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A New York ruling which has Argentina dicing with default

19 Dec
Scenes from a default. Buenos Aires in 2001

Scenes from a default. Buenos Aires in 2001

Holdout creditors from the 2001 default, led by a debt depressed firm, are suing the Argentinian state for non-repayment of debt.

Two of the main funds suing are considered “vulture funds”, because they bought the debt on the secondary market meaning they purchased it off the original holders of the debt for a knockdown price, when it became clear Argentina was close to default and the price of the debt was reduced. The aim of vulture funds is to buy debt at their most depressed value and recover the full amount and sue if this is refused.

Over 11 years since Argentina defaulted on over $100 billion worth of debt, it has still been unable to settle the issues with all creditors. 7% of the debt holders have held out to proceed with litigation just as in this current case, while much of the rest of the debt has been restructured at a quarter of the original price and an agreement between the IMF and Argentina over debt repayments was agreed between 2005 and 2008.

The case follows on from rulings in the New York court in February and October 2012, which decided in favour of those currently suing the Argentinian state. One firm suing, NML Capital Ltd,  has since been responsible for the impounding the Argentine naval ship, the “Libertad”, off the coast of Ghana, also in October 2012.

The current hearing is Argentina’s appeal of that ruling.

The case is important for several reasons. The first is the potential impact it could have on Argentina. If the South American state is forced to repay these funds in full, any bank which deals with Argentine foreign debt must also abide by the ruling to force Argentina to pay both the restructured and full debt. Argentina claims this will mean it will be unable to service its debt and be pushed back into default. It is illegal in Argentinian law to pay vulture funds.

This will affect its ability to borrow through its borrowing rates and the rates on the discounted bonds and, thus, would devoid the state of money used to fund state services.

The October ruling, which was delayed pending the current appeal, saw Argentine bond prices fall 5%, while discount bonds issued during the debt swaps of 2005 and 2010 fell 12.5%.

The Government of Cristina de Kirchner rejects the vulture fund claims

The Government of Cristina de Kirchner rejects the vulture fund claims

The second is a worldwide issue. The precedent set from the case will affect any future debt restructurings, as funds, such as these vulture funds will view holding out for litigation a more profitable option than accepting the restructuring terms. This is particularly pertinent for Europe’s bailed out nations, as it is likely these countries could see themselves sued by such vulture funds in the years to come over any restructured debt.

The third reason is a moral issue and for this a greater examination of the funds is required.

The funds suing are NML Capital Ltd, which is a subsidiary of Elliot Associates and is based in the Caymen Islands, while the other is Aurelius Capital Management funds, which sued the Irish state over losses to subordinate bondholders at the now nationalised Irish bank AIB. That case was settled out of court and the details of the agreement remain confidential.

NML Capital Ltd, the subsidiary of Elliot Associates, is owned by Paul Singer, a major funder of the United States Republican party, who accompanied then President George W. Bush to Israel to celebrate the 60th anniversary of the founding of the state of Israel in 2008. He contributed over $1 million dollars to a superpac supporting Republican candidate Mitt Romney in the most recent US election. His net worth is $1.1 billion.

His firm Elliot Associates has a long history of vulture fund activity. Name the major sovereign defaults in recent decades and this fund has sued; Peru, DR Congo, Zambia and of course Argentina.

Now let’s consider Argentina. Private estimates measure the current poverty levels in the Spanish-speaking country at 30%. The official figures estimate lower, but in a country where the inflation rate claimed by the state is merely 10% and the official allowance to live on per day per person is six pesos (less than one euro), their claims are untrustworthy.

In one of the richest regions, the state capital Buenos Aires, over 800 shantytowns – known as villas – exist, which house over half a million people with unreliable electricity sources and lack proper sewage systems.

As well as that, the Argentine state is particularly vulnerable today, as the massive growth rates seen post default have vanished and capital flight is becoming a major problem, as seen by the continued increase in the black market dollar price.

Opinions about Argentina’s current leader Christina Fernandez de Kirchner are polarised throughout Argentina, especially in the capital Buenos Aires, but most agree those who benefit the most from her left-wing and socialist policies are the poorest in society.

Therefore, the ruling in New York promises to affect the most vulnerable – of which there are many – whose benefits and ability to survive would be affected by another default by the Argentinian state. Contrast this to the fortunes of Singer and vulture funds in general, whose large profit margins would hardly be affected by a negative ruling. They would, actually, make no loss, because the money of the restructured rate of return would be the same as their original purchase.

A slum near downtown Buenos Aires

A slum near downtown Buenos Aires

To set the precedent that greedy funds (and make no mistake they are motivated by nothing but greed), who are out simply to bleed vulnerable nations dry, are in the right in the eyes of the law is – to quote former British Prime minister Gordon Brown when speaking of vulture funds activity – “a morally outrageous outcome”.

For the principles of repayment of debt to overrule the vulnerabilities of the poorest in societies is disgusting and a betrayal of any human beliefs in dignity. This is why it is wrong and must be stopped.

As for those behind vulture funds, how different Dostoevsky’s most famous work Crime and Punishment would be if the murder victim was a vulture fund manager not a debt collector. In the novel, the protagonist battles with his conscious after butchering to death a greedy, scurrilous debt collector (and also another person who is in the wrong place at the wrong time). If Dostoevsky replaced his victim with a vulture fund manager, surely the protagonist would have hacked the bastard to death, walked away, had a few vodkas in a local bar to celebrate and carried on with his life after a job well done. It mightn’t of made for an all-time classic, but it definitely would be a satisfying read.

Vulture funds, for their greed and intolerance of wider societal values should never forget the words of Bob Dylan “Let me ask you one question/Is your money that good/Will it buy you forgiveness/Do you think that it could/I think you will find/When your death takes its toll/All the money you made/Will never buy back your soul”. Let’s hope the New York judges hold the same sense of importance on basic morals.

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Posted by on December 19, 2013 in Uncategorized

 

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