Caputo’s nephew.
Burford Capital also argues that the Central Bank is an alter ego of the country as far as the gold reserves are concerned. They supported their claim by asserting that “when the financial institution received a public information request about its transfer of gold reserves out of Argentina, it was Economy Minister Luis Caputo rather than the Central Bank head Santiago Bausili who announced the operation to the press,” and that Caputo also offers “public statements about the government’s plans to strengthen the peso – an issue of monetary policy within the domain of [the Central Bank].”
The hedge fund added that Luis Caputo himself “is central to the Republic’s relationship with YPF” as an argument for YPF also being an alter ego of the country, offering as an example the government’s decision move the location of a liquid natural gas plant from Buenos Aires to Río Negro and quoting Buenos Aires governor Axel Kicillof’s claim that the decision was made at the direction of Argentine President Javier Milei.
The legal challenges are the latest twist in the central bank gold saga that was first revealed in July, with the information itself coming to light in an unusual way, as the Milei government did not provide an official announcement about the transfer of the gold, nor did it come from the Banco Central de la República Argentina (BCRA).
“Rather, the information came from the bank workers’ union, known as La Bancaria,” Spanish newspaper El Pais reported at the time. “Its leader — the left-wing legislator Sergio Palazzo — presented a request within the framework of the Law of Access to Public Information for the Central Bank of the Argentine Republic (BCRA), asking ‘if there [were any] operations to send gold bars abroad during the month of June.’”
The Milei administration was then forced to admit that they moved at least some of the central bank’s $4.5 billion worth of gold abroad in order to “get returns,” but critics warned at the time that the sovereign gold was now exposed to potential seizure.
“There are also fears that the gold could possibly be seized, due to long-standing legal cases that have been filed against Argentina by foreign creditors,” the report said.
“It’s a very positive move,” Luis Caputo argued after the story broke. “If you have gold in the BCRA, it’s as if you have [assets] inside that cannot be used for anything. If you have it outside the country, you can get returns. It’s much better to have it guarded outside, where they pay you something.”
Caputo’s comments suggested that the gold was shipped abroad so that it could be deposited in order to earn interest, but economists have pushed back on the viability of the plan, saying that the cost of the transfer, including insurance, would absorb nearly all of the potential returns on investment.
President Milei himself hinted that the gold was transferred for use as collateral for a bridge loan. “The president said that Argentina already has sufficient U.S. dollars available to pay the maturity of interest on foreign debt — a payment of about $1.6 billion — which is due in January 2025,” El Pais wrote. “He claims that the bridge loan would be to pay an additional sum of $3 billion to foreign creditors.”
The revelations surrounding the bullion shipments sparked a furious response from Argentina’s main opposition, the center-left Unión por la Patria alliance, which criticized the lack of transparency and demanded that BCRA president Santiago Bausili “urgently” explain how much gold was taken and why they moved the bullion out of the country. “The opposition also inquired about ‘what risks the operation entails’ and ‘if it’s possible that the [gold] could be seized while in transit, or from the bank where it was sent,’” the report said.
In early September, the Central Bank of the Republic of Argentina (BCRA) formally announced that portions of its gold reserves had been moved out of the country, releasing a statement that it had “completed the transfer of part of its gold reserves in its different accounts.” BRCA officials also criticized what they called “irresponsible” reports about the gold going abroad and stressed the importance of keeping activities related to the country’s gold reserves confidential.
“The BCRA expresses its concern about the irresponsible diffusion of information, for political purposes, related to these operations before their completion because it put the security of the assets of all Argentines at risk,” the central bank said in a statement. “Information on the administration of BCRA reserves has always been handled confidentially in an effort to preserve its security. Both the General Audit of the Nation and the pertinent control entities maintain access to that information under the same cloak of confidentiality.”
Analysts have suggested that the final destination for the gold reserves is the headquarters of the Bank for International Settlements (BIS) in Basel, where the country has deposited gold belonging to the BCRA for years. All assets deposited with the BIS are supposed to have “sovereign immunity,” meaning they are not subject to requests for embargo or seizure.
Source: https://www.kitco.com/