Supreme Court’s inaction signals bad news for heavily indebted poor countries

A man walks next to his makeshift home in 2008 in Buenos Aires, Argentina. The U.S. Supreme Court denied an appeal by Argentina in a case in which a hedge fund has sued the country for $1 billion, meaning the country will be forced to turn over information about financial assets in New York banks and face the possibility of not providing development aid for the country's poorest residents. (CNS/Cezaro De Luca, EPA)

A man walks next to his makeshift home in 2008 in Buenos Aires, Argentina.  (CNS/Cezaro De Luca, EPA)

The U.S. Supreme Court’s decision yesterday not to hear an appeal from Argentina after being sued by a hedge fund for $1 billion has upset advocates for debt relief.

The inaction by the Supreme Court lets two lower federal court rulings stand and Argentina now must turn over information about its U.S. bank holdings to the hedge fund.

Catholic News Service recently reported on the case and the work of Jubilee USA to advocate for debt relief for poor countries.

Eric LeCompte, executive director of Jubilee USA, told CNS this morning that the case means it is open season on the assets of other heavily indebted poor countries.

“It has incredible impacts in terms of how the financial system operates, how poor countries have the ability to become middle income countries,” he said. “There are few winners and lots of losers.

“A small group of hedge funds, less than 100 engage in this predatory behavior, are the winners. The losers, it’s most of us. The U.S. government, the International Monetary Fund, legitimate Wall Street investors, who supported Argentina and any poor country that would qualify for debt relief are the losers,” LeCompte explained.

“It affects all of us because debt relief is brokered using U.S. taxpayer money. Essentially the ultimate money that these predatory hedge funds will collect is U.S. taxpayer money.”

Because the Supreme Court decided not to hear the case, LeCompte fears that the floodgates could open for other hedge funds to recover the assets of defaulting countries to the detriment of poor citizens. He identified Ivory Coast, Zambia and some Eastern European countries as “on the chopping block.”

The Argentine case dates to 2001 when it defaulted on its loan payments and subsequently was sued by the hedge fund firm NML Capital. The hedge fund won in both in U.S. District Court and in the U.S. Court of Appeals. Argentina had resisted the requests and appeal to the U.S. Supreme Court to hear the matter.

The court offered no comment on its decision to decline the case.

Debt relief advocates call companies like NML Capital “vulture funds” because they swoop in to buy up debt for pennies on the dollar and then sue for full repayment. Some of the claims result in huge profits for the funds.

The International Monetary Fund, Wall Street firms and the governments of the U.S., France, Mexico and Brazil sided with Argentina because of the potential impact on debt restructuring programs, access to credit by poor countries and global financial stability.

“These are the actors that Pope Francis described as savage,” LeCompte said of the hedge funds. “These are the type of actors he was speaking about because these are people who profit off the backs of the poor.”

13 Responses

  1. More enlightening and equally relevant to the subject is a discussion of how the poor countries got that way. Included would be facts regarding the heads of state (more accurately, heads of juntas) who’ve stolen foreign aid for their own purposes.
    Too often, it seems, we get complaints from people who want to feel good about themselves by “giving,” caring nothing about how the money and material actually are squandered and never get to the poor.
    This is not a defense of hedge funds. It is a defense of the concept of contracts and their enforcement with the requisite background question: “Why does this country need the aid and how does mismanagement and corruption play into the need for the aid?”

  2. I agree with Duane Lamers.

    What is the problem? The issue is one of legal contracts not charity. When two freely participating parties make an agreement it should be kept. The consequence of keeping the agreement is the result of the risks each party accepted in making the agreement. That is simple free market capitalism. Complaining that the result did not turn out favorably and therefore should be negated is silly and rightfully ignored; just as the Supreme Court did. That millions of people are hurt by the risks their government takes on their behalf is the result of their choice in government. The solution is simple: End crony capitalism (government supported business) and end socialism.

    Freedom and free market capitalism are a holy alliance. And the solution for millions of people; actually for everyone. The author of this article, Dennis Sadowski, exhibits poor reasoning. He implies that the Supreme Court should force the party owed money to provide charity instead taking its rightfully earned payment.

    Pope Francis is right to call it evil to manipulate the free market system. He didn’t say to nullify contracts. People would be wise to choose better governments rather than to support governments that demand nullifying the results of contracts.

    This is not hard. Evil is not the answer.

  3. Duane Lamers, you are sooooooooooo RIGHT! Those who cause the debt are responsible for the poor they create in their countries, rather than those who will finance that debt for the possibility that the causers will work to correct their wrong doing. But the causers run away expecting those who were willing to help them eat the losses.

  4. It’s absolutely true that much of the debt in the world comes from bad governments, but it’s also true that the lenders bear responsibility for that as well. We need rules in place for responsible lending and borrowing so that countries don’t take on debt without receiving something in return. That’s something that Jubilee supports. In this case, however, what these hedge funds are doing is simply trying to profit from the lack of a system to resolve these problems. They never invested in Argentina, but rather did what they are doing all over the world, buy up debt cheap and then litigate countries into submission. Whether or not it is legal, it is certainly not moral.

  5. No one forced Argentina to issue debt, and then engage in domestic economic policies that made it difficult if not impossible to repay the debt.

    Who will lend money to any poor country if that country can just walk away from its debt?

  6. @Duane Lamers
    @James

    Over 90% of Argentina’s creditors were willing to negotiate with the country to refinance its debts, and the value of their bonds has since tripled. The “vulture funds” that are refusing to reach any form of agreement are affecting much more than ‘two countries freely making an agreement’, rather, vulture funds take advantage of indebted countries, many of whom are in debt because of loans made to dictators long since gone.

    Debt relief can contribute positively to many parties—the government can use the money to finance public works programmes and prove generally more attractive to investors. As you may have read, Argentine stocks dropped massively after Monday’s Supreme Court Decision. Vulture funds do not merely affect the country’s government and its people, but rather a whole host of investors. Additionally, as Eric LeCompte mentioned, the support the US Government, the IMF and other parties for debt relief has been seriously undermined by the Supreme Court decision.

    Questioning how the countries came under debt (often under dictatorships and military regimes that have since been disbanded, with the debt still carrying over to the democratic regimes, as seen in South Africa) does little to explain the effects of vulture funds on the myriad affected parties, and should ultimately not be the topic of conversation.

  7. Anya, I agree with virtually everything you write except, perhaps, for your concluding phrase. I’ll stand by what I originally wrote in what should be my second paragraph (without proper spacing). Too many people will look only at bad results and insist something must be done by those who do not contribute to those same results. They never question whether the original problem should never have been “solved” in the way it was.

    We have the same situation perpetually reenacted yearly by the liberal majority in the Congress–that is a liberal majority in both political parties. They feel good about having created a program, and their interest ends there except for continually funding it at ever-increasing levels. No evaluation. No cancellation. Ever. We have had a continued uptick in poverty levels and in social and family dysfunction ever since Johnson gave us his “war on poverty.” Fifteen trillion dollars later and nothing good to show for it. Not even Head Start can produce positive results after three or four years.

    The “vulture funds” will not be controlled by Congress because too many politicians and businesses profit from their activity. Therein lies the evil and corruption, to be continued as long as we elect the same values-deprived people to public office, including the top job.

  8. @Michael – the problem is a lack of a system. Nobody should walk away from legitimate debt, but there needs to be a process to balance the needs of the population (which often had no say in incurring the debt) with the importance of contractual obligations. And that’s why Responsible Lending and Borrowing are so important….to prevent harmful, irresponsible loans in the first place

    The author is right about this case and right about the implications for very poor people.

  9. The U.S. is developing debt under this administration that is growing fast and threatening our own economy if it is not stopped and reduced. Are we a backward 3rd country? No, we have a lousy spend happy Administration that throws money away even though tax revs this past year were the highest in history. The economy is terrible do to the policies of this Democrat Administration and U.S. Senate. And China is buying up our debt and will own us if were don’t change direction. .

  10. Those who are saying that Argentina deserved it for running up debt in the first place need to remember that a large portion of the debt was run up during the military dictatorship. Much of the money was pocketed by the generals or used to supply the military that was being used to repress the Argentine people; and though the debt has already been paid many times over, it continues to grow due to fluctuating interest rates.

    To say that the Argentine people living decades after the dictatorships deserve to have billions of their tax dollars sent away to enrich hedge funds and foreign banks because of a debt that their long past, unelected government ran up is difficult.

    Since the default in 2001, Argentina has had some of the highest growth rates in the world (THE highest growth rates in the Western hemisphere-94 percent total growth 2002-2011). Unemployment has plummeted and poverty fallen by two-thirds. These sort of things are much more important than making sure that a multi-billion dollar hedge fund gets millions more. Certainly in a Catholic publication, I think we can agree on that.

  11. Sister Anne Marie, SSND

    I believe that all of us who purport to try and live the Gospels, need to understand “vulture funds,” how they prey on heavily indebted countries, and how the U.S. Supreme Court decision not to hear Argentina’s case specifically, opens the door to wide-spread manipulation of monies directly affecting those made poor.

    Debt-restructuring has happened repeatedly. What is missing, and something JubileeUSA has long worked for are international policies on responsible borrowing and lending that would address the inequities that now allow injustices that benefit vulture funds like NML Capital.

    We have to be aware that dictators and corrupt governments that entered into this debt were certainly not looking out for the country’s/people’s good and the people did not have the power to change that situation.

  12. I agree that leaders have used the money unwisely and stolen it for their own use. We must also look at the lenders who continued to loan money to such governments knowing that the money was not being used as promise or getting to those most in need. We must ask for reform that includes a way of monitoring how money loans will be spent. We must also look at this issue the Hedge Funds operators in the future will buy up loans for a small amount of money on a dollar than wait until this country has been placed in debt restructuring and than demand the full value of the loan plus interest making up to a 300% profit. This will be done in the future with the outcome of this ruling on the backs of the extreme poor those who survive on a $1 or less a day. As noted the government leaders who took all this loans where not duly elected. I believe we can’t ask people who live through this violence now to pay back the loans of corrupt borrowers and unwise lenders.
    Hoping for compassion

  13. Argentina, NML Capital, and the U.S. Supreme Court:
    Complexities of Sovereign Debt Today

    On December 23, 2001, the first day of a one-week term of office, Argentina’s President Adolfo Rodríguez Saá announced a default on $81.8 billion in sovereign debt owed to private bond holders. A month later, the new President Eduardo Duhalde dismantled the 1991 Convertibility Law that pegged the peso to the U.S. dollar. Immediately, the peso crashed and the economy collapsed, exacerbating a recession begun in 1998 that yielded 20% unemployment and a poverty rate of 54%. On September 9, 2003, Argentina missed a $2.9 billion loan payment due to the IMF, the single largest non-payment in the history of the IMF.

    Global creditors panicked. Some resigned themselves to never recovering their losses. A few unloaded bonds to distressed debt investors who paid pennies on the dollar. Others began the arduous process of evergreening loans and negotiating haircuts to recoup partial payment, notably the IMF that threatened to add Argentina to the failed states list along with Sudan and Somalia. In total, Argentina owed $141 billion to private foreign investors and multilateral lenders.

    On March 3, 2005, the new President Néstor Kirchner announced a debt cancellation agreement with three-fourths of bond holders who agreed to payment of 32 cents on the dollar, which the President said was “more than Enron bond holders received” after the energy trader filed bankruptcy in 2001. Despite their disgust, 93% of creditors took the deal by 2010. In retaliation, global financiers cut-off Argentina from further debt capital. All is fair in global arbitrage, a game ill-advised for the faint of heart.

    So how did the U.S. Supreme Court get involved last week in a sovereign debt default? Usually such matters are handled between issuers and creditors. The story goes back to 2001 when Argentina announced the default and two percent of creditors sold their bonds to distressed debt hedge fund investors on Wall Street. Two key buyers were NML Capital, Ltd. and Aurelius Capital Management who are in the business of long-term legal battles whereby they buy uncollected debt at a fraction of face value and then sue the bond issuer for 100 cents on the dollar. The distressed debt investors bet on getting a government (and/or IMF) bailout to make them whole and then some.1

    Leading the distressed debt investors in the Argentina default was Paul E. Singer—owner of Elliot Management and NML Capital—who acquired Argentina debt obligations for an estimated 20 cents on the dollar. Singer aggressively tried to seize assets as payment on the defaulted securities. For example, on October 1, 2012, Elliot Management seized a naval ship, Frigata Libertad, at port in Ghana and produced a legal order that demanded Argentina pay a $20 million court bond to let the ship go. The ruling was overturned and the ship released. Singer’s prior success in distressed debt investing is remarkable.2 His hedge fund now controls $21 billion in assets.

    In August of 2013, Singer sued Argentina for $1.33 billion in New York court. He successfully argued that if 93% of creditors are paid interest on the restructured bonds, then Argentina has to pay the holdouts in full, a legal provision known as pari passu (i.e., equal treatment). Argentina claimed that pari passu did not apply to the loans restructured in 2005 and 2010. Judge Thomas P. Griesa of the U.S. District Court for the Southern District of New York ruled in Singer’s favor in December of 2012 because there was no Collective Action Clause in the loan restructurings to protect Argentina. Judge Griesa’s decision was upheld by the U.S. Court of Appeals for the Second Circuit and again by the U.S. Supreme Court on June 16, 2014, signaling a big win for distressed debt investors.

    Next steps? In the long term, the pari passu ruling portends that during economic distress, nations may not be able to restructure debt. Moreover, by filling a gap in the international debt workout mechanism, the U.S. Supreme Court is setting new rules governing global capitalism with serious ramifications for economic development in the future.

    In the near term, Argentina may be forced to negotiate a settlement with NML Capital on the $1.5 billion owed (including accrued interest) before it can make the next coupon payment due June 30, 2014 on its separate $24 billion restructured debt. Paul Singer noted a willingness to engage in a workout session in January of 2014 at the World Economic Forum in Davos, Switzerland: “We’ve been willing for quite a while to sit down with Argentina. We could settle this thing in an afternoon.” Argentina is not so sanguine. Yesterday the Minister of Economy defied the U.S. Supreme Court ruling in an address to the United Nations ambassadors to the G77 developing nations. If there is no workout, Argentina will enter into a technical default in 30 days at which point NML might try to impound Argentina’s Bank of New York account from where the nation pays on its restructured debt obligations.

    The prospect of default and long-term hardship in Argentina looms large. But Argentina has a history of pulling through adversity. Following the 1998-2002 period of no growth, Argentina emerged as a strong economy with annual GDP growth exceeding 8% between 2003 and 2008. By refusing further loans from the IMF to service the outstanding debt, the nation was forced to re-evaluate its economic growth strategy. New alternatives emerged to lift the country from disaster. Citizens created a massive barter program to exchange basic goods and services through the National Barter Network. Unemployed workers created 150 business cooperatives to re-open abandoned factories through the National Movement of Recuperated Companies. People formed inter-neighborhood assemblies to govern democratically and in solidarity to mitigate against desperation and provide basic public safety, education, health, and human services in rural and urban communities. Argentina is a nation to watch.

    Notes
    1. In 1995, the Toronto Trust Argentina Emerging Market Fund bought distressed Argentina bonds that yielded an annual return of 79.25% and was heralded as the world’s best-performing emerging market mutual fund that year.

    2. In 1996, Elliot Management bought $20 million of defaulted Peruvian bonds and won $58 million when it sued Peru in U.S. court. In 2005, Elliot bought $2.3 million of Congo-Brazzaville defaulted debt and recouped $39 million through a state oil sale.

Comments are closed.

Follow

Get every new post delivered to your Inbox.

Join 750 other followers

%d bloggers like this: