By Kinda Mohamadieh
GENEVA, Apr 6 2015 (IPS)

The world’s attention turned to the practices of vulture funds after the U.S. Supreme Court affirmed a lower court opinion in the NML Capital vs Argentina case, which forbids the country from making payments on its restructured debt.

Argentina had defaulted in 2001 and went through two rounds of negotiations to restructure its debt, both in 2005 and 2010. In June 2014, the court ordered Argentina to pay the ‘vulture funds’ that held out and did not accept the terms of the debt swaps.

Kinda Mohamadieh

The vulture funds had held out with the aim of achieving what amounts to a 1,600 percent return on their original investment. The funds concerned had purchased the Argentinian bonds in 2008 at 48 million dollars and the court ruling ordered Argentina to pay them 832 million dollars.

Nobel laureate Joseph Stiglitz noted that this was “the first time in history that a country was willing and able to pay its creditors, but was blocked by a judge from doing so”.

While this case brought the term ‘vulture funds’ into the public sphere, the predatory practices of these entities did not start with Argentina.

According to a former U.N. independent expert on the effects of foreign debt and other related financial obligations of states on the full enjoyment of all human rights, the term ‘vulture funds’ describes “private commercial entities that acquire, either by purchase, assignments or some other form of transaction, defaulted or distressed debts, and sometimes actual court judgments, with the aim of achieving higher returns.”

Basically, vulture funds are hedge funds whose modus operandi focuses on three main steps including: (1) purchasing distressed debt on the secondary market at deep discounts far less than its face value; (2) refusing to participate in restructuring agreements with the indebted state; and (3) pursuing full value of the debt often at face value plus interest, arrears and penalties, including through litigation, seizure of assets or penalties.“The African Development Bank has reported that at least twenty heavily indebted poor countries have been threatened with or have been subjected to legal actions by commercial creditors and vulture funds since 1999”

Many developing countries have been exposed to the predatory practices of vulture funds, especially African and Latin American countries.

The African Development Bank has reported that at least twenty heavily indebted poor countries have been threatened with or have been subjected to legal actions by commercial creditors and vulture funds since 1999. These countries include Sierra Leone, Cote d’Ivoire, Burkina Faso, as well as Angola, Cameroon, Congo, Democratic Republic of the Congo, Ethiopia, Liberia, Madagascar, Mozambique, Niger, Sao Tome and Principe, Tanzania, and Uganda.

Peru was targeted by NML Capital in the year 2000. According to media reports, the fund spent almost four years in the courts to win a ruling that forced Peru to settle for almost 56 million dollars on distressed debt, which the fund had initially bought for 11.8 million dollars.

The African Development Bank has documented that up until the year 2007, 25 judgments in favour of vulture funds had yielded nearly one billion dollars. Out of this amount, 72 percent of the judgments have been against African countries. The reported number of outstanding cases against debtor countries has doubled since 2004.

According to the World Bank and the International Monetary Fund (IMF), 54 court cases were instituted against 12 heavily indebted poor countries between 1998 and 2008. The IMF estimates that in some cases claims by vulture funds constitute as much as 12 to 13 percent of a country’s gross domestic product.  The World Bank estimates that nearly one-third of countries that are eligible for debt relief and other poverty alleviation programmes are the targets of nearly 26 vulture funds.

Concerned about the extent of the threat posed by such predatory practices and their systemic implications, several international authorities and multilateral institutions have voiced their concern about the matter.

The African Development Bank has warned that by precluding debt relief and costing millions in legal expenses, these vulture funds undermine the development of the most vulnerable African countries.

In June 2014, the heads of state and government of the Group of 77 and China, in their declaration issued on the occasion of the ‘For a New World Order for Living Well’ summit held in Santa Cruz de la Sierra, Bolivia, reiterated the importance of “not allowing vulture funds to paralyse the debt restructuring efforts of developing countries” and stressed that “these funds should not supersede the state’s right to protect its people under international law.”

The IMF had cautioned that upholding the decision against Argentina would harm future sovereign debt restructuring attempts. In 2013, the IMF stated that “if upheld, [the Court of Appeals decision] would likely give hold-out creditors greater leverage and make the debt restructuring process more complicated”.

In 2007, G8 finance ministers had expressed concern about actions of some litigating creditors against heavily indebted poor countries, and agreed to work together to identify measures to tackle this problem based on the work of the Paris Club.

In September 2014, a resolution on the activities of vulture funds and the effects of foreign debt and other related international financial obligations of states on the full enjoyment of all human rights, particularly economic, social and cultural rights, was presented by Argentina and adopted at the 27^th session of the U.N. Human Rights Council which took place in Geneva.

It is also worth noting that the 26^th session of the Human Rights Council in June 2014 had adopted a resolution titled ‘Elaboration of an international legally binding instrument on Transnational Corporations and Other Business Enterprises with Respect to Human Rights’.

This resolution sets in place a process of negotiations towards an international legally binding instrument on transnational corporations and their liability in the area of human rights. (END/IPS COLUMNIST SERVICE)

Edited by Phil Harris   

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

* This column is based on a longer version published in published in the South Centre’s South Bulletin 83 of 12 February 2015.

Excerpt:

Screenshot of Argentine President Cristina Fernández during her Monday Jun. 16 televised address to the nation. Credit: TV Pública

By Diana Cariboni
MONTEVIDEO, Jun 17 2014 (IPS)

Argentina finds itself in a strange position since the U.S. Supreme Court rejected its appeal Monday to take a case in which a small group of creditors is suing this country for full repayment: it is on the brink of default even though it is one of the countries in the world that has done the most to dig itself out of debt.

The Supreme Court decision in the case Republic of Argentina v. NML Capital leaves in place a 2012 ruling handed down by the second district court of New York, ordering Buenos Aires to pay bondholders, immediately and in full, some 1.5 billion dollars – an amount that includes interest and penalties.

But it also sets a precedent with respect to all of the unpaid debt in the hands of other speculative bondholders, totalling around 16 billion dollars.

This amount, however, “is equivalent to just three percent of Argentina’s GDP,” economist Ramiro Castiñeira, with the Econométrica consultancy, told IPS.

“It doesn’t make sense for Argentina to default over that amount, when it is one of the countries that has advanced the most in reducing its debt in the past few years,” Castiñeira argued.

Brazil, for example, owes interest payments this year equivalent to five percent of GDP, on top of principal payments amounting to more than 12 percent of GDP, he said.

The problem is that Argentina does not have 16 billion dollars in cash – the equivalent of half of its foreign reserves, which were hit hard by a series of restrictive monetary policies that fuelled capital flight.

Argentine President Cristina Fernández complained about the Supreme Court ruling Monday night, calling it “extortion” while stressing that her country would continue to make repayments to lenders who had agreed on renegotiated settlements.

After Argentina defaulted on its foreign debt in late 2001 during the worst economic crisis in the country’s history, the government made enormous efforts to work its way out of debt, which had reached 160 percent of GDP.

It repaid the World Bank and International Monetary Fund (IMF) in full and restructured the debt held by 92.4 percent of bondholders, at a deep discount, in 2005 and 2010.

The debt shrank to manageable volumes. In late May, Argentina reached an agreement with the Paris Club of creditor nations for repaying overdue debts. And earlier this year, the government agreed on a package to compensate Spanish oil company Repsol for the 2012 nationalisation of its subsidiary YPF.

But the situation produced by the Supreme Court ruling could jeopadise everything achieved so far.

The sentence prohibits banks in New York from making interest and principal payments to creditors that accepted the restructuring unless the New York-based hedge fund NML Capital is paid.

On Jun. 30, Buenos Aires is to pay 532 million dollars for bonds issued under foreign legislation.

To avoid the embargo, payment jurisdicion could be modified by means of a voluntary swap. “The idea might seem tempting, but it is impracticable and would also mean falling into technical default” by changing the parameters set when bonds are issued, Argentine economist Leonardo Stanley, associated with the Centro de Estudios de Estado y Sociedad (CEDES) think tank , told IPS.

Although Fernández’s statement was ambiguous, Stanley’s interpretation is that the president expressed a willingness to pay. That means “negotiations will have to start with the holdouts [creditors who refused the restructuring], which could take place within the context of what the judge handling the case [in New York] is asking for,” he said.

Stanley said: “From here on out the decision is political. Just as it reached agreements recently with Repsol and the Paris Club, the government should sit down and negotiate with Paul Singer,” whose hedge fund, Elliott Management, is the parent company of NML Capital.

The economic impact is inevitable, he added, “although the current government would not necessarily have to deal with it,” as Fernández’s term ends in December 2015. For that reason, “any proposal would have to be made in the legislative sphere,” which would help boost “transparency and credibility,” he said.

In her address to the nation Monday, Fernández said “this case has repercussions for the entire global financial system. [The ruling] validates a business model on a global scale which, if it continues to be reinforced, will produce unimaginable tragedies.”

Eric LeCompte, executive director of the religious anti-poverty organisation Jubilee USA Network, said in a statement that “For heavily indebted countries supporting poor people, this is a devastating blow. These hedge funds are [now] equipped with an instrument that forces struggling economies into submission.”

“Argentina may not have used the best options or strategies,” said Stanley. But the stance taken by the U.S. Supreme Court shows that “despite the institutional crisis, the lobbying power of the financial sector is intact,” he added.

And if countries begin to doubt the benefits of issuing a bond under New York jurisdiction, the ruling “could also hurt that sector, and the United States…which has gone from being the world’s creditor to one of its biggest debtors,” he argued.

Peter Hakim, president emeritus of the Washington-based Inter-American Dialogue think tank, said “Both the U.S. Treasury and the IMF were also concerned about the broader effect of what would be considered an Argentine default, and also worried about the impact on other debt negotiations.

“Remember the U.S. Treasury [along with the IMF], although it did not join the lawsuit, basically supported Argentina’s contention that it should be able to pay the holdouts the same amount as it was paying creditors who had accepted Argentina’s debt restructuring.
“ U.S. relations with Argentina… have improved in recent months as Argentina has pursued a more orthodox and moderate set of economic policies (including efforts to reform its notoriously manipulated economic statistics, repay its Paris Club obligations, settle the claims of Repsol, etc).”

But the immediate future of those ties depends on how Buenos Aires reacts in this case, for which a solution could be possible if the Argentine goverment demonstrates greater flexibility, Hakim said.

“The Fernández government will have to resist the temptation to turn the decision into a domestic political issue,“ he said.

But that seems difficult to do. For decades the management of the country’s debt has been a central factor in economic and political crises. In her speech Monday, Fernández summed up the history of this issue.

The portion of bonds that Singer and his allies are pressing Argentina to pay is illustrative on its own. In 2008, NML Capital purchased the bonds at a nominal price of 370 million dollars. But at the time they were only worth 48 million dollars.

Thirty percent had been issued during the administration of Carlos Menem (1989-1999), when the peso was pegged to the dollar.

The rest were issued during the “megaswap” – a financial operation cooked up in 2001 to give Argentina breathing space by stretching out the government’s principal and interest payments, which backfired and increased the public debt by tens of billions of dollars.

Former president Fernando de la Rúa (1999-2001) and his economy minister Domingo Cavallo were prosecuted for the megaswap and an international arrest warrant was issued for David Mulford, at the time chairman international of the Credit Suisse First Boston bank and former U.S. Treasury official.

The Supreme Court of the United States. Credit: Mark Fischer/CC by 2.0

By Carey L. Biron
WASHINGTON , Jun 17 2014 (IPS)

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
LeCompte says.

“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.”

*Medium-term solutions*

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.

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."[The case against Argentina] will set a precedent that will just have huge repercussions in terms of global poverty."
-- Eric LeCompte

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.”