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Friday, December 9, 2016
- The U.S. Supreme Court’s decision to reject an appeal by the Argentine government will embolden aggressive “holdout” creditors, anti-poverty groups say, and make it far more difficult to arrive at debt-relief agreements for poor countries.
The move, announced Monday, is a definitive setback for Argentina, which has been battling two U.S. hedge funds for years to allow a major debt-restructuring agreement to go forward. Yet the court’s decision is also being seen as a significant loss for poor countries looking for debt relief.
“I’m still reeling from this news,” Eric LeCompte, executive director of Jubilee USA Network, an umbrella of religious anti-poverty groups, told IPS.
“Not only is the behaviour of the hedge funds validated, but it has actually been encouraged. Now they have new legal instruments to force countries like Cote D’Ivoire and Zambia into submission pretty quickly.”
As per tradition, the court did not explain why it was declining Argentina’s appeal and, instead, letting stand a lower-court decision that requires Argentina to pay some 1.5 billion dollars to creditors. Following that verdict, in August, the Argentine government stated it would never comply with the order, though it has since softened its stance.
A second decision, also handed down by the Supreme Court on Monday, was overwhelmingly in favour of the hedge funds, allowing bondholders to force global banks to assist in tracing Argentine assets.
At issue is a strategy adopted by a small number of hedge funds, based particularly here in the United States, to purchase reduced-rate debt from poor countries with little hope of repayment. These firms then file lawsuits against those governments for failure to repay, looking to scoop up government revenues and international aid monies when they eventually start to flow.
Perniciously, these firms maintain the lawsuits even as other investors agree to reduce some debts, accepting lower-than-expected returns that nonetheless allow the indebted government to begin to recover economically.
Even a single such “holdout creditor” or “vulture fund” can gum up the entire debt-restructuring process, as legally the deal can’t go forward without approval from all creditors.
The landmark case has been the one involving Argentina, which in 2001 defaulted on billions of dollars’ worth of bonds after years of a roiling economy. Twice over the following decade the Argentine government offered to swap its externally held bonds for new ones worth about a quarter of their value.
While some 93 percent of Argentina’s creditors eventually agreed to such a deal, the arrangement has been rejected by two New York-based hedge funds, NML Capital and Aurelius. Those two subsequently sued the Argentine government, and NML was the lead plaintiff in the Supreme Court case.
The Argentine government had yet to comment on Monday’s rulings by deadline. In a statement to the media, NML said, “Now it is time for Argentina to honour its commitments to its creditors, which would benefit both Argentina’s economy and its international standing.”
*An enticing option*
Close observers of the process worry that the Supreme Court’s decision will not only embolden the rest of Argentina’s creditors, but could now lead other investors to see such “holdout” strategies as both acceptable and enticing.
“This behaviour was already among the most profitable in the world, and this ruling now deems it both legitimate and even more profitable, given that investors will have to spend less on litigation,” Jubilee USA’s
“It’s hard to say how many investors will now want to jump in, but we can only assume that investors will inevitably be interested in actions that are both legally legitimised and extremely profitable.”
The United Nations has noted that the United States is the “preferred jurisdiction” for holdout creditors, though Monday’s decision will initially help fewer than 100 U.S.-based hedge funds. Still, some have
suggested that Aurelius and NML fought so hard around the Argentina case less for the money immediately at stake than for the model that a favourable ruling would solidify for the future.
The potential negative impacts of Monday’s decision could thus be many and varied. Communities living in extreme poverty, for instance, could now have their state and international assistance assets become openly targeted and collected by predatory investors.
Multilateral lenders such as the International Monetary Fund (IMF) or the Paris Club, which has facilitated debt relief for 90 countries worth some 573 billion dollars, could also see their debt-restructuring attempts
become far more difficult. Legitimate investors will likely increasingly decide against taking part in such restructuring, after all, given that their investments could now be in jeopardy.
As the current legal battle has played out in recent years, the IMF, the World Bank, the administration of President Barack Obama and a broad collection of investors have all formally sided with Argentina.
At the beginning of this month, an IMF spokesperson stated that the fund “remains deeply concerned about the broad systemic implications that the lower court decision could have for the debt-restructuring process in general.”
There are multiple international efforts afoot that could either undercut predatory investors or, more broadly, create a formal international arbitration system to address sovereign debt.
Just last week, members of the IMF executive board discussed a new staff paper aimed at preventing global economic crises. According to an analysis from Jubilee USA and New Rules for Global Finance, a Washington watchdog group, proposals are being sought to “limit or eliminate extreme predatory and
holdout behaviour that violate global debt relief policies, debt restructuring and sound operation of the financial system.”
Several U.N. bodies are also currently looking at various ways to outlaw holdout-type behaviour. Groups such as Jubilee are pushing a series of principles on responsible lending and borrowing.
Similar domestic legislation is expected to be introduced in the U.S. Congress later this year, though past such proposals have failed. Still, some suggest that discussion around the Supreme Court case could now motivate increased interest in the issue of holdout creditors.
At both the domestic or international level, however, any such move would offer a solution only in the medium term. Argentina now likely faces a Jun. 30 deadline to arrive at new repayment terms with all of its bondholders, including NML and Aurelius, though the country says paying what could
amount to some 15 billion dollars would risk another default.