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:

Argentina has now taken the U.S. to The Hague for blocking the country’s 2005 settlement with the bulk of its creditors. The issue underscores the need for an international mechanism for nations to go bankrupt.

Better yet would be a sustainable global monetary scheme that avoids the need for sovereign bankruptcy.Better than redesigning the sovereign bankruptcy mechanism might be to redesign the global monetary scheme in a way that avoids the continual need for a bankruptcy mechanism.

Argentina was the richest country in Latin America before decades of neoliberal and IMF-imposed economic policies drowned it in debt. A severe crisis in 2001 plunged it into the largest sovereign debt default in history.

In 2005, it renegotiated its debt with most of its creditors at a 70 percent “haircut.” But the opportunist “vulture funds,” which had bought Argentine debt at distressed prices, held out for 100 cents on the dollar.

Paul Singer’s Elliott Management has spent over a decade aggressively trying to force Argentina to pay down nearly 1.3 billion dollars in sovereign debt. Elliott would get about 300 million dollars for bonds that Argentina claims it picked up for 48 million. Where most creditors have accepted payment at a 70 percent loss, Elliott Management would thus get a 600 percent return.

In June 2014, the U.S. Supreme Court declined to hear an appeal of a New York court’s order blocking payment to the other creditors until the vulture funds had been paid. That action propelled Argentina into default for the second time in this century – and the eighth time since 1827.

On Aug. 7, Argentina asked the International Court of Justice in the Hague to take action against the United States over the dispute.

Who is at fault? The global financial press blames Argentina’s own fiscal mismanagement, but Argentina maintains that it is willing and able to pay its other creditors. The fault lies rather with the vulture funds and the U.S. court system, which insist on an extortionate payout even if it means jeopardising the international resolution mechanism for insolvent countries.

If creditors know that a few holdout vultures can trigger a default, they are unlikely to settle with other insolvent nations in the future.

Blame has also been laid at the feet of the IMF and the international banking system for failing to come up with a fair resolution mechanism for countries that go bankrupt. And at a more fundamental level, blame lies with a global debt-based monetary scheme that forces bankruptcy on some nations as a mathematical necessity. As in a game of musical chairs, some players must default.

Most money today comes into circulation in the form of bank credit or debt. Debt at interest always grows faster than the money supply, since more is always owed back than was created in the original loan. There is never enough money to go around without adding to the debt burden.

As economist Michael Hudson points out, the debt overhang grows exponentially until it becomes impossible to repay. The country is then forced to default.

Fiscal mismanagement or odious debt?

Besides impossibility of performance, there is another defense Argentina could raise in international court – that of “odious debt.” Also known as illegitimate debt, this legal theory holds that national debt incurred by a regime for purposes that do not serve the best interests of the nation should not be enforceable.

The defence has been used successfully by a number of countries, including Ecuador in December 2008, when President Rafael Correa declared that its debt had been contracted by corrupt and despotic prior regimes. The odious-debt defence allowed Ecuador to reduce the sum owed by 70 percent.

In a compelling article in Global Research in November 2006, Adrian Salbuchi made a similar case for Argentina. He traced the country’s problems back to 1976, when its foreign debt was just under six billion dollars and represented only a small portion of the country’s GDP. In that year:

An illegal and de facto military-civilian regime ousted the constitutionally elected government of president María Isabel Martínez de Perón [and] named as economy minister, José Martinez de Hoz, who had close ties with, and the respect of, powerful international private banking interests.

With the Junta’s full backing, he systematically implemented a series of highly destructive, speculative, illegitimate – even illegal – economic and financial policies and legislation, which increased Public Debt almost eightfold to 46 billion dollars in a few short years.

This intimately tied-in to the interests of major international banking and oil circles which, at that time, needed to urgently re-cycle huge volumes of “Petrodollars” generated by the 1973 and 1979 Oil Crises.

Those capital in-flows were not invested in industrial production or infrastructure, but rather were used to fuel speculation in local financial markets by local and international banks and traders who were able to take advantage of very high local interest rates in Argentine Pesos tied to stable and unrealistic medium-term U.S. dollar exchange rates.

Salbuchi detailed Argentina’s fall from there into what became a 200 billion dollars debt trap. Large tranches of this debt, he maintained, were “odious debt” and should not have to be paid:

“Making the Argentine State – i.e., the people of Argentina – weather the full brunt of this storm is tantamount to financial genocide and terrorism. . . . The people of Argentina are presently undergoing severe hardship with over 50% of the population submerged in poverty . . . . Basic universal law gives the Argentine people the right to legitimately defend their interests against the various multinational and supranational players which, abusing the huge power that they wield, directly and/or indirectly imposed complex actions and strategies leading to the Public Debt problem.”

Of President Nestor Kirchner’s surprise 2006 payment of the full 10 billion dollars owed to the IMF, Salbuchi wrote cynically:

“This key institution was instrumental in promoting and auditing the macroeconomic policies of the Argentine Government for decades. . . . Many analysts consider that . . . the IMF was to Argentina what Arthur Andersen was to Enron, the difference being that Andersen was dissolved and closed down, whilst the IMF continues preaching its misconceived doctrines and exerts leverage. . . . [T]he IMF’s primary purpose is to exert political pressure on indebted governments, acting as a veritable coercing agency on behalf of major international banks.”

Sovereign bankruptcy and the “Global Economic Reset”

Needless to say, the IMF was not closed down. Rather, it has gone on to become the international regulator of sovereign debt, which has reached crisis levels globally. Total debt, public and private, has grown by over 40 percent since 2007, to 100 trillion dollars. The U.S. national debt alone has grown from 10 trillion dollars in 2008 to over 17.6 trillion today.

At the World Economic Forum in Davos in January 2014, IMF Managing Director Christine Lagarde spoke of the need for a global economic “reset.”

National debts have to be “reset” or “readjusted” periodically so that creditors can keep collecting on their exponentially growing interest claims, in a global financial scheme based on credit created privately by banks and lent at interest. More interest-bearing debt must continually be incurred, until debt overwhelms the system and it again needs to be reset to keep the usury game going.

Sovereign debt (or national) in particular needs periodic “resets,” because unlike for individuals and corporations, there is no legal mechanism for countries to go bankrupt. Individuals and corporations have assets that can be liquidated by a bankruptcy court and distributed equitably to creditors.

But countries cannot be liquidated and sold off – except by IMF-style “structural readjustment,” which can force the sale of national assets at fire sale prices.

A Sovereign Debt Restructuring Mechanism ( SDRM) was proposed by the IMF in the early 2000s, but it was quickly killed by Wall Street and the U.S. Treasury. The IMF is working on a new version of the SDRM, but critics say it could be more destabilising than the earlier version.

Meanwhile, the IMF has backed collective action clauses (CACs) designed to allow a country to negotiate with most of its creditors in a way that generally brings all of them into the net. But CACs can be challenged, and that is what happened in the case of the latest Argentine bankruptcy. According to Harvard Professor Jeffrey Frankel:

“[T]he U.S. court rulings’ indulgence of a parochial instinct to enforce written contracts will undermine the possibility of negotiated restructuring in future debt crises.”

We are back, he says, to square one.

Better than redesigning the sovereign bankruptcy mechanism might be to redesign the global monetary scheme in a way that avoids the continual need for a bankruptcy mechanism. A government does not need to borrow its money supply from private banks that create it as credit on their books.

A sovereign government can issue its own currency, debt-free. But that interesting topic must wait for a follow-up article. Stay tuned.

Ellen Brown can be found on her Web of Debt Blog.

Edited by: Kitty Stapp

Argentine President Cristina Fernández addressing supporters in a courtyard in the government palace on Jul. 31, after giving a speech to the nation to explain the country’s debt payment situation. Credit: Casa Rosada

By Fabiana Frayssinet
BUENOS AIRES, Aug 4 2014 (IPS)

Argentina’s supposed “default”, an unprecedented case in the history of world capitalism, sets a legal, political and financial precedent that indicates the need for concrete measures regarding the fine line between legal, ethical business activities and criminal usury.

In the debate, the orthodox financial sectors say Argentina’s failure to comply with U.S. Judge Thomas Griesa’s ruling means it has once again defaulted, while others argue that it has actually honoured its commitments and made its payments, and the fact that the funds have not reached the creditors is not the government’s fault.

“Preventing someone from paying is not default,” said President Cristina Fernández in a Jul. 31 nationally televised address, after a meeting with the so-called vulture funds – opportunistic investors who purchase the debt of heavily indebted countries at pennies to the dollar and then vigorously pursue full repayment in court – which failed to come up with a solution to the conflict.

“Now they invented a new term: ‘selective default’. It doesn’t exist. Preventing someone from taking our payments is not default. I told them they would have to invent a new word,” she said with irony.

At a Jul. 30 meeting in New York with Argentine officials, the mediator named by the U.S. court, Daniel Pollack, rejected Argentina’s offer to restructure the debt in the hands of “holdout” creditors – those who did not agree to the 2005 or 2010 debt swaps.

Since Argentina defaulted on nearly 100 billion dollars in debt in late 2001, during the worst economic crisis in the country’s history, 92.4 percent of the bonds have been restructured at a deep discount, with lower interest rates and at longer terms.

But a group of hedge funds that refused to participate in the two debt restructurings sued for full payment of 1.3 billion dollars in Argentine bonds in federal court in New York.

The offer made by Argentina in the Jul. 30 negotiations was for the holdouts to restructure their debt in conditions similar to those accepted earlier by the vast majority of creditors – under late president Néstor Kirchner (2003-2007) in 2005, and under his successor and widow Fernández in 2010.

Jul. 30 was the deadline to pay 539 million dollars in interest due on the discount bonds.

The Fernández administration had deposited the funds with the bond trustee, the Bank of New York Mellon (BoNY Mellon). But Judge Griesa blocked the payments to the bondholders because the Argentine government ignored his order to also pay the hedge funds.

”Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default,” Pollack said after the meeting in New York. “Default is not a mere ‘technical’ condition, but rather a real and painful event that will hurt real people.”

In an Aug. 1 court hearing, Argentina’s representatives unsuccessfully demanded that Pollack be removed as mediator, because of his remarks.

Some credit rating agencies lowered the rating on Argentina’s foreign currency bonds to “selective default”, while the judge avoided using that term in the Aug. 1 hearing but said it was clear that there had been no payments.

Argentine Economy Minister Axel Kicillof said “Argentina is not in default, because it has already paid. The bondholders did not pick up their payments because of a ban put in place by Judge Griesa.

“They talk about technical default, selective default — some have called it Griesa default, Griefault. No one knows what to call it because it is new, because it doesn’t exist, because no one would have thought that a judge could come along, and say – after the payment – ‘I’m going to order the banks to not meet their contracts.’ ”

Alejandro Drucaroff, a lawyer who specialises in banks and finance, pointed out to IPS that the debt swaps accepted by the vast majority of creditors “involved major discounts of capital and interest and very long terms for repayment.” But he also stressed that Argentina has punctually met all of its payments.

Some of the holdouts – the 7.6 percent of the creditors, who refused to accept the swaps that offered about 35 cents on the dollar – sold their bonds to hedge funds, two of which later sued in federal court in New York for full payment of 1.3 billion dollars in bonds, roughly one percent of the total debt.

The vulture funds acquired the bonds in 2008 at 20 to 30 percent of their nominal value.

In 2012 Judge Griesa ordered Argentina to pay the bonds at full-face value, plus interest and fees – some 1.5 billion dollars.

On Jun. 16, the U.S. Supreme Court rejected an appeal by the Argentine government, thus upholding the earlier ruling, which banned Argentina from making payments on the restructured debt unless it also paid the holdouts.

“That ban, which has no legal basis and goes beyond the judge’s legal authority, has no practical effect because Argentina met its payments anyway,” Drucaroff said.

But after BoNY Mellon was “warned” by Griesa that transferring the money to bondholders would violate his ruling, the bank held on to the funds.

“Griesa does not have the authority to keep Argentina from paying its debts to third parties not involved in the trial. Nor does he have authority over funds that aren’t from the U.S. – he can’t embargo them,” Drucaroff argued.

“There is no default; what this is, is an absolutely unprecedented legal situation,” the lawyer added.

“BoNY should be held accountable by the 92.4 percent of creditors and by Argentina for failing to comply with its function,” he said. “It could argue that it acted the way it did because it could be found guilty of contempt of court as a result of Griesa’s ruling – and in my opinion, in that case Griesa would also be responsible for preventing the money from reaching the creditors.”

According to University of Buenos Aires economist Fernanda Vallejos, the wording in the contracts makes it clear that a default would only occur “if Argentina didn’t pay.”

“However, the country not only has the will and the capacity to pay, but it has already paid and will continue to do so,” she added.

That, in her view, is independent of the credit rating agencies, “which in their eagerness to pave the way for the vulture funds to do business, because of the payment of default insurance, invent terms like ‘selective default’, which have nothing to do with reality or with Argentina’s financial solvency.”

The problem, the Argentine government says, are not the 1.5 billion dollars that the judge and the plaintiff are demanding payment of, but the fact that the debt would skyrocket if the bondholders that accepted a discount sued for repayment at full value as well.

The government said the debt could climb as high as 500 billion dollars in that case, which would throw the country back into a crisis similar to the one that triggered the 2001 default in the first place.

Political analyst Alejandro Horowicz said: “A plunge in our foreign reserves of that magnitude would not only affect international trade but would make the fixed exchange rate impossible to control and hence the rest of the reserves would face the same fate and would end up fleeing in a vain attempt to curb the stampede in the price of the dollar.”

Vallejo warned that the U.S. court ruling discouraged any process of debt restructuring by favouring “a small minority who represent the most savage face of international financial capital.”

“Who would accept a restructuring like Argentina’s if by bringing legal action in the courts of any country you can get that level of returns and repayment at full face value?” she asked.

The economist said an international regulatory framework is needed “that would preserve debt restructuring processes and put limits on the complete deregulation of the financial markets which trod roughshod over states and subjugate people.”

Vulture funds are already under scrutiny from governments and international bodies, among which there is a growing consensus that they should be reined in.

Nearly all of them “were involved in the latest international financial crisis [which broke out in 2008] by means of a range of speculative maneuvers that in many cases were actually illegal,” Drucaroff said.

“In theory a large part of the ‘formal’ financial system rejects them and sees them as running counter to business ‘ethics’. But no concrete step has been taken to curtail their activities which, to a large extent, are carried out through tax havens,” he said.

An area in which the question of whether Argentina defaulted or not is just one tip of the iceberg.

Edited by Estrella Gutiérrez/Translated by Stephanie Wildes

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.

Aggressive creditors and investors are seriously undermining the ability of poor countries to deal sustainably with debt issues, academics and anti-poverty campaigners told a briefing at the U.S. Capitol on Wednesday.

Further, many of these investors are now based in the United States, after other important financial centres have moved to curtail such practices. As such, national lawmakers and international experts are stepping up calls for Washington both to follow suit domestically and to lead a related international effort.“If the hedge funds win, they will have a precedent that will allow them to dismantle 15 years of core U.S. debt restructuring policy." -- Jubilee's Eric LeCompte

“We need to acknowledge that aspects of the financial crisis could have been prevented if we had basic, common-sense principles on responsible lending and borrowing within the international financial system,” said Eric LeCompte, executive director of Jubilee USA, a network of anti-debt campaigners and a co-host of Wednesday’s briefing.

“In fact, both Northern and Southern countries that have gone through severe external debt crisis may have been saved the severe shocks to their economies and austerity restructuring if these reasonable principles were in place.”

(Jubilee released a full report on these proposed principles last year.)

Maxine Waters, a member of the House of Representatives, agreed, saying in a statement, “The time has come for the world to design a formal, more efficient system for managing the restructuring of sovereign debt.”

At issue is a strategy adopted by a small number of hedge funds 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 typically agree to reduce some debts, accepting lower-than-expected returns that nonetheless allow the indebted government to begin to recover. Even a single such “holdout creditor” (also known as a “vulture fund”, for having purposefully sought out governments in fiscal distress) can gum up the entire debt-restructuring process.

“One of the most obvious remedies being discussed is that of collective action clauses, which allow a super-majority of creditors to force holdouts to accept a restructuring,” Rep. Waters noted Wednesday.

“Yet it would be wrong to rely solely on such clauses … This is why I favour the establishment of a formal, institutionalised, and politically recognised mechanism for restructuring the debt of bankrupt sovereigns, which would address all forms of debt.”

Other countries, most notably the United Kingdom, have already put in place restrictions aimed at undercutting the motivation to engage in such “vulture” speculation. Yet the United States has yet to do so.

On Wednesday, Cephas Lumina, the United Nations independent expert on the effects of foreign debt, noted that the U.S. is today a “preferred jurisdiction” for holdout creditors. He called on Washington to take “robust legislative measures … to limit the ability of vulture funds to pursue immoral profits at the expense of the poor.”

High stakes

In the aftermath of the 2008-09 financial crisis, government debt has become an increasingly important topic for all countries. And as austerity measures increasingly impact on poor communities, some advocates suggest that stronger international principles on sustainable lending practices could mitigate some of these ongoing ramifications.

Perhaps improbably, the issue of holdout creditors has heated up considerably here in Washington in recent months. Much of this is due to a landmark legal fight taking place between the government of Argentina and two New York-based hedge funds – NML Capital and Aurelius – that own some of the bonds Buenos Aires, then facing bankruptcy, defaulted on in 2001.

In a widely watched decision, in August a judge ordered the Argentine government to pay the two funds nearly 1.5 billion dollars. But Buenos Aires rejected the decision, saying that it would continue to repay its debts on its own terms (indeed, it is barred from paying the hedge funds, due to a law passed by the Argentine legislature in 2005).

It also warned that agreeing to pay off NML and Aurelius would embolden the 93 percent of Argentina’s other creditors – each of which has agreed to accept lower repayment – to demand their full share. Doing so, Argentina noted, would put the government back in the situation it faced in 2001.

The case has now been appealed to the U.S. Supreme Court. Although the justices refused to take on the issue in October, following a new appeal many observers now see a high probability the court will review the case.

Jubilee’s LeCompte says the stakes are high. Most countries facing holdout creditors, it should be noted, are far poorer than Argentina.

“The outcome could have some of the most far-reaching consequences for global poverty in our lifetimes,” he says.

“If the hedge funds win, they will have a precedent that will allow them to dismantle 15 years of core U.S. debt restructuring policy. With this precedent, the hedge funds will hurt some of the most fragile economies in the world.”

In June, even the International Monetary Fund was planning to file a brief on behalf of Argentina with the U.S. Supreme Court, its first ever such move. That decision was scuttled, however, reportedly due to lack of support from the U.S. government.

Legislative momentum?

Some see the issue’s suddenly high visibility as encouraging for potential legislative action.

“It would certainly be good timing right now, so we’ll probably see something rolling out,” Nathan Coplin, coordinator of the New Rules for Global Finance Coalition, a Washington-based international network of activists and researchers, told IPS.

“This will have a major precedent for sovereign debt for middle income and low-income countries. But there could also be an impact for the United States – given that one holdout creditor can stall the entire [restructuring] process, countries may consider issuing their bonds outside the U.S.”

It is currently unclear how much appetite there is in the U.S. Congress to tighten regulations on holdout creditors. Representative Waters has repeatedly introduced legislation to do so in past years, but none of these proposals was even brought up for a full vote.

Still, despite the significant lobbying power of the U.S. financial services industry, most investors don’t want to have anything to do with “vulture funds”.

“Certainly legitimate investors are in support of having a streamlined process, in which they can restructure the debt and move on,” Coplin says. “Where exactly the pushback is coming from is an interesting question – it’s hard to see how a small group of investors and hedge funds could influence or obstruct any kind of legislation.”

The Casa Rosada, the seat of the Argentine government, which is seeking to reopen a debt swap to overcome the legal action brought by “vulture funds”. Credit: Marcela Valente/IPS

By Marcela Valente
BUENOS AIRES, Aug 29 2013 (IPS)

As a sign of Argentina’s willingness to repay its bondholders, President Cristina Fernández introduced a bill for a new swap of the foreign debt held by “holdout” creditors who refused earlier restructurings after the country’s late 2001 default.

This time around, most of the opposition backs the proposal.

In the initiative that the Senate began to discuss on Wednesday Aug. 28, the government seeks authorisation to reopen the debt restructuring process for a second time.

Although 93 percent of bondholders accepted the earlier restructurings, in 2005 and 2010, the remaining seven percent refused the offer of about 35 cents on the dollar, and insisted on full repayment.

Through the restructuring, Argentina renegotiated 90 billion dollars in debt.

The new swap, expected to be approved by Congress, would offer the same conditions as the previous deal. The difference is that it would be open-ended, whereas the earlier exchanges gave bondholders only a few months to swap their debt.

“Equity is a foundation stone of this debt restructuring process,” states the bill, which prohibits offering holdouts who have brought legal action more favourable treatment than those who did not do so.

The government initiative is in response to the Friday Aug. 23 ruling by the U.S. Court of Appeals for the Second Circuit in New York – the last step before the Supreme Court – that upheld an earlier decision that Argentina must pay the holdouts in full.

Fausto Spotorno, an economist with the Centre for Economic Studies, told IPS that the bill “is very reasonable.”

“They should never have closed the swap. But opening it now is a good political signal to the justice system and could get some more of the bondholders to agree to an exchange,” he said.

Spotorno said that if the case was accepted by the Supreme Court, a favourable verdict for Argentina was unlikely.

The hedge funds that sued in federal court in New York for full payment of 1.3 billion dollars in Argentine bonds had acquired them in 2008 at 20 to 30 percent of their nominal value.

They are known as “vulture funds” – opportunistic investors who purchase the debt of heavily indebted countries cheap and then sue for full repayment.

The lawsuit in New York is led by hedge fund billionaire Paul Singer’s Elliott Management.

The bill presented by the Argentine government stresses that the holdouts who sued represent only a small portion of the unrestructured debt. It also points out that if they were paid 100 percent of the nominal value, as they are demanding, they would make a profit of 1,300 percent.

The bill also states that “it is common knowledge that our country is the object of ruthless legal attacks and heavy political pressure by these vulture funds.”

When she unveiled the proposal on Monday Aug. 26, centre-left President Fernández said the Aug. 23 U.S. court ruling was “unfair to our country” because it ignored the restructuring agreements reached with 93 percent of the bondholders.

She also said “we are serial payers, not serial debtors.”

Since the restructuring began, Argentina has serviced its debt punctually.

By 2003, the country’s debt represented 150 percent of GDP, the bill presented to the legislature states. The country has not had access to the global credit markets since 2002.

But as the economy began to recover from the 2001-2002 severe economic crisis, the debt situation began to improve as well.

According to the latest report by the Economy Ministry, as of late 2012 Argentina held 83 billion dollars in net debt, equivalent to 18.8 percent of GDP.

And with the payment of restructured bonds scheduled for September, the foreign currency denominated private debt to GDP ratio will drop to just 8.3 percent, Economy Minister Hernán Lorenzino said.

However, the country’s successful reduction of the debt burden is threatened by the small group of litigious hedge funds, which found their first ally in District Judge Thomas Griesa, who handed down the initial sentence in New York, in March.

The Aug. 23 ruling, which will be appealed by Argentina, dealt a blow to the restructuring process that Fernández’s late husband Néstor Kirchner, her predecessor, began while serving as president from 2003 to 2007.

If Argentina was forced to pay 100 percent of what the holdouts are owed in principal and accrued interest, the bondholders who agreed to the 2005 and 2010 restructurings could invoke the “most favoured creditor clause” and demand the same treatment.

Fernández also proposed that the voluntary debt swap invite holders of foreign-law bonds to exchange them for new debt that would be paid under Argentina’s local legislation, in order to evade eventual embargoes in case the Supreme Court upholds the Aug. 23 ruling.

The Radical Civic Union, the main opposition party in both houses of Congress, responded positively to the bill overall. But some of its leaders said the measure came too late, or contained overly critical language when referring to the holdout creditors and the judges.

The right-wing PRO also called the bill “reasonable.”

“Argentina has to do whatever it can to get the Court to open the case and turn around the sentence,” PRO lawmaker Federico Pinedo told IPS.

He said it was necessary to act “responsibly and in a serious manner, and to send out a message that we want to ensure equal conditions for all of the creditors. That is an argument that holds a great deal of weight with the Court.”

Many legislators, including members of the governing Frente para la Victoria, believe it will be difficult to get the vulture funds to agree to any kind of swap. But they say it is necessary to show a willingness to restructure the debt – as long as it is under conditions set by Argentina.

The fate of countries with major debt problems is at stake in federal courts in New York, which are to decide in April whether or not they accept Argentina’s proposal to the bondholders who rejected two restructurings of sovereign debt.

Since Argentina defaulted on nearly 100 billion dollars in debt in late 2001, close to 93 percent of the bonds have been restructured at a deep discount, with lower interest rates and at longer terms.

But a group of hedge funds that refused to participate in the 2005 and 2010 restructurings sued for full payment of 1.3 billion dollars in Argentine bonds in federal court in New York.

On Tuesday, the 2nd U.S. Circuit Court of Appeals in New York declined to grant a full-court rehearing of a decision by a three-judge panel that went against Argentina in October, ruling that this country had to deal with all of its debt holders equally.

The suit not only threatens to return Argentina’s debt restructuring process to square one. Experts warn that it could have an impact on the decision-making capacity of other countries that run into severe financial difficulties at times of global crisis.

The government of centre-left President Cristina Fernández has until Friday Mar. 29 to present a solution for making the payments to the hedge funds.

The government says it will offer the holdouts the same conditions as the ones accepted by the rest of the creditors in the 2010 restructuring: discounts, lower interest and longer terms.

But that would involve a new debt swap, which would require congressional approval because a law passed after 2010 banned the reopening of debt restructuring.

Argentina is now financially stable and makes its debt payments on time, despite the fact that it lost access to global credit markets after the December 2001 default, which was announced in the context of an economic and social meltdown.

According to the latest report by the Economy Ministry, as of mid-2012 Argentina holds 183 billion dollars in debt, equivalent to 41.5 percent of GDP, one of the lowest proportions in Latin America. The report did not include the defaulted bonds.

Up to now, the Fernández administration had refused to settle with the hedge funds, referring to them as “vulture funds” – opportunistic investors who purchase the debt of heavily indebted countries cheap and then sue for full repayment.

The lawsuit in New York is led by hedge fund billionaire Paul Singer’s Elliott Management. The hedge funds acquired the Argentine bonds at 20 to 30 percent of their nominal value.

If the courts finally come down on the side of the hedge funds, Argentine assets could be embargoed internationally.

Some experts in Argentina believe the U.S. court will accept the Fernández administration’s proposal, in order to put an end to the dispute and to defend the credibility of global payment systems.

But others are more sceptical.

Fernando Porta, an economist with Centro Redes, a research institute in Buenos Aires, told IPS that if the courts in New York refused to recognise Argentina’s restructuring proposal, “a huge level of uncertainty would be introduced in the system.”

“The potential negative impacts would go beyond Argentina and would throw into question the operation of the international debt restructuring system when countries are having trouble meeting their payments,” he said.

Porta said that with respect to debt restructuring, there are no multilateral agreements setting rules, but merely precedents that give the process predictability.

For that reason, he believes Argentina’s proposal “will be accepted in the end,” although several other obstacles may have to be overcome first.

But analyst Fausto Spotorno with the Orlando Ferreres y Asociados consultancy was less optimistic. “I don’t think this proposal will be accepted by the holdouts,” he said.

In Spotorno’s view, the New York appeals court is unlikely to accept Argentina’s offer if it does not have unanimous support among the creditors. “The holdouts have the first-instance ruling in their favour, which means they aren’t going to accept a proposal with discounts and longer terms now,” he said.

The analyst said it was naive to believe that the court would take into account the impact that its decision could have on future cases of debt restructuring. “New bond issues contain clauses that prevent this problem,” he noted.

He was referring to collective action clauses (CACs), first proposed by Mexico in 2003, which since then have been included in bond issues to facilitate eventual restructuring.

CACs allow a majority of bondholders to agree to a legally binding debt restructuring. By forcing potential holdouts to accept the restructuring if a large majority of other creditors do so, it provides protection against vulture funds.

The clauses were used controversially by Greece in 2010, when it introduced them retroactively to restructure the country’s debt and avoid default, according to “Un ensayo sobre las Cláusulas de Acción Colectiva”, a paper on collective action clauses published in Mexico.

The study, published this year by Mexican economists Alejandro Castañeda and Pablo Newman in the Gaceta de Economía journal, says the new mechanism became widely used as a result of the threat posed by opportunistic creditors in the cases of Argentina and Peru.

The European Union has required the inclusion of CACs in all new eurozone bond issues since January.

But they had already been incorporated by most countries in Latin America and other regions, with varying minimum percentages of support required from bondholders.

In their report, the Mexican academics point out that the bonds issued by Argentina in its debt swaps contain CACs, but older rules requiring unanimous acceptance of new conditions apply to the bonds held by the holdouts.

Under the older rules, if one single bondholder rejects the proposed new financial terms, the process can be blocked by litigation which, if successful, can also benefit the rest of the bondholders – and seriously affect the state issuing the bonds.

But there are still countries with bonds issued in the 1990s that would be affected by a resolution against Argentina.