Quelle Surprise: Vulture Funds Set Their Sights on the Argentine Gold Milei’s Government Just Shipped to Europe

Europe is hardly the safest place for financial assets these days, as Russia and Venezuela can attest. It may now be Argentina’s turn to have its assets frozen or even stripped.

As readers may recall, a few months ago Argentina’s Milei government began surreptitiously sending shipments of the country’s gold reserves to Europe, where they are purportedly sitting in the vaults of the Bank of England and/or the Basel-based Bank of International Settlements. Of course, Europe is hardly the best destination for financial assets these days, as Russia and Venezuela can attest. As we warned at the time, moving the gold overseas could invite attempts by Argentina’s legions of unpaid creditors to seize the gold as payment or collateral.

That is now beginning to happen.

So far, two hedge funds that have rulings against Argentina over debt in default and/or the 2011 nationalization of the oil company YPF have expressed a keen interest in knowing the whereabouts of Argentina’s gold. Once again, the cases will be heard in New York’s Southern District, where 10 years ago Judge Thomas P Griesa passed an outrageous judgment that, as Michael Hudson said at the time, essentially “prevented not only Argentina but all countries that issue bonds in the New York market from ever writing down or renegotiating the debt.”

Griesa’s ruling was in response to a suit brought by vulture funds to make the Argentinian government pay them 100% of the value of bonds, which they had purchased for a fraction of the face value. This time round, the two plaintiffs involved are asking New York Judge Loretta Preska to compel Argentina to disclose the whereabouts of its gold holdings, so that they can try to take possession of them.*

One of the creditor holdouts demanding discovery of Argentina’s overseas gold holdings is Bahamas-based Bainbridge Fund, which has holdings of Argentine public debt that was defaulted on during the country’s 2001 financial crisis. Bainbridge has refused to participate in any of the debt restructurings proposed by successive Argentine governments since, including the exceedingly generous offer made by the Mauricio Macri administration in 2016.

In 2023, Judge Preska gave Bainbridge the green light to seize Argentine assets worth $95 million plus interest. Now, the fund has launched a discovery process in Preska’s New York Southern District court. In other words, Bainbridge is asking the US court to compel Argentina’s government and central bank to disclose information about their assets and where they are being held, so that it can accelerate the collection of its debts.

“Bainbridge Fund is asking Judge Loretta Preska to order the Argentine Republic to produce information on the destination and use of the gold belonging to the Central Bank currently deposited in Europe,” explained Sebastián Maril, an expert on investor-state arbitration and CEO of Latin Advisor, on X. “Bainbridge is in the midst of asset discovery to collect unpaid damages… and also seeks to take possession of YPF shares in the hands of the State.”

Another fund that is seeking discovery the Burford Capital, a UK-based hedge fund that won a whopping $16.1 billion lawsuit against Argentina in 2023 for the expropriation of energy company YPF. Like Brainbridge, Burford’s 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.

Where Is Argentina’s Gold?

None of this should come as a surprise. As we noted in our August 6 post, “What Is the Milei Government Doing With Argentina’s Gold?“, the government’s decision to send multiple shipments of the country’s gold across the Atlantic under the cover of darkness puts it at risk of seizure by unpaid creditors, of which Argentina has a very long list:

As readers may recall, London — and more broadly, Europe — are hardly the safest places to store gold reserves and other sovereign assets these days. In 2019, the UK government impounded Venezuela’s roughly $2 billion of gold deposits stored at the Bank of England after “derecognising” the Venezuelan President Nicolas Maduro in favour of the US- self-appointed Juan Guaidó. Even after Venezuela’s leading opposition parties voted to oust Guaidó in 2023, the UK continues to hold on to Venezuela’s gold deposits.

With Argentina facing numerous lawsuits over unpaid bills and debts, including one concerning the former Cristina Fernández de Kirchner government’s expropriation of roughly half of national energy company YPF, the risk of part or all of Argentina’s gold being seized is not negligible, as the Secretary General of the Banking Association and deputy, Sergio Palazzo, himself warns:

“The gold in transit may be seized by any judge who eventually orders a seizure for any of the cases Argentina has pending abroad. It’s an unnecessary risk being run, and [the central bank] should clarify to us Argentines the reason for this transaction, whether it is to exchange the gold for foreign currency in another country, or whether it is a credit operation, or whether it is a purchase and repurchase operation with the International Payment Bank.

It is largely thanks to Palazzo’s efforts that the people of Argentina are at least minimally aware that a large chunk of the nation’s gold has been moved across the Atlantic, though the specifics of the transfers remain vague. In mid-July, Palazzo made a FOIA request to the Central Bank of the Republic of Argentina (BCRA) asking the bank to confirm whether “operations to send gold bullion abroad had taken place during the month of June.”

Palazzo also asked the BCRA to provide details of the amounts involved, their ultimate destination, and the officials and administrative procedures behind the operations. The BCRA had 30 days to respond. It still hasn’t said anything. Citing security reasons, the BCRA has refused to say anything about the movements and location of gold in its reserves.

But on July 19, Argentina’s Minister of Economy (and former JP Morgan Chase and Deutsche Bank banker) Luis Caputo confirmed that gold reserves from the Central Bank had been sent abroad. But Caputo did not provide any clarity as to the amount of gold that had left the country or their current whereabouts. He even tried to present the operation as a shrewd financial move, rather than what it really was — the covert pawning of part of the nation’s gold:

“It is a very positive move, because today you have gold in the BCRA that is like a piece of property that cannot be used for anything. If you have it abroad, you can generate returns. It is much better to have it stored outside, where they pay you something for it.”

Caputo did not clarify how much gold had been sent, to which bank, or the kind of operation that was undertaken. As a result, no one knows exactly how much gold has left the BCRA’s vaults or where it is at. According to a recent article in Clarín on Milei’s increasing desperation, isolation and paranoia, $2.3 billion of Argentina’s gold — equivalent to roughly half of the nation’s total gold holdings — is now sitting in a vault in London. And another $700 million’s worth will soon be joining it.

As we posited two months ago, its purpose is as collateral for a $5 billion loan:

[The gold] was sent on weekly flights to London. Now in the Bank of London there are bullion from the BCRA for US$ 2,300 million. [BCRA governor] Santiago Bausili adopted the audacious maneuver to use them as collateral for a loan from the Bank of Basel. It would be to obtain a bridge loan to strengthen the BCRA’s reserves. The interest rate would be 3.9%. But it would require a controversial guarantee: Argentina’s gold, as if it were grandmother’s jewels.

According to many analysts, the government needs the money to cover the near-total loss of the central bank’s currency reserves. After Milei’s economic team has burnt through over $17 billion of reserves since December in a vain attempt to keep the dollar from rising too high, Argentina’s central bank is estimated to have negative net reserves of around $5 billion.

The country is desperate for fresh funds from the IMF while struggling to service the roughly $40 billion it still owes the Fund. Indeed, as we reported last Tuesday, the Milei government is so desperate that it is now negotiating the relaunch of Argentina’s strategic economic partnership with China, with whom Milei had repeatedly stated he would never do business.

The irony is that Caputo’s intervention appears to have provided Argentina’s creditors with a perfect pretext for going after Argentina’s gold. Maril told PERFIL that Baindbrige is basing its claim on the fact that “Caputo, as Minister of Economy, should not be making decisions about the gold that belongs to the Central Bank. As such, this can be used to demonstrate that… the Central Bank and [government of] Argentina are one and the same thing.”

This stands in direct opposition to what successive Argentine governments have claimed. As Bainbridge’s letter to Preska notes, “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.”

History Repeating

This is not the first time an Argentine government has sent gold abroad. In 2017, the Macri administration transferred 11,000 kilos of the precious metal to London in order to take advantage of carry trades on the metal. According to Clarín, the bars were rented on international markets and reinvested in more profitable trades (a yen swap is usually chosen), thus generating a carry trade. Then, as now, the gold was at risk of being seized by vulture funds and other creditors.

That gold is purportedly still sitting in the vaults of the Bank of England, where in August, 2023  it was used as collateral for a repo loan issued in dollars by the Bank of International Settlements for payment to the IMF. La Nación noted at the time that the “operation with gold is perhaps the most controversial of the set of measures that the government is deploying in the context of the dollar crisis.”

Supporters of the Milei government argue that it is perfectly standard practice for central banks to send their gold to London or New York for storage or investment purposes, which is partially true. But what this argument ignores is that most central banks’ assets are not in the cross-hairs of legions of hedge funds.

It also ignores the fact that most central banks, rather than selling or pawning their gold, are accumulating the precious metal as a safe haven in a time of rising volatility, high inflation and slow decline of the USD as the global reserve currency. As geopolitical tensions surge, capital markets are seeing a repatriation of gold, with India and Nigeria among a number of countries to recently bring back their gold from US or UK vaults.

In 2023, Reuters cited an Invesco survey suggesting that countries are repatriating their gold reserves to insulate themselves against the sort of sanctions imposed by the West on Russia. The EU’s recent decision to seize the windfall profits from frozen Russian assets will have only intensified this trend.

Ricardo Aronskind, a researcher and professor at the General Sarmiento National University, warns that “Caputo’s [transfers of gold] are out of synch with this broader trend, with many countries increasing their gold reserves as insurance against possible disruptions in the world economic order.”

But as we noted in our previous piece on this topic, Argentina is already in deep crisis mode — indeed has been since taking out the biggest ever IMF loan in 2018, worth $57 billion, and then proceeding to default on its debt twice over the next two years. The transfer of part of its gold reserves abroad, presumably as collateral for a short-term loan, underscores the critical situation of its finances as well as the lack of a coherent and sustainable economic plan. It not only compromises the country’s financial security, by heightening its risk of asset seizures, but also undermines the confidence of international investors.

---

 

* Readers may recognise the name of the presiding judge. In 2021, Preska attracted widespread opprobrium for refusing to recuse herself from Chevron’s case against the environmental lawyer Steven Dozinger, despite her position as a leader of the Federalist Society, a pro-corporate society of lawyers and judges to which Chevron is a major donor. Years earlier, Donziger had fought a class action suit against Chevron on behalf of Ecuadorian farmers and indigenous communities who had suffered environmental damage and health problems caused by the company’s oil drilling in the Lago Agrio oil field.

In the case against Donziger, Preska denied the lawyer a jury of his peers and allowed a private Chevron law firm to prosecute him in the name of the US government after the US Attorney’s office rejected the case. After hearing the “evidence”, Preska found Dozinger guilty on all six counts and sentenced him to six months in prison.

In his October 2021 article, “The Anonymous Executioners of the Corporate State”, Chris Hedges decried the prosecution of Donziger as a “show trial” akin to those carried out by “tyrannies of the past”, and compared his case to that of Julian Assange, saying “they are designed to send a message. All who defy corporate power and the national security state will be lynched.”

Now, Preska appears to hold the fate of hundreds of millions, if not billions, of dollars of Argentine gold in her hands.