As Argentina continues its battle with the ‘vulture funds’ preying on its economy, Dr Daniel Ozarow outlines how a ‘Plan B’ for Europe could protect the continent from illegitimate debt.
Each of recent history’s episodes of debt crisis have, on the one hand, raised popular consciousness about the unsustainability of national and household debt, while on the other exposed the internal contradictions of global financial capitalism such that they often also provide opportunities for multilateral actors to consider and even propagate greater regulation of the debt system. When national debts have become dangerously unsustainable, this has included cancellation in order for the system to save itself. For instance the Multilateral Debt Relief Initiative of 2005 provided for 100 per cent relief for the Heavily-Indebted Poor Countries by the IMF, World Bank and the African Development Fund and, recognising that Greece’s debt had become unsustainable, the IMF and Eurozone leaders agreed to debt restructuring in 2012.
But the episode I will focus on is one that in particular exposes how international financial capitalism’s grotesque logic permits wealthy hedge fund managers to profiteer from speculating on national debts while generating misery for citizens in affected countries: that of Argentina and its long-running battle with the so-called ‘vulture funds’, which the Financial Times has been dubbed the “sovereign debt trial of the century”.
This case also raised consciousness about the potentially devastating consequences of financial speculation on the global economy among citizens, policymakers, economists and governments. As with other episodes, it also presented an opportunity for the intensification of multilateral cooperation to reverse the damaging impact of national indebtedness. Such that the sovereign debt restructuring process was re-written and these absurd speculative practices outlawed just four months ago, when the UN General Assembly voted to establish new rules to guide sovereign debt restructurings.
So for the last few years, a handful of wealthy billionaire speculators who own a few US hedge funds have been holding Argentina’s entire economy to ransom in an ongoing court case that is having enormous ramifications not just for Argentina, but also the entire international debt system.
How vulture funds work
The term ‘vulture fund’ refers to a hedge fund that buys up the bonds of countries that are facing debt defaults on the secondary market, taking advantage of economic or political crises when these can be purchased for a matter of a few cents on the dollar of their nominal value. They do this with the intention of waiting or ‘holding out’ until a debt restructuring takes place so that they can then sue the debtor country for full repayment of the original bond value, plus interest and penalty fees. Thus they make exorbitant profits in the process to the tune of tens or hundreds of millions of dollars.
These vulture funds usually target developing countries in crisis. They have even been known to track the debt relief process, buying the distressed debt of the poorest nations in the world that are about to receive debt relief and they then sue the country after it has received a windfall of resources thanks to debt cancellation. In the courts they argue that their governments now have the ability to pay them the full debt amount.
Peru, Liberia, Democratic Republic of the Congo and Cameroon have all suffered these fates in recent years. Incredibly, despite the fact that through their actions the vultures are effectively causing hundreds of thousands of deaths in these countries by denying governments millions of dollars that could be spent fighting disease and poverty these practices were completely legal and regulation to prevent them was scarce.
However vulture funds are a threat to any country facing distressed debt including members of the European Union. DART is a vulture fund that made a €250m profit on Greek debt during the 2012 haircuts and in the UK, Aurelius’ investment in the Cooperative Bank forced it to abandon its mutual cooperative structure in 2013.
The ‘sovereign debt trial of the century’: Argentina vs NML Capital
So what exactly happened in Argentina? Well, its government was forced to declare the largest ever sovereign debt default in history ($81bn) in 2001 when its economy crashed through the floor and GDP fell by 20 per cent. A quarter of the population were left unemployed, and over half of Argentines fell into poverty.
Around this time however, a number of hedge funds bought up some of the debt at bargain prices, in the form of bonds, paying just 20 cents for every dollar of debt value, speculating on the misery of millions of Argentinians in their attempts to make hundreds of millions of dollars years later.
In the years that followed, after tough negotiations by the new President Nestor Kirchner (then his wife Cristina), 93 per cent of the country’s creditors agreed to write-off of two-thirds of the value of the debts they were owed. Partly thanks to this, along with a return to a form of Keynesian economic policy, Argentina become the fastest growing economy in the western hemisphere and lifted 11 million people out of poverty. Default was proven to be the right thing to do, despite the initial pain.
The problem was that a small number of Argentina’s creditors (vulture funds like NML and Aurelius) refused to agree to the debt write downs and instead sued Argentina for the full amount of what their original bonds were worth, which represents a profit of 1,400 per cent.
Now in August 2013 a judge in New York, where the bonds were originally issued, ruled that Argentina must pay $1.3bn to Aurelius and NML (its current debt bond value plus interest). Now you might ask why Argentina didn’t simply pay this – a lot of money, but affordable on its own to a G20 country with currency reserves of $30bn?
Well, paying the vultures would have activated the ‘pari passu‘ clause of the bond contracts (meaning all creditors must be treated under equal terms), but which according to Judge Thomas Griesa’s interpretation, if Argentina made any more payments to its debt-swap participants under their restructured terms, it would have to have had to pay what it owed to the vulture funds in full. However, because of another clause, RUFO (Rights Upon Future Offers), if NML and Aurelius were subsequently paid in full, then the 93 per cent of the country’s bondholders that had agreed to debt write-downs would then also be entitled to sue Argentina for the original amount of their debt bonds. In other words, it would have left the Argentinian state with an insurmountable bill of perhaps $100bn, which would have forced it into a debt default again, igniting a crisis as serious as that of 2001.
In June 2014 Judge Griesa embargoed a scheduled $539m interest payment that Argentina wanted to make to its restructured bondholders, declaring it illegal until the vultures were also paid in full. This triggered a Kafkaesque scenario under which credit agencies dubiously declared Argentina to be in debt default, even though it both had both the financial ability and willingness to pay almost all of its creditors.
The outgoing Kirchner government refused to pay a penny to the vulture funds until the day they left office in December 2015, even after the RUFO clause expired a year earlier, which meant that it could negotiate freely with the vulture funds. Worryingly, the country’s new pro-market President Mauricio Macri opened negotiations with these funds last week.
Global and national repercussions
Why are the consequences of this ruling so important for the international community? Well, first at the time, Judge Griesa’s ruling set a legal precedent under which the rights of a handful of billionaire speculators to make enormous profits on their investments supersede those of a sovereign government to protect its people under international law.
Secondly, future debt restructurings by crisis-ridden countries may have become impossible because hedge funds no longer have any incentive to write off national debts owed to them. After all, the ruling has meant that they can simply go to friendly Western courts and have a judge rule that the full amount must be paid. Countries in the global south could be condemned to generations of austerity and structural adjustment as the only way of affording repayment in the absence of the possibility of debt restructuring.
Thirdly – and this is where our episodic moment of opportunity from crisis comes in – as a direct result of this ludicrous situation, a virtual international consensus has emerged on the need to regulate speculative financial practices and vulture fund activity. Argentina gained global sympathy, especially in the south, where national governments realised that they too could become victims of the unregulated debt system in the same way. In September 2015 the Argentinian government proposed a motion at the UN General Assembly which for the first time in history would agree a series of nine principles that should be respected when restructuring sovereign debt. The Resolution was overwhelmingly forced through by 136 nations, including the G77, China and the BRICS. While too late for Argentina, this could prevent vulture funds from blocking debt restructurings in future.
A ‘Plan B’ for Europe on debt cancellation
What lessons are there for Europe from Latin America and Argentina’s experience in terms of the possibilities for multilateral debt relief? What could be included in our ‘Plan B’? Here are five proposals.
First, the unprecedented degree of solidarity expressed with Argentina by the international community in creating the new UN framework for debt restructuring shows that there is an appetite to fundamentally re-write the rules of the global debt system. While such an initiative may no longer be led by Argentina given its change of government, it nevertheless lays the foundation for future negotiations for a multilateral framework for debt cancellation and provides an opportunity for those of us who are politicians, economists, academics or activists in Europe to realise that there are allies in the global south for the European Left to work with. These allies may not only be found in left-wing and green parties in G77 countries but also their governments (regardless of political creed), which have the most to gain through debt cancellation and which have already proven themselves willing to stand up to the US, Britain, Germany and others at the UN. However, we must also support civil society campaigns that seek to raise awareness among their citizens about the importance of conducting debt audits and then cancelling illegitimate, illegal or odious debt. Argentina, Ecuador and Greece have all recently established Debt Audit Commissions to investigate the nature of their debts and Ecuador’s Government even enacted its findings, unilaterally cancelling 70 per cent of its debt. Through partial default and selective buy-back of bonds it wiped $3bn off its debt. It currently stands as one of the fastest-growing economies in the region.
A second proposal is to use the momentum of the UN vote to establish an international debt court that openly challenges the legitimacy and indeed legality of both external debts themselves and subsequent speculative investments made in them. The Court would act to legally force creditors to accept debt reduction – something that sovereign states can’t do just by defaulting. Currently all they can do is stop paying, and then get sued. It would need to possess independence from creditors, be transparent and base judgements on levels of debt which are sustainable on the requirements needed to meet baseline living standards for the population.
Growing public support
In terms of terms of the feasibility of such a project and whether the world’s leading countries would agree to such an arrangement, here one can look to the International Criminal Court, which operates successfully in the absence of full ratification by major global powers including the US and China and indeed half of the world’s nations. Growing public support in the Global North for an international debt court would surely soon pressure many remaining G20 nations to join.
Third, in terms of alternative sources of finance to free market conditionality in exchange for loans that the IMF and ECB are so keen on, we need to challenge the hegemony of these and other IFIs in our Europe and open a conversation about replacing them with counter-hegemonic institutions that do not reproduce relationships of financial dependence. In Latin America its left and centre-left governments have led the way on this through the creation of the Bank of the South in 2009. The aim is to provide an alternative borrowing institution that offers favourable lending terms from close regional allies for the construction of public infrastructure and financing of social programmes. The model in Europe could be financed by an EU-wide financial transaction tax and increased clampdowns on corporate tax avoidance.
Our vision for Europe as one in which the chains of debt are loosened could be one step closer.
Fourth, there are also lessons that we can learn from campaigns and movements closer to home. For instance there is an urgent need to adopt a multilateral approach within the EU to protect the poorest countries in the world from profiteering by so-called vulture funds by outlawing the use of European courts to sue the world’s poorest countries. In the United Kingdom, partly thanks to lobbying from Jubilee Debt Campaign in April 2010, a landmark Act of Parliament – the Debt Relief (Developing Countries) Act – was passed which did precisely this and permanently prohibits the vulture funds from suing any of the world’s poorest countries in UK courts, a favourite jurisdiction of the funds. The Act represents the first of its kind anywhere in the world, but must now also extend to other European financial and legal centres.
Finally, Europe needs a debt conference like the one that Alexis Tsipras proposed along the lines of the 1953 London Debt Agreement, when half of German debt was written-off. The people of Ireland, Portugal, Spain, Latvia and elsewhere in Europe have the right to learn that many of their debts were accumulated illegitimately, against the popular will and the public interest. Thus the Conference would also serve to raise awareness among citizens groups by the sharing of knowledge and expertise on debt resistance strategies and tactics, for instance regarding how to replicate France’s Committee for a Citizen’s Audit on the Public Debt which found 60 per cent of its debt to be illegitimate.
As with crises past, if we learn the right lessons and seize the opportunities presented to us to both educate and mobilise a sympathetic and heavily indebted public about the merits of national debt cancellation while laying the foundations for multilateral mechanisms that can make it a reality, our vision for Europe as one in which the chains of debt are loosened could be one step closer.
Originally presented at the ‘International Summit for a Plan B in Europe‘, Paris, 23 January 2016.