Financial vultures are a particular category of debt holders in countries on the periphery of global capitalism. Firstly, they are minority debt holders who usually only hold a small percentage of a country’s sovereign debt. Secondly, they are mostly secondary debt holders, which means that they purchase securities from the original creditors. Thirdly, they have unofficial support in Western courts. And fourthly, it is usually hedge funds that act as vultures. Other types of institutions refrain from such obvious financial pillaging, afraid of damaging their reputation.
The initial founder of vulture funds specialising in sovereign debts is believed to be Paul Singer, an American billionaire from New York. In 1977, he created the investment fund Elliott Associates, which managed to rob several poor countries. At the present time, there are at least 40 lawsuits in the courts filed by vulture funds against countries on the periphery of global capitalism. They have already managed to squeeze a lot of countries dry and have made a tidy sum in the process. According to a report by the IMF and World Bank, at least 11 developing countries have become victims of financial vultures who deal with sovereign debts.
Vultures in Latin America
It is believed that the development of financial pillaging techniques involving sovereign default began in Latin America. In the 1990s, financial vultures targeted Brazil and Peru. The pillage of Brazil was organised by the well-known vulture speculator Kenneth Dart. In 1992, Dart began buying up Brazil’s external debt for 25-40 percent of its nominal value. After buying up approximately 4 percent of the government’s USD 35 billion debt for USD 375 million, he became the largest private creditor in Brazil. To begin with, the country’s government did not understand who it was dealing with and saw the financier almost as a kind of benefactor. After a year, however, Dart exposed his bared teeth when he began talks with investors about restructuring the external debt. All of the investors approved the restructuring, except for Dart. Kenneth Dart turned out to be the person who managed to blackmail an entire government – you see, the restructuring could not go ahead without his agreement. Citicorp, Citibank, Banco di Brasil and other investors tried to persuade him, but to no avail. William Rhodes, senior vice chairman of Citicorp, met secretly with Dart at a private airfield in New York to convince him to leave Brazil alone. And still it came to nothing. In the end, the Brazilian government was forced to make a secret deal with Dart and offer him unusually favourable terms. Dart could already sense that he had backed the country into a corner, however, and demanded even more. The upshot was that Brazil went for broke and restructured its external debt independently of Dart. In principle, he still made quite a lot of money during the course of the restructuring, since he received significantly more than he had spent buying up the securities on the secondary market. But Dart still filed a lawsuit demanding that the Brazilian government pay USD 1.4 billion in compensation. Dart was in litigation with Brazil for more than two years and, in 1996, he was awarded the compensation, albeit significantly less than he had asked for. There’s a rumour that Dart now has his sights set on Ecuador.
At approximately the same time as Brazil was being hunted by Dart, the aforementioned Paul Singer was taking action against Peru through his investment fund Elliott Associates. In 1996, he purchased Peru’s debt securities with an original face value of USD 20 million for USD 11 million. Then, he threatened to bankrupt the country if Lima did not pay back the money with interest. Backed into a corner, the Peruvian government paid Singer USD 58 million in 2000, more than five times more than the speculator bought the securities for in the first place.
The chronology of events surrounding Argentina
To date, the most high-profile operation by financial vultures is against Argentina. In the 1990s, the IMF and the world’s media put Argentina forward as a model worthy of imitation. It was an example of the liberal economic model developed at the IMF and actively incorporated into the life of Argentina’s Ministry of Economics by Domingo Cavallo. At the end of 1998, Argentina’s economy entered a phase of decline. In exchange for a variety of unpopular measures, including cutting budget expenditure and raising taxes, the IMF, World Bank and US Treasury gave the country several loan tranches. The economic crisis deepened, however, there was a full-scale financial panic and the social fallout and political crisis of 2001-2001 ensued. The country’s economy came to a standstill, its external debt grew to a record level of USD 132 billion (166 percent of GDP), and the government was only able to service the debt (pay the interest) thanks to new tranches of external debt.
At the end of 2001, the IMF blocked the next tranche and Argentina’s government was left with only one option: to declare sovereign default on obligations with a total face value of USD 95 billion (on its so-called «privileged» loans, first and foremost loans from international financial organisations, the country continued to fulfil its obligations and did not declare default). A restructuring of Argentina’s debt securities was carried out in 2005 and 2010. It exchanged old securities for new ones with a 70 percent discount (up to 30 cents on the dollar). Debt holders received GDP-indexed bonds: the quicker the country’s economy grew, the more its creditors would receive. It is interesting that most, but not all, of the holders of Argentina’s debt agreed to exchange the old securities for new ones. Some of the holders of securities decided to sell their obligations to vulture funds for a heavily-reduced price. A few experienced speculators, primarily the hedge fund Elliott Management under the leadership of billionaire Paul Singer, have seen an opportunity to make huge profits on the problems being faced by the Latin American government. They have bought up the old obligations for next to nothing and have started to demand that Argentina pay the entire debt – up to 100 cents on every dollar. As wittily noted by one blogger: «hedge funds have behaved like a spoilt girl who, after buying a jumper in the sale at a 70 percent discount, demand that the shop take it back at full price». Argentina has run into exactly the same situation that Brazil, Peru and some African countries found themselves in not long before. The Argentine authorities have stood their ground, have not given in to the vultures’ blackmail attempts and have rejected their claims. Back in 2005, when the first restructuring of the debt was taking place, hundreds of lawsuits were filed against Argentina, but the country was sure that it was covered: small lenders rarely win cases in court and are even less likely to be able to seize government property.
Having failed to get Argentina to agree to pay back its debt at 100 percent, American vulture funds (NML Capital and Elliott Management) decided to file a lawsuit with a court in New York. In November 2012, the «fairest» American court in the world decided that Buenos Aires had to pay the bondholders USD 1.33 billion. Also, before transferring the money to the vultures, all remaining debt service payments had to be suspended. At the time the court’s decision was announced, Argentina’s restructured sovereign debt obligations amounted to nearly USD 24 billion (45 percent of GDP). Before 15 December 2012, Argentina had to pay nearly USD 3 billion on its debt obligations. It was the interests of those holding restructured securities that were discriminated against. Experts say that the amount of USD 1.33 billion that was ordered to be paid is just the tip of the iceberg. According to their estimations, the total volume of securities (at their original face value) in the hands of the «objectors» (those who refused to agree to restructuring) amounts to nearly USD 10 billion.
The New York court’s decision hit Argentina badly. After the decision was announced, all of Argentina’s investment and credit ratings fell sharply. By the end of 2012, it had become clear to everybody that the weapons of America’s global hegemony were not just missiles and aircraft carriers, but also American courts that had expanded their jurisdiction to cover the whole world. In Argentina, the decision of the American Themis was referred to as «judicial colonialism». Buenos Aires refused to obey the decision and filed an appeal with the American courts.
Financial vultures have a great deal of influence on more than just the judicial authorities. Would it be that surprising if Paul Singer was one of the main sponsors of the US Republican Party, for example? Using this influence, they are seeking to organise an economic blockade of Argentina without even resorting to the legislative ruling on introducing sanctions, but relying purely on court decisions. Attempts to seize Argentine assets abroad have already been initiated more than once. First and foremost, this has been the country’s air and sea transportation. President Cristina Kirchner, for example, is unable to fly to the West in her own presidential aeroplane, since at Washington’s bidding it would be seized at once.
This year, the United States Court of Appeals for the Second Circuit accepted Argentina’s complaint for examination. At the end of August 2013, the court announced its own, possibly historical, decision revoking the right of a sovereign state to independently manage its own debt… Argentina restructured its debt several years ago but now, because of the court’s decision and despite announcing its default in accordance with all the rules and having a signed agreement with investors, it will have to pay the American speculators, who bought up part of the country’s sovereign debt on the cheap, the total amount owing to them on the obligations, as though there had never been any kind of default at all.
The dispute is not yet over, however, and Argentina still has one more legal recourse left – the US Supreme Court.
The US Supreme Court could turn every country into a «debt colony»
If Argentina pays according to the court’s decision, then it will set a dangerous precedent. The holders of Argentina’s debt who agreed to a debt restructuring (to account for 97 percent of the original debt owed) will demand that everything be returned to its original position. In other words, Argentina will once again be forced into the same position it was in back in 2001 on the eve of the default.
As the Nobel Laureate and American economist Joseph Stiglitz said, the legal precedent regarding Argentina’s debt fundamentally changes the modern-day concept of the sovereign debt market and turns American investors into a privileged caste of «gods» in the global financial system, before whom debts have an unconditional and irrevocable character. The International Monetary Fund has also expressed its bewilderment at the legal precedent regarding Argentina’s debt. The decision deprives the IMF of the opportunity to recommend to countries how to carry out their debt restructuring, forces «third-world» countries into a debt hole without a trace and leaves them with absolutely no chance at all.
In November 2012 (immediately after the New York court’s scandalous decision), an article appeared in the Guardian newspaper entitled «How could Greece and Argentina – the new ‘debt colonies’ – be set free?» It was devoted to an analysis of the rights of nations to bankruptcy and contained suggestions for the international regulation of sovereign debts. The article was written by South Korean economist Ha-Joon Chang, one of the world’s leading specialists on developing economies and currently a lecturer at Cambridge. Ha-Joon Chang raises the following question: is a small hedge fund able to bankrupt one, or even two, countries? It is a huge economic and ethical problem that the global community is now being faced with. Ultimately, the price for these bankruptcies may be incredibly high – a new round of the global financial crisis. The problem is also that talks with creditors can last for years, pulling the economies of debtor countries into a spiral of crisis even more forcefully.
Europe has been keeping a close eye on the events unfolding in Argentina. If Argentina pays according to the court’s decision, then it will also set a dangerous precedent for EU member countries. You will recall that the largest restructuring of sovereign debt in Europe (and possibly the world) was carried out in 2012. I am referring to the Greek sovereign debt. An overwhelming share of the holders of Greek debt securities agreed to the terms of restructuring. Firstly, the face value of the debt securities was reduced by 53 percent. Secondly, repayment periods and interest rates were revised. In total, all of the obligations on Greece’s sovereign debt were reduced by 70-75 percent. The Greek debt, just through a review of the face value of securities, was reduced by EUR 107 billion. Everything would have been fine, but here is the ill luck: a small group of debt holders (no more than 3-4 percent) did not agree to the restructuring. Some of these filed lawsuits last year. The Argentine precedent could increase their chances of a win, and if they win their lawsuits in Europe, the entire restructuring of the Greek debt (nearly EUR 107 billion was written off at the time) may be subject to revision. A global financial turmoil would begin, the repercussions of which are difficult to predict. In February 2013, the Argentine Minister of Economy, Hernán Lorenzino, noted that the decision in favour of seven percent of the holders of default obligations who are calling for their debt to be paid back in full, is unfair with respect to the remaining 93 percent who agreed to the restructuring. According to Lorenzino, «the question at stake is whether sovereign debt restructuring, the necessity for which other countries around the world may also find themselves faced with, has a future».
International mechanisms to settle debt disputes are needed
Until recently, collective action clauses (CAC) were used in instances of an imminent default or its announcement, where the debtor suggests the conditions for debt restructuring. The matter is then put to a vote. If the majority of bondholders (usually between two thirds and three quarters) agrees to a debt restructuring, then the obligation to implement the agreements reached and adhere to the agreed payment schedule applies to all of the creditors. In the last 10 years, practically every country has issued bonds including CACs. It became the norm. However, the CAC rules started being torpedoed (legally disputed) by financial vultures.
Back in the 1990s, there was an idea floating around in the air to create an international body that would enable complicated disputes in connection with sovereign debts to be settled. After the crisis in Argentina, there was an attempt to create a single international mechanism that would ensure a fair restructuring of sovereign debt, but George Bush’s administration vetoed the project.
Ha-Joon Chang believes that practices from corporate law need to be introduced into the mechanism for managing sovereign bankruptcies. One should go back to the above-mentioned collective action clauses after concluding the relevant international agreements (conventions). The Korean economist is not alone in this view: analysts are leaning more and more towards the fact that the risks of debt colonialism are too high, especially for the global economy as a whole.
Well-known American economist Nouriel Roubini, who the press have dubbed an «economic prophet», has also commented on the American court’s decision. He points out that from the end of the 1990s, a system for carrying out controlled sovereign defaults has gradually evolved in the world. It was exactly one of these that Greece experienced in March of last year, when part of the country’s debt to private creditors was written off. The decision of the New York court could undermine the entire system, says Roubini, although it simply needed to be improved. Roubini is sure that the New York court’s decision sets an incredibly dangerous precedent for every country in the world, but first and foremost for Greece. It is Athens that will bear the brunt: the second restructuring of its private debt that the country needs will simply not happen. Roubini notes that Greece’s official creditors from the «Troika» (the European Commission, the European Central Bank and the IMF) are in no way better than the vulture funds. After all, controlled sovereign defaults have kept the status of «privileged» creditors for these structures who have to be paid 100 percent. Roubini believes that the IMF can and should look into the issue of settling disputes in cases where the threat of a default or its announcement is on the cards. The Fund is not looking into it, however. It is just silently spending its time looking at the illegal decisions of American courts.
Argentina against the financial vultures
So, Buenos Aires is going to try and contest the previous court rulings at the US Supreme Court. In this instance, according to experts, the affair could drag on until the middle of 2015. Argentina’s defence team has openly stated that if the court does not rule in its favour, then Buenos Aires will simply refuse to pay. «We are representing a government», lawyer Jonathan Blackman stressed, «and governments will not be told to do things that fundamentally violate their principles». Whereas before it had been the IMF interfering in the country’s internal affairs, now it is an American court.
If a default is still going to be announced, it could lead to a fall in the price of Argentina’s government bonds and deal a blow to local banks with a lot of accumulated debt. However, the majority of experts believe that a technical default will not plunge the country into crisis, since Argentine exporters do not depend as heavily on creditors for financing foreign trade as they did in 2001. Following the death of Venezuelan President Hugo Chavez, Cristina Kirchner is probably the most consistent fighter of American imperialism in Latin America. She features on the «black lists» of the Finance International together with Fidel Castro.
However, it is not just the President of Argentina in a special account at the Finance International, but the whole country. She is unable to exploit the opportunities of the international financial market to attract funds, but on the other hand she has learnt to live without external debt financing while maintaining a positive balance on foreign trade. At present, in other words, Argentina is not borrowing money but earning it. In 2011, the country had a positive balance of USD 13.3 billion, and in 2012 – USD 12.6 billion. The country is facing many social and economic difficulties, but the pace of its economic development is higher than in those countries that are obediently following the recommendations of the IMF and the decisions of American courts.