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| IIlustration by Jon Krause |
THE VULTURES VICTORY:
VULTURE FUNDS HAVE RAISED GREED TO A NEW LEVEL
A
recent decision by a UNITED STATES appeals court threatens to upend global
sovereign-debt markets. It may even lead to the US no longer being viewed as a
good place to issue sovereign debt. At the very least, it renders non-viable
all debt restructurings under the standard debt contracts. In the process, a
basic principle of modern capitalism – that when debtors cannot pay back
creditors, a fresh start is needed – has been overturned.
The
trouble began a dozen years ago, when ARGENTINA had no choice but to devalue
its currency and default on its debt. Under the existing regime, the country
had been on a rapid downward spiral of the kind that has now become familiar in
GREECE and elsewhere in EUROPE. Unemployment was soaring, and austerity, rather
than restoring fiscal balance, simply exacerbated the economic downturn.
DEVALUATION AND DEBT RESTRUCTURING WORKED.
In
subsequent years, until the global financial crisis erupted in 2008, ARGENTINA’S
annual GDP growth was 8% or higher, one of the fastest rates in the world.
Even
former creditors benefited from this rebound. In a highly innovative move, ARGENTINA
exchanged old debt for new debt – at about 30 cents on the dollar or a little
more – plus a GDP-indexed bond. The more ARGENTINA grew, the more it paid to
its former creditors.
ARGENTINA’S
interests and those of its creditors were thus aligned: both wanted growth. It
was the equivalent of a “Chapter 11” restructuring of AMERICAN corporate debt,
in which debt is swapped for equity, with bondholders becoming new
shareholders.
Debt
restructurings often entail conflicts among different claimants. That is why,
for domestic debt disputes, countries have bankruptcy laws and courts. But
there is no such mechanism to adjudicate international debt disputes.
Once
upon a time, such contracts were enforced by armed intervention, as MEXICO,
VENEZUELA, EGYPT, and a host of other countries learned at great cost in the
nineteenth and early twentieth centuries. After the ARGENTINE crisis, President
George W. Bush’s administration vetoed proposals to create a mechanism for
sovereign-debt restructuring. As a result, there is not even the pretense of
attempting fair and efficient restructurings.
Poor
countries are typically at a huge disadvantage in bargaining with big
multinational lenders, which are usually backed by powerful home-country
governments. Often, debtor countries are squeezed so hard for payment that they
are bankrupt again after a few years.
FINANCIAL FIRMS PUT THEIR OWN INTERESTS AHEAD OF THOSE OF
THE COUNTRY – AND THE WORLD.
Economists
applauded ARGENTINA’S attempt to avoid this outcome through a deep
restructuring accompanied by the GDP-linked bonds. But a few “vulture” funds – most notoriously the hedge fund Elliott
Management, headed by the billionaire
Paul E. Singer – saw ARGENTINA’S travails as an opportunity to make huge
profits at the expense of the ARGENTINE people. They bought the old bonds at a
fraction of their face value, and then used litigation to try to force ARGENTINA
to pay 100 cents on the dollar.
AMERICANS
have seen how financial firms put their own interests ahead of those of the
country – and the world. The vulture funds have raised greed to a new level.
Their
litigation strategy took advantage of a standard contractual clause (called pari
passu) intended to ensure that all claimants are treated equally.
Incredibly, the US Court of Appeals for the Second Circuit in New York decided
that this meant that if ARGENTINA paid in full what it owed those who had
accepted debt restructuring, it had to pay in full what it owed to the
vultures.
LENDERS ARE SUPPOSED TO BE EXPERTS ON RISK MANAGEMENT AND
ASSESSMENT
If
this principle prevails, no one would ever accept debt restructuring. There
would never be a fresh start – with all of the unpleasant consequences that
this implies.
In
debt crises, blame tends to fall on the debtors. They borrowed too much. The
creditors are equally to blame – they lent too much and imprudently. Indeed,
lenders are supposed to be experts on risk management and assessment, and in
that sense, the onus should be on them. The risk of default or debt
restructuring induces creditors to be more careful in their lending decisions.
THE REPERCUSSIONS OF THIS MISCARRIAGE OF JUSTICE MAY BE FELT
FOR A LONG TIME.
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US Judge Thomas Griesa: Impartial or lackey of Financial Institutions?
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After
all, what developing country with its citizens’ long-term interests in mind
will be prepared to issue bonds through the US financial system, when AMERICA’S
courts – as so many other parts of its political system – seem to allow
financial interests to trump the public interest?
Countries
would be well advised not to include pari passu clauses in future debt
contracts, at least without specifying more fully what is intended. Such
contracts should also include collective-action clauses, which make it
impossible for vulture funds to hold up debt restructuring. When a sufficient
proportion of creditors agree to a restructuring plan (in the case of ARGENTINA,
the holders of more than 90% of the country’s debt did), the others can be
forced to go along.
The fact that the International Monetary Fund, the US
Department of Justice, and anti-poverty NGOs all joined in opposing the vulture
funds is revealing. But so, too, is the court’s decision, which evidently
assigned little weight to their arguments.
For
those in developing and emerging-market countries who harbor grievances against
the advanced countries, there is now one more reason for discontent with a
brand of globalization that has been managed to serve rich countries’ interests
(especially their financial sectors’ interests).
In
the aftermath of the global financial crisis, the United Nations Commission of
Experts on Reforms of the International Monetary and Financial System urged
that we design an efficient and fair system for the restructuring of sovereign
debt. The US court’s tendentious, economically dangerous ruling shows why we
need such a system now.
ARGENTINA ANTICIPATED ADDRESSING
‘VULTURE FUNDS’ ISSUE AT G20 SUMMIT
The Argentine leader said Greece is going for its third debt
restructuring with ‘shaves’ and yet has been unable to pay, “and to us who have
agreed with 93% of bondholders and have been paying regularly since 2005, they
want to beat us down”.
After
arriving in RUSSIA for the two-day G20 summit, ARGENTINE President Cristina
Fernández stressed she will be addressing the “vulture funds issue” during the
summit despite the US rejected to mention it in the final statement.
The
ARGENTINE president said ‘vulture funds take advantage of everyone”
“Vulture
funds take advantage of everyone, not only ARGENTINA” she told reporters adding
ARGENTINA will discuss “employment creation, production and investment “which
are” the elements which will save the global economy amid a context of crisis”.
“I
was reading that in GREECE the government has allowed the sale of food with
expired dates and over a million government staff despite not having been paid
for the last year, still go every day to work fearing the loss of jobs”, added
the ARGENTINE president.
ARGENTINA WILL HOLD BILATERAL TALKS WITH RUSSIAN AND CHINA.
“These
are the things we should talk about and deal with the ‘vulture funds’ which
take advantage of countries close to defaulting or indebted as us” insisted
Cristina Fernandez. “This has happened to the GREEKS and the SPANIARDS and the PORTUGUESE
and in SPAIN vulture funds also purchased junk sovereign bonds at rock bottom
prices and will be asking for full face payment”.
The
Argentine leader said GREECE is going for its third debt restructuring with
‘shaves’ and yet has been unable to pay, “and to us who have agreed with 93% of
bondholders and have been paying regularly since 2005, they want to beat us
down”.
“The
St Petersburg summit is very special since it takes place at a delicate and
serious moment of world affairs, not only because of the economic crisis but
also because of the complicated global institutional situation such is security
in the MIDDLE EAST”
The
ARGENTINE head of state is expected to hold bilateral meetings with RUSSIAN leader
Vladimir Putin and CHINA’S Xi Jinping.
Secretary
General to the presidency Oscar Parrilli also informed Cristina Fernández will
be meeting INDIAN and JAPANESE leaders Manmohan Singh and Shinzo Abe
respectively as well as SOUTH AFRICAN head of state Jacob Zuma in the margins
of the multilateral reunion.
With
her CHINESE counterpart, the ARGENTINE leader will be signing three agreements
that aim at strengthening bilateral ties in strategic areas such as economy and
food.
Background Information:
BUSINESS CLIMATE IN LATIN AMERICA
REACHES 18-MONTH HIGH
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| Paul E. Singer |
Cristina
Fernandez will also receive at a special meeting the new chief of the World
Trade Organization, Roberto Azevedo.
According
to government sources, Cristina Fernández de Kirchner will be taking to the G20
table the official decision to reopen the debt swap (which already has
half-approval and is supported by the opposition) –facing a 1.3 billion dollar
legal dispute against US-based vulture funds-, calls to reform the
international financial system, the fight against tax havens, and the creation
of employment as a key element both to face and overcome the global crisis
hitting the world since 2008.
RUSSIA
occupies this year the rotating chair of G20 and is hosting the St Petersburg
summit at the St Constantine Palace. Putin said that the summit agenda will
concentrate on uniting efforts to prop global economic growth and promote
employment by creating jobs.
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