“Vulture Funds” Seek Dangerous Precedent In Argentine Debt Case

“Vulture Funds” Seek Dangerous Precedent In Argentine Debt Case

A woman holds her Argentine pesos as she waits to pay for her groceries in Buenos Aires, Argentina, Wednesday, Feb. 12, 2014. (AP Photo/Victor R. Caivano)

Argentina Requests Supreme Court Relief in “Vulture Fund” Case

By Carey L. Biron
Originally published in Mint Press News.

WASHINGTON — Argentina this week requested that the U.S. Supreme Court review a lower court ruling that would compel the country to pay more than $1.3 billion to U.S. “holdout” bondholders that the Argentine president has called “vultures.”

The case is being widely watched due to its immediate, as well as long-term implications. On one hand, economists worry that the lower court’s ruling could force Argentina back into default, potentially leading the Supreme Court justices to play the odd role of dictating another country’s economic fate.

Anti-poverty and global development advocates say any decision in favor of the bondholders would have far-ranging implications for future attempts at debt restructuring or debt relief. They say this would impact — first and foremost — the world’s poorest countries and the most marginalized communities within those countries.

“The ruling would make it very hard for debtors going through similar problems in the future to restructure their sovereign debt in a successful, timely and orderly fashion,” Aldo Caliari, director of the Rethinking Bretton Woods Project at the Center of Concern, a think tank here, told MintPress.

“This is bad news for the poorest and most vulnerable in the world, because we can expect more extended uncertainty in future crises. And in crises situations, the poorest and most vulnerable are the ones that suffer the most from job and service cuts, failures in the social safety net, and increases in inequality as wage [cuts] take a toll.”

The issue goes back to the economic crisis that seized Argentina for half of a decade starting in the late 1990s. It was partly spurred by financial problems in other parts of the world, including the bursting of the Internet bubble in the United States. With the country’s economy contracting by more than a quarter, the Argentine government defaulted on its external debt in 2001, then worth a record $95 billion.

Twice over the following decade, in 2005 and again in 2010, Argentine officials tried to restructure their debt by offering to “swap” the government’s externally held bonds for new ones worth around a quarter of the original value. The idea behind such a swap is that creditors can make back some of their money, write off the rest of the value as a loss and allow a struggling government to get back on its feet. About 93 percent of Argentina’s foreign creditors agreed to the swap.

Meanwhile, a very small number of creditors refused to do so, led by two U.S.-based hedge funds, Aurelius Capital Management and NML Capital. Instead, over the past decade these “holdout” creditors have waged a legal battle to force Argentina to make good on the original price of the debt they now hold.

Due to legal technicalities, by refusing to accept the bond swap offer, Aurelius and NML have held up the entire restructuring process.

Preferred jurisdiction

In a widely watched decision, in August a court in New York ordered the Argentine government to pay the two funds more than $1.3 billion dollars. Buenos Aires rejected the decision, saying that it would continue to repay its debts on its own terms. Indeed, a law passed by the Argentine legislature in 2005 bars it from paying the hedge funds.

Argentina has now requested the Supreme Court to revisit the August decision, questioning, among other things, the sovereignty issues involved in a U.S. court targeting assets held by another government. The previous decisions “effectively reach into Argentina’s borders, coercing it into violating its sovereign debt policies and commandeering billions of dollars of core sovereign assets,” according to the appeal filed this week.

The U.S. Supreme Court is already hearing another, narrower case in the fight over Argentina’s holdout creditors, with arguments expected in April. Some observers say it would appear likely the court would want to hear the broader case, though others disagree.

It’s important to note that Aurelius and NML were not original holders of Argentine bonds. Rather, following the country’s financial implosion, these and other hedge funds purchased Argentine debt at extremely cheap prices. Now they stand to make a massive return on their investment if the U.S. courts decide in their favor.

The United Nations has noted that the United States is the “preferred jurisdiction” for holdout creditors. As such, a Supreme Court decision could largely make or break this type of “holdout” activity far into the future, with a favorable ruling legally legitimizing such activity.

“As the International Monetary Fund has recognized, it will do this by reinforcing the belief among creditors that not participating in debt restructurings and suing for the full amount is a feasible avenue to recover their claim in full,” Caliari said. “With this, the chances that any debtor country can in the future succeed in achieving a debt restructuring solution with its creditors will diminish significantly.”

Indeed, some suggest that players such as Aurelius and NML are fighting so hard for the Argentina case less for the money that’s at stake in this case, and more for the model that a favorable ruling would solidify for future such actions.

“At the end of the day, Argentina caucuses with the [Group of 20 industrialized] countries – it has the financial means and is able to hire the lawyers that countries such as Cote D’Ivoire and Zambia can’t,” Eric LeCompte, executive director of Jubilee USA Network, a religious anti-poverty organization, told MintPress.

“The precedent of this case will essentially allow these predatory hedge funds to take advantage of poor countries in sub-Saharan Africa and those struggling throughout Eastern Europe. Part of me wonders whether the holdout hedge funds are more interested in the precedent of this case than in actually collecting from Argentina.”

Improvement through pain

At the heart of the current judicial wrangling, of course, are intricacies of U.S. law. Yet LeCompte warned that the broader problem – what truly allowed for such a situation to arise in the first place – is what he calls the “mind-bogglingly illogical” structure of today’s international financial system.

“The reality of why we’ve had more than a decade of litigation on this case is because of the absence of a sovereign bankruptcy process, a transparent arbitration process like we have in most developed countries around the world. We need to understand that this whole problem essentially starts with this lack of process,” LeCompte said.

“With that absence, we have an international financial system that’s not regulated. Essentially, the way that debt restructuring has been looked at is that it needs to hurt the struggling economy in order to work – that we can only improve economies by hurting them.”

There is both domestic and international momentum on creating such a bankruptcy mechanism, though nothing is imminent on the horizon. Jubilee USA will be moving forward with legislation on responsible lending and borrowing in the U.S. Congress later this year. (The group released a full report on proposed principles in 2012.)

Several U.N. bodies are also currently looking at ways to outlaw holdout-type behavior, while the International Monetary Fund (IMF) has expressed its own similar concerns. Such processes have the backing of governments around the world, which are likewise taking various actions to outlaw vulture funds through domestic laws.

The Obama administration, too, has been a forceful advocate on behalf of Argentina as these cases have moved through the courts. If the Supreme Court takes up the new request, many observers expect that it would do so again.

While the U.S. government’s concern is partially moral – distress over the impact of holdout creditors on poor countries – it also has to do with its own finances. After all, the pots of money targeted by many vulture funds in the aftermath of a country’s economic crisis often come from bilateral and multilateral relief funds, including those from the United States.

“The U.S. understands the potential impact here when the United States is part of giving debt relief to countries, because that’s the money these holdout creditors target and collect,” LeCompte said. “And they also know that it impacts on extreme poverty.”

If the Supreme Court justices decide to take the new Argentina case, oral arguments would take place this fall or next spring. If the court declines to take the case, the lower court directive for Argentina to pay Aurelius and NML would go forward – though Argentine authorities in the past have stated that they would never do so.

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  1. Tessa

    Jubilee Debt Campaign’s article:
    http://jubileedebt.org.uk/actions/support-argentinas-fight-against-vulture-funds
    Latest from Campaign issues, note Parliamentary Briefing on Vulture Funds.
    http://jubileedebt.org.uk/campaigns/stop-vulture-funds

    Co-op UK
    http://jubileedebt.org.uk/blog/vulture-funds-take-control-cooperative-bank
    “The same vulture fund which is trying to make Argentina default on its debt has now wrested the Cooperative Bank out of cooperative hands. Aurelius Capital Management, along with Silver Point Capital, have demanded more ownership of the Cooperative Bank in return for reducing the debt they are owed. The end result is that 70% of the Bank will now be owned by private investors rather than the Cooperative Group, including 10% each for Aurelius and Silver Point.”
    Note the comments.
    Since the article was written in October 2013 Aurelius have sold on.
    http://www.thenews.coop/33854/news/banking-and-insurance/last-minute-change-co-op-bank-plan-aurelius-sell-stake-perry-capital/#.Uz_nkKLK2t8
    http://www.managementtoday.co.uk/news/1223185/aurelius-bails-co-op-bank-ahead-crucial-vote/

    I found these links:
    What is LT2 group of hedge funds?
    http://www.globalclarity.info/2013/11/04/co-op-bank-to-close-50-branches-as-hedge-funds-broker-rescue-deal/
    The bank will only be able to use the Co-operative name if it keeps its ethical stance, and customers will be given their say on this next year. They were last asked for their opinions on which businesses to lend to and which ones to turn away in 2009 and, since the bank first began its ethical approach in 1992, it has turned away £1.2bn of business. An independent director will chair an ethics and values committee. The bank said “customer power” would keep it ethical. The group of hedge funds, advised by Caroline Silver of Moelis and known as LT2, stressed that it was determined to maintain the ethical stance for which the Co-op Bank is best known.

    http://www.americanbanker.com/magazine/123_10/the-25-most-powerful-women-in-finance-caroline-silver-moelis-1062218-1.html
    Silver’s advisory background at Morgan Stanley and Bank of America Merrill Lynch has put her at the heart of major exchange deals since 2001, including Euronext’s IPO and eventual sale to the NYSE.
    Through her work with a U.K. charity tackling global poverty, the London-based Silver has spent time in Africa and personally funds a microfinance initiative enabling the production of Shea butter by female farmers in northern Ghana. Silver also is involved in the Prince of Wales’ initiative to help the unemployed in the over-50 age group refashion themselves as entrepreneurs.

    More on” “The group of hedge funds, advised by Caroline Silver of Moelis and known as LT2, stressed that it was determined to maintain the ethical stance for which the Co-op Bank is best known.”
    The Save Our Bank Group (crowd power to keep our bank ethical) have just sent out their newsletter: http://www.saveourbank.coop/mailout-4apr
    “So, it’s spring, when’s the ethics consultation?
    The Co-op Bank announced late last year that it would consult with its customers on ethics “in spring”. We took a look outside and there is blossom on the trees, so we’re eager to see some sign of this soon!
    We want to make sure the bank gets the message loud and clear that there should be no watering down of the Ethical Policy that was one of the main reasons for many of us using the bank. We will be watching this consultation very carefully.
    Also, in light of the bonus scandal at The Co-op Group we have (as announced in our last newsletter) teamed up with Unite, Britain’s largest trade union, to call on the bank to firmly distance itself from the scandal at the Group by including questions on executive pay and bonuses in the upcoming consultation.
    We’ve had a brilliant response from Save Our Bank supporters – you have been writing and tweeting the bank in your hundreds to get the message across to the bank. While the consultation has not yet begun, it’s not too late to join in. Let’s keep the pressure on. See our page on how to contact the bank here.”

    http://saveourbank.coop/docs/ethical_policy.pdf

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