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Saturday, March 8, 2014
- A recent U.S. court ruling over a fight between Argentina and its creditors on Wall Street will increase global poverty by making it easier for “vulture funds” to seize the assets of indebted nations, according to anti-debt campaigners who are urging the U.S. government to overturn the decision.
In 2001, Argentina suffered an extreme economic crisis that led it to default on nearly 100 billion dollars in debt. Since then the country has settled with 93 percent of its creditors on a plan to pay back about a third of what was originally owed.
The seven percent who are holding out, however, insist that Argentina must pay the full value of its defaulted bonds, despite the fact that many of those now holding those bonds never paid the full value themselves, having purchased the debt in the immediate wake of the 2001 crisis for a fraction of what they are now demanding.
The International Monetary Fund (IMF) has argued that a victory for Argentina’s holdout bondholders would undermine efforts to renegotiate debt held by other nations while also risking another major debt default in Argentina, which could have major consequences for global financial markets.
In a Jul. 23 statement, the IMF said it was “deeply concerned about the broad systemic implications” of the case. The administration of U.S. President Barack Obama has similarly argued that how Argentina handles its debt is a matter of national sovereignty. However, the administration cancelled an IMF plan to side with Argentina in the U.S. legal system, maintaining that such support was premature.
That excuse may no longer hold. On Aug. 23, the U.S. Court of Appeals for the Second Circuit – the last step before the Supreme Court – upheld an earlier decision that Argentina must pay its bondholders in full, to the tune of 1.3 billion dollars, rejecting claims of negative impacts on global financial markets as “speculative” and “hyperbolic”.
“We believe that the interest – one widely shared in the financial community – in maintaining New York’s status as one of the foremost commercial centres is advanced by requiring debtors, including foreign debtors, to pay their debts,” the court ruled.
The government of Argentina has appealed the case to the Supreme Court. Its creditors, meanwhile, have spent millions of dollars on a lobbying and public relations campaign aimed at increasing the political cost to the Obama administration of siding with Argentina before the high court.
Paul Singer – the billionaire CEO of Elliot Management and a major Republican donor whose subsidiary NML Capital is the lead plaintiff in the legal fight against Argentina – has singlehandedly spent millions of dollars funding right-wing think tanks, pundits and politicians who have painted Buenos Aires as an increasingly lawless ally of Iran, as previously reported by IPS.
The campaign has included position papers and letters from Singer-supported members of Congress suggesting Argentina may even be helping the Islamic Republic develop nuclear weapons.
A victory for Singer and Argentina’s other creditors could make Singer hundreds of millions of dollars. It could also have devastating consequences for the world’s poor.
Increasing profits and poverty
The hedge funds pursuing legal action against Argentina “are profiting off the backs of the poorest people in the world,” Eric LeCompte, executive director of Jubilee USA, told IPS. Wealthy by global standards, those suing Argentina also hold the debt of the some of the world’s poorest nations – and the case against Argentina is crucial to their long-term business strategy.
“Essentially, it will set a precedent that will just have huge repercussions in terms of global poverty,” LeCompte said. Representing a coalition that includes organised labour and hundreds of religious groups and anti-debt campaigners, LeCompte said his group is urging the Obama administration to maintain its support for Argentina in the U.S. legal system while also pursuing a legislative solution in Congress.
If the hedge funds prevail, “poor countries will have less access to credit, and it will be much more difficult to restructure debt,” LeCompte said. If Argentine bondholders successfully hold out for the full value of their bonds, that could encourage the holders of other defaulted debt to do the same, miring indebted nations in poverty.
Even if a nation in default has already renegotiated its debt payments with the vast majority of its creditors, as has Argentina, all it takes is one firm to hold a nation hostage. Instead of funding domestic priorities such as education and health care, developing countries and others facing economic distress could be stuck paying off foreign creditors for a generation or more. The cost of credit for these countries will rise as financial institutions balk at the increased risk of lending.
This has happened before. In countries such as Zambia and the Democratic Republic of Congo, U.S. hedge funds used courts around the world to seize assets of poor nations they claimed owed them money. They are planning to do the same elsewhere.
“These vulture funds have been buying up distressed debt across Eastern Europe, in Greece, in developing countries, waiting for the precedent of this case being set,” said LeCompte. He hoped the Obama administration would not be cowed by the public relations campaign against Argentina and would continue to stand up for the right of sovereign nations to renegotiate their debt, before the Supreme Court and elsewhere.
“If the Supreme Court doesn’t take the case or takes the case and rules against Argentina,” said LeCompte, “we would hope the Obama administration would take executive action to protect the international financial system from this reckless behaviour.”