Tag Archives: sovereign debt

Hedging Bets: Vultures and Their Economic Prey

15 Aug

Much of the Latin American civil society community is rightfully distressed about a recent decision by a US judge who ruled that hedge fund (vulture) debts incurred by Argentina would have to be paid in full.  This came on the heels of a missed deadline (June 30) for Argentina to pay off creditors as noted by Kathy Gilsinan in The Atlantic. Gilsinan placed part of the responsibility for this financial mess on the willingness of Argentinian officials in the 1990s to submit to US jurisdiction over some of its bonds. Certainly there is more responsibility to go around.

As explained in part by the Buenos Aires Herald, vulture funds represent a type of highly profitable (if nefarious) financial investment, in which a fund buys sovereign debt cheaply and then sues to enforce payment. Benefiting from tax and jurisdiction loopholes, vulture funds purchase debt from generally highly distressed countries as it is about to be written off. They then sue the debtor/borrower for the full value of the debt, plus interest and penalties, in courts located in the US, Paris or Brussels. The original holders of the debt are usually more than willing to rid themselves of these liabilities as many of these debts are soon to come into default or face protracted restructuring negotiations.

With regard to the Argentina case, a move by OAS delegates to void the judge’s decision was rejected by the US.   Moreover, there has been relevant commentary in the US regarding the incompetence of Argentina’s lawyer who allegedly urged Argentina to threaten rather than negotiate a settlement. http://factcheckargentina.org/should-the-court-sanction-cleary/.  Other commentators have placed responsibility on a system that fails to properly regulate market volatility (or even enforce existing regulations) let alone to sufficiently acknowledge the vested interests of sovereign states in lending relationships.  As noted by Larry Elliot in The Guardian, “The problem is simple. Individuals and corporations have recourse to bankruptcy codes that give them protection from their creditors. Sovereign states do not.”

As noted both by civil society and by many in the financial community, this ‘vulture’ crisis is not at all confined to Argentina.   Many of the nations that face vulture fund lawsuits are Heavily Indebted Poor Countries, including several countries in sub-Saharan Africa. As Elliot notes, “There are wider implications. If the so-called “vulture funds” that have brought the current action emerge victorious, it will not only encourage legal action in other cases where creditors have been forced to take a “haircut” but will make future debt restructurings more difficult to organise.”  Clearly this benefits none but the vultures.

In many ways, the Argentina ‘vulture’ decision mirrors larger problems with the international financial system:  political leaders in the global south desperate for working capital, anxious to maintain their political standing and, in some cases even lining their own pockets.   This combined with loose or uneven regulations in the centers of global capital virtually invite predation of the sort that seems to have occurred here.

Many in civil society fear that another financial crisis is likely, perhaps even around the corner.  If that happens, the burden of debt will fall less on the governments that negotiate credit agreements and more on the farmers and bus drivers and other workers whose employment is subject to both the lending ‘bets’ made by their leadership and the predatory and opportunistic mindset of the ‘vultures’ circling around weakened economies.

In many ways this process of decisionmaking by government leaders reflects a more common practice – many of us in the so-called developed world hedge our bets all the time.   Our ‘calculus’ allows us to make economic and related decisions based on a short term logic that virtually dismisses the rights of generations to come, let alone the rights of persons whose sole purpose seems to be to provide raw materials for our often mindless consumption.   We live, as Wendell Berry once noted, beyond the effects of our own bad work, manifest in our propensity for building bridges we’ll never cross, but also for entering into agreements without sufficient consideration for the people who will be required to meet the obligations that we recklessly incur.

As highlighted by Brooke Sample in Bloomberg View, “The problem is that at any given time, it always looks better to delay — and the worse a crisis gets, the more attractive a delay looks, because the reckoning is already very painful.”  Clearly, we all must do more and speak louder, reminding leaders that pushing burdens and their accountabilities away from their authors and on to their progeny is ethically dubious at best and certainly corrosive of a viable community life.  For many in civil society and their constituents, the pain that accrues from bad economic agreements is a pervasive fact of life.  However, pain based on an honest assessment of previous practices that can lead to fairer economic arrangements and more accountable economic relationships is somewhat easier to bear.

As human demands grow and government leaders find themselves responding more to short-term private financial interests than longer-term public ones, the avoidance of conflict and accountability will remain tempting.   And as we continue to defer real leadership the vultures will remain ready to capitalize. But the conflict born of an often fundamentally unfair economic system will not disappear.  Its consequences can only be pushed forward for so long. As the global community prepares to embrace a new set of sustainable development goals, there is no time like the present to place those consequences in sharp relief and deal with them forthrightly.

Dr. Robert Zuber