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:

“Family photo” at the fifth BRICS Summit, held in 2013 in Durban, South Africa. Credit: Government of South Africa

By Fabiana Frayssinet
BUENOS AIRES, Jun 18 2014 (IPS)

As Argentina starts to mend fences with the international financial markets, the emerging powers that make up the BRICS bloc invited it to their next summit. This could be a step towards this country’s reinsertion in the global map, after its ostracism from the credit markets since the late 2001 debt default.

For now, there is no letter “A” in the BRICS acronym, which stands for Brazil, Russia, India, China and South Africa. But in Buenos Aires speculation is rife about whether it should be called BRICSA, ABRICS or BRICAS, if Argentina is admitted.

The invitation for President Cristina Fernández to participate in the group’s sixth summit, scheduled for Jul. 15 in the northeast Brazilian city of Fortaleza, is seen as another sign that Latin America’s third-largest economy may be incorporated, after India, Brazil and South Africa indicated their interest.

“This is very significant for Argentina,” Fernanda Vallejos, an economist at the University of Buenos Aires (UBA), told IPS.

“It not only points to the recognition by the rest of the members of Argentina’s importance and potential, but also opens a door for our country to gain greater political and economic clout on the international stage.”

Vallejos stressed the key role played by BRICS over the last decade in the growth of the global economy at a time of financial crisis in the industrialised North.

The term BRICS was coined for the world’s major emerging markets in 2001 by economist Jim O’Neill of investment bank Goldman Sachs. Together, these countries represent around one-quarter of global GDP, 43 percent of the planet’s population, and 20 percent of global investment.

In addition, as Argentina’s foreign ministry stressed, the five countries account for 45 percent of the world’s labour force, hold over three trillion dollars in combined foreign reserves, and produce two billion tonnes a year of agricultural products.

Vallejos said that in a world where blocs are playing a bigger and bigger role, BRICS has a growing voice in international forums, where the members are “demanding participation in accordance with the weight of their economies.”

“The proposal set forth by India – with which bilateral trade expanded 30 percent in 2013 – and backed by Brazil and South Africa also puts paid to the opposition’s tired complaint about our country supposedly being isolated from the world,” said Vallejos, who is also a researcher at the Energy, Technology and Infrastructure Observatory for Development (OETEC).

The formal invitation to Fernández was issued by Russia, which also thus confirmed its support.

“I think this shows that Argentina is fully inserted in international relations, not ‘isolated from the world’,” Nicolás Tereschuk, a political scientist at UBA, told IPS. “It simply doesn’t toe the line with the policies of the central countries at just any cost or in any circumstances, as it used to do at other times in its history.”

Argentina’s invitation from BRICS came almost simultaneously with the May 28 announcement of an agreement reached by the Fernández administration and the Paris Club, which this country owed 9.7 billion dollars since the default 13 years ago.

Some political sectors here see the public debt contracted by the 1976-1983 military dictatorship as illegitimate. But the centre-left Fernández administration hopes the agreement with the Paris Club will facilitate the renewed flow of international credit and investment.

Economist Diego Coatz said the agreement and other measures adopted by the government such as “improving” its economic data, whose reliability was questioned by the International Monetary Fund (IMF), point to a “shift” by the authorities aimed at “reintegration in the world in financial terms…and at positioning the country better on the international front.”

Coatz, with the research centre of the Argentine Industrial Union – the country’s leading industrial employer federation – said that if Argentina is admitted to the BRICS bloc, “it will once more be seen as an emerging developing country with great potential.”

In addition, incorporation in the bloc would open a new window for external financing, when Argentina is in need of foreign exchange and investment, he said.

At the Fortaleza summit a formal decision could be reached on creating a regional development bank as an alternative to international financial institutions like the IMF, World Bank or Interamerican Development Bank.

The new bank would have a 50 billion dollar fund for financing infrastructure in the bloc’s member countries. It would also establish a joint foreign exchange reserves pool of 100 billion dollars, “which would serve as insurance against the volatility of the markets,” Vallejos said.

“Argentina could access financing at very beneficial rates compared to the heavy interest rates of other international institutions” in order to finance infrastructure for development, she underscored.

“The strengthening of international trade by the possible admission to BRICS means important possibilities for Argentina to make significant progress towards a more developed industrial sector, with insertion in global production chains, the development of strategic sectors and the industrialisation of the countryside,” Vallejos said.

The interest would appear to be mutual.

“The invitation came after the turmoil in emerging markets early this year, after which the ‘establishment’ international financial press talked about a ‘decline’ of BRICS,” Tereschuk said.

In addition, “growth in China is slowing down, India is at a decisive moment, with the dilemma of faster growth or stagnation, and the Brazilian economy is not really flourishing at this time,” the economist said.

So for them and the rest of the members of the bloc, “joining together with a periphery country that makes up the G20 [Group of 20] would seem to be a decision of interest to the BRICS countries,” he said.

The G20 block of leading industrialised and emerging economies “is in somewhat of a crisis itself, because of the crisis that the central countries are still immersed in.”

For that reason, according to Tereschuk, Argentina would be useful to the BRICS so that the voice of their two South American leaders, Argentina and Brazil, “would be heard in unison in the greatest number of places possible.”

The political scientist said Brazil and Argentina have led a “shift to the left with growth, reduction of poverty and inequality in a framework of democracy and greater political, civilian and social rights for their citizens.

“The other members of BRICS cannot offer all of these characteristics combined,” he said.

Vallejos, for her part, stressed Argentina’s role as a supplier of raw materials. “We are an agricultural powerhouse,” she pointed out.

In addition, “Argentina has the world’s second-largest reserves of lithium, one of the biggest reserves of gold – nearly 10,000 tonnes – 500 million tonnes of copper, and 300,000 tonnes of silver, while we are becoming the third-largest global exporter of potassium,” she said.
“We are sitting on the world’s third- largest platform of unconventional fossil fuels. And to that you have to add our technological development, and the development of nuclear energy for peaceful purposes,” she added.
So would it be “BRICAS”, “ABRICS” or “BRICSA”? At any rate, what is at stake is a bit more than deciding on a new acronym.

Nearly 20 of the world’s largest creditor countries have announced that they would be cutting nearly half of Myanmar’s total foreign debt, worth some six billion dollars.

Those countries, which include the United States, United Kingdom and several members of the European Union, are part of the Paris Club, a group of 19 of the world’s largest donors. On Monday, the group stated that its members were aware of Myanmar’s “exceptional situation” and had agreed to a 50-percent cancellation of arrears and a seven-year grace period for the remainder.

On the sidelines, Norway and Japan came to separate agreements to cancel additional debts amounting to around four billion dollars. President Thein Sein, who has overseen more than two years of contested political and economic reforms in Myanmar, had reportedly made debt relief a priority for his administration.

The Paris Club move comes just a day after the World Bank and the Asian Development Bank (ADB) came to a separate agreement to restructure close to a billion additional dollars that Myanmar owed the institutions. This deal, made possible by a substantial “bridge loan” from Japan, will give the country economic breathing room as it works to emerge from decades of international isolation and almost nonexistent economic and social development.

The deals follow on an agreement signed last month stipulating that Myanmar would adhere to conditionalities set by the International Monetary Fund (IMF). Together, the accords signed in recent days clear up, at least temporarily, almost three-quarters of Myanmar’s total foreign debt.

Estimated by the IMF at around 15 billion dollars, that debt load has been described by some economists and diplomats as one of the most significant impediments to the new government’s plans for reforms and development.

Among other things, the new agreements will allow Myanmar leeway to engage in new programmes through the World Bank, which had been constrained in the extent to which it could engage with the country. Last week, the World Bank approved a new credit, worth 440 million dollars, aimed at strengthening the country’s macroeconomic climate – and beginning to pay back the Japanese government’s bridge loan.

Future saddling

Myanmar received significant foreign financing during the 1980s, but that was largely halted following a brutal crackdown on civil liberties that began in 1988. By the end of the 1990s, the military government, amidst broad stagnation and increasingly isolated on the international stage, essentially stopped paying its foreign debts.

As the past two years of reforms have taken hold, however, international donors and multinational companies have begun to eagerly flood back into the country; the World Bank Group re-opened Yangon offices in August. Yet the fact that Myanmar will now again be fully integrated into the international framework strikes some overly quick – and the terms of the new agreements as overly generous.

“These agreements allow large amounts of new lending, before any investigation has been made into how past loans did and did not benefit the people of Burma,” Tim Jones, a policy officer with the Jubilee Debt Campaign, an international anti-debt advocacy group, said Monday in a statement.

He also noted that the new World Bank and ADB deals, which simply restructure rather than cancel Myanmar’s debts, will now allow the government once again to engage in borrowing from these institutions.

“None of these deals save Burma any money now, but they commit future governments to making payments on debt they inherit,” he says. “This support for a military dictatorship could bind the hands of a hoped-for future democratic government.”

Indeed, for all of the changes of the past few years, Myanmar’s government is still dominated by the military, with President Thein Sein himself a former general. And despite suggestions of significant factionalisation within that force, it is far too early for many in and out of the country to believe that the Myanmarese military is in any way reformed.

“It is incredible that Burma gets billions of dollars of debt relief when its biggest spending is on the military,” Anna Roberts, executive director of Burma Campaign UK, said Monday. “Burma’s leaders should be on trial in The Hague, not getting special deals on debt relief.”

Unnecessary exception

The “specialness” of the new deals is of particular interest. Over the past decade, after all, the international community has made some progress in consolidating a set of principles by which it should deal with foreign debt amassed by developing countries.

“If two developing countries have the same amount of debt, we’d like them to get the same deal,” David Roodman, who researches aid and debt relief at the Center for Global Development, a Washington think tank, told IPS.

“But according to the norms that have been developed, Myanmar didn’t meet those requirements. So this agreement not only is an exception to those rules but undermines the rules-based approach more generally.”

In evolving discussions over the past 10 years, the international community has agreed to define eligibility for debt relief based on the sustainability of debt levels – the ratio of debt to gross domestic product (GDP), for instance, or the ratio of debt to exports.

Yet Roodman says that while the agreed level for debt to GDP is 30 percent, Myanmar’s debt stands at just 18 percent of GDP, almost half of the stipulated requirement. Likewise, the level for debt to exports has been agreed at 100 percent, while Myanmar’s stands somewhat lower at 85 percent.

“Further, the IMF has done some scenarios through modelling on the likely course of exports and GDP in coming years in Myanmar,” he says, “and they found that the debt load, if anything, is going shrink.”

The key to understanding the Paris Club decision, then, might have to do less with development than with foreign policy. From this perspective, while foreign governments may be successfully jockeying for position with Myanmarese officials, they may be losing valuable leverage that could still be required down the road.

Notably, Myanmar still owes around two billion dollars to China, the military’s closest ally for decades and a key reason many Western countries may be prioritising relations with Myanmar today. In a new blog post, Roodman notes that opposition leader Aung San Suu Kyi has in the past urged foreign governments to suspend rather than end economic sanctions.

“(T)he threat of easy reinstatement, in her judgment, would spur further reform,” he writes. “The analogous step in the debt dance was to refinance defaulted loans rather than cancel them. Just as sanctions can be permanently abolished later, so can debts be.”