Vulture funds’ legal victory against Argentina highlights need for debt work-out mechanism

In mid-June, the United States Supreme Court rejected a request to review a lower court order forcing the Argentine government to pay in full the seven per cent of creditors who refused to join a negotiated restructuring of the country’s debts, which followed the world’s largest sovereign debt default in December 2001.

The hold-out creditors consist largely of so-called vulture funds that bought the bonds at a fraction of their original price in the hope that through litigation in the US – the bonds had been issued in New York – they could force Argentina to reimburse the bonds at face value.

The funds’ predatory behaviour was rewarded by the US courts.

They ordered that Argentina had to reimburse the vultures before making any further payments to the 93 per cent of creditors who had agreed to partial reimbursements and extended maturities after two rounds of negotiations completed in 2005 and 2010.

The ITUC’s Americas regional organisation supported Argentina’s stance in opposing the court’s order, which it says “rewards financial speculators at the expense of national economic sovereignty and, most of all, at the expense of ordinary people”

Commentators ranging from Mark Weisbrot writing in the New York Times to the Financial Times’ Martin Wolf have also defended Argentina’s position, pointing out that debt restructuring is the only recourse available to governments that have become insolvent.

Bankruptcy is not an option for states.

Moreover, purchasers of Argentine bonds in the years before the 2001 default were paid a hefty premium compared to US Treasury bonds in compensation for their risky nature, much as buyers of Greek bonds enjoyed a large interest-rate spread over German bonds in the lead-up to that country’s sovereign debt crisis.

By ordering Argentina to pay the vultures the face value of the bonds plus interest, the US courts have essentially told them that risk is no longer an issue that investors need to pay attention to.

It will also make it next-to-impossible to achieve negotiated debt restructurings between governments and creditors, since the court decision means that hold-outs who refuse to negotiate are those who get the highest rewards.

After the IMF’s failed attempt to create a Sovereign Debt Restructuring Mechanism in the early 2000s, because of opposition from Wall Street and the US government, more than a decade later, the Argentine default has again called attention to the economic and social damages caused by unsustainable debts.

They are made even worse when international financial institutions respond by forcing countries to implement austerity and structural adjustment policies called for by the private financial sector.

After becoming the darling of the IFIs in the 1990s because of the neo-liberal policies applied by the Menem government in the 1990s, Argentina fell into a deep recession in 1998 from which it only began to emerge four years later – after losing one-fifth of its GDP – by defaulting on its debt, abandoning its currency peg to the US dollar and reversing the austerity and privatisation policies of the previous years.

The protracted and still incomplete efforts to restructure the debt of Greece, which like Argentina more than a decade ago suffered a huge loss of GDP – 25 per cent since 2007 – after imposing massive public spending cuts in a futile attempt to maintain loan payments on an unsustainable debt, have also resuscitated debates about the need for a multilateral debt restructuring mechanism.

Discussions are taking place at think-tanks and international institutions such as UNCTAD and the IMF.

The IMF has stated that it is exploring new approaches for countries experiencing sovereign debt crises “so that the costs of crisis resolution can be minimized for debtors, creditors, and ultimately the international financial system”.

Left unmentioned is that the costs of not restructuring unsustainable debts, of pushing countries into deep recessions so that they can maintain payments to creditors who refuse to acknowledge shared risk, are clearly unacceptable: 26.8 per cent unemployment currently in Greece; 23.1 percent poverty rate in Argentina in 2002, which after the policy reversals fell to 1.9 per cent by 2010 according to World Bank data (using the Bank’s US$2 a day benchmark).