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Vulture Funds Against Argentina


Written for teleSUR English, which will launch on July 24

Several decades ago the concept of “dependency” was coined to name the uneven relationship between Europe and the US on one hand, and underdeveloped countries on the other. The idea was that the structural inequalities of world order meant that poor countries willing to overcome poverty depended on capital, technology and commercial flows controlled by rich countries. This situation translated into serious constraints for the less-developed. The path to prosperity required decision-making oriented towards the national interest, which was not usually in coincidence with the priorities of rich countries. Dependency meant not only economic disadvantage, but also a loss of sovereignty.

For diverse reasons that concept became unfashionable. “Globalization” seemed to replace it, bringing the promise, if not of equal levels of prosperity, at least of real chances of development for all. By engaging in an international free market regulated by multilateral agreements and transnational institutions, countries would find their way to a more comfortable situation. Indeed, the emergence of new economic powers seemed to have brought a world in which certain countries were not dependent on a few others anymore. True, it soon became obvious that all States became weaker with regards to corporations, and that domestic decision-making was strongly conditioned by the IMF, WTO and other transnational bodies. But in any case, the time in which a single nation could unilaterally dictate the policies of others seemed to be over. Global wealth and power were certainly not equally distributed, but they were disseminated in a new, more complex network of bodies, public and private, national and transnational.

To some extent, the parable of Argentine external debt seemed to follow that historical trajectory. In the early 1970s, it was of little relevance. The debt that kept spiraling out of control until it led to the final 2001-2002 crisis and the biggest default in world history was initially acquired by the military dictators that seized power in 1976. That criminal regime –which, incidentally, was supported by Henry Kissinger, then the Secretary of State of the US– benefited from extensive IMF loans, which were granted to de facto rulers with no democratic legitimacy, while they were murdering and kidnapping thousands of Argentineans. No questions were asked. When the military Junta left power in 1983, the IMF loans were already virtually impossible to repay. Unfortunately, Raúl Alfonsín, the democratic president elected that year, did not dare to reject that burden, something that was legally feasible according to the doctrine of the “Odious debt” –used before by other countries, including the US. The loans were not even properly documented in national institutions, and there are hints that part of them went straight to personal bank accounts. In the following years the IMF refinanced that debt once and again; the new “loans” were often little more that accounting movements, involving no real money entering the country. As the capital of the debt increased, the country was forced to pay larger sums of money as interests; as a matter of fact, Argentina paid back several times the amount of the initial loans, and yet became more indebted. In one of the typical situations described by “dependency” theoreticians, the IMF dictated Argentine economic policies as a condition for refinancing; the debt meant not only impoverishment for the majority of Argentineans, but also a loss of national sovereignty. And since the IMF was an international club controlled by the US and few more of its allies, it was clear that the weakness of one country was the strength of others.

In the 1980s and 1990s the scenario became more complex. The rapid expansion of transnational financial business made available new sources of credit. The funds to keep the bubble of the debt rolling now started to come not only from international organizations, but also from private hands, commercial banks and investors, but also petty savers investing through financial corporations that offered Argentine bonds as a juicy deal. In few years the structure of the debt changed, now in the hands of a heterogeneous myriad or creditors from different countries. The Brady Bonds of the early 1990s –named after Nicholas Brady, the US Secretary of Treasure who proposed them– and later bonds included special provisions by which Argentina accepted US courts in case of disputes and surrendered other sovereign rights, such as immunity of certain State assets abroad. The complexity of the new scenario and the frailty of Argentina’s finances gave transnational financial interests new opportunities for business and more influence in domestic politics. Their short-term, predatory and sometimes utterly corrupt practices added their share of fire to Argentina’s explosive situation. Under president Fernando De la Rúa, elected in 1999, two mega-deals –named “the Shield” (Blindaje) and the “Mega-Exchange” (Megacanje)– were cut in a last-minute effort to avoid default. Again, in actual terms they did not mean real money or better conditions, but mere accounting make-up. Of course they were totally unsuccessful when it comes to helping the country, but they did increment the already gigantic external debt and generate all sorts of prizes and commissions for intermediating banks and brokers. The case of David Mulford –former Under Secretary of the US Treasury for International Affairs, then broker for Credit Suisse– is illustrative: he alone got a chunk of 20 million dollars for his “help” in the design of the Mega-Exchange. There is an on-going investigation in Argentine courts; some consider these operations the biggest financial fraud in Argentine history. Neither the IMF nor the best known international credit-rating firms raised questions over their convenience or legality.

The public is more aware of recent developments. In 2002 Argentina declared herself in default, as part of the deepest economic and political crisis of her history. The degree of social suffering that that involved for low and middle-income people was colossal and the consequences of that crisis are far from being over. After 2005 the Argentine State proposed a scheme of restructuration of the debt in default, which was finally accepted by 93% of private creditors. There are no bankruptcy rules for countries, but by all means 93% can be considered a successful result for such proposals (according to the usual regulations in most countries, when a person or a private company goes bankrupt the agreement of 60 to 70% of creditors is enough to move forward). Argentina has subsequently repaid the totality of her debt to the IMF and recently reached an agreement with the Paris Club, while meeting her obligations with holders of the new bonds. Almost all of the remaining 7% is in the hands of vulture funds, which purchased for peanuts the Argentine defaulted bonds in the worst moment, speculating that they would later force the country to repay them in their original value, thus making absurdly gigantic earnings. To put but one example, if Paul Singer, the owner of the main vulture fund, gets away with murder, he would be making earnings of 1600%.

They have certainly found a willing ear in the US judiciary system. Following a rather imaginative interpretation provided by Singer’s lawyers, New York judge Thomas Griesa has concluded that the usual pari passu clause included in bonds –which is meant to ensure that all holders are treated equally– means that, since the 93% of creditors who accepted new bonds for less money are being paid the totality of their (new) value, then the 7% who did not must be paid the totality of their (old) papers. In a recent ruling, he sentenced Argentina to pay cash, immediately, the total value of the old bonds. As the transcript of a recent hearing in his Court shows, the proximity between the 84-year-old judge and the vulture funds’ lawyers is such, that he asked them to draft one of his resolutions against Argentina (a country referred to as “they”, while the other party, for the judge, is “us”).  As the Supreme Court of the US refused to take the case, Griesa is in legal right to do as he pleases. In his last resolution, as I wright this article, he forbids Argentina to pay the 93% of creditors who accepted the restructuration if the country does not pay the vultures at the same time; the money that the country has deposited in the Bank of New York Mellon –appointed to deliver the funds to part of the holders of new bonds– has been frozen. Shortly before that, Griesa had ruled that Argentina has no right to offer the creditors who get their money in New York to voluntarily receive the money anywhere else, which is an obvious intrusion both in the sovereign rights of a nation and in the private rights of creditors who, in some cases, are not even American or live in the US. He has even decided that Argentina cannot pay the bonds issued in currencies other than the dollar and under legislation of European countries, a rather obvious abuse of his legal powers. As the next coupon for the restructured debt expired on 30 June (with 30 days of tolerance), Argentine is being left with the option of either getting into a new “technical default” or paying the vultures. The second option is unviable, as such an action would immediately trigger lawsuits among the holders of the new bonds, who would reclaim the same right to a pari pasu. In other words, the restructuration of Argentina’s debt collapses. In both scenarios the vultures win, as they had previously acquired default insurance policies: if Argentina pays, they get money. If Argentina does not, they get money.

Going back to the beginning, a simple American judge having the right to decide over a sovereign nation, for the benefit of an American businessman, would seem quite in tune with the old descriptions of “dependency”, and I have no reason to deny it. Indeed, it seems that this has become a personal issue for Griesa, who is determined to “civilize” Argentinean savages and educate them in the principle that contracts must be honored. The imperial arrogance of his viewpoint make him blind to other aspects of the issue at stake: the fact that he serves a State that has participated in countless ways in the long and corrupt process by which Argentina got in this situation in the first place.

However, it is interesting that the world is indeed more complex than it used to be. For obvious reasons, in the last few days many less-developed countries have issued declarations in support of Argentina and criticizing Griesa’s arrogance. But it is not only poor countries or Latin American neighbors: México, France and Brazil had already been amicus curiae for Argentina’s case in the Supreme Court; Venezuela, Uruguay, Ecuador and other regional friends followed, and now the list includes the G-77 + China, Mercosur, Unasur and other multilateral institutions. Even a hundred Members of the British parliament, the IMF, the US Council on Foreign Relations and dozens of well-reputed newspapers –including the Financial Times–, economists and intellectuals have questioned Griesa’s judgement, not necessarily because they are friends of Argentina, but because they understand that the prevalence of the vulture funds in this case would bring new dangers to the financial stability of the world. If the vultures win, future restructurations of sovereign debts would be even harder. In addition, Griesa has the power to block the delivery of the funds in the Bank of New York Mellon, but Argentina will continue to pay to bond holders who have chosen other capitals in Europe or Japan, which would cast international doubts over the reliability of New York as a financial plaza, something American bankers are not happy with.

The way out of this cul-de-sac is not obvious. The Argentine government has decided not to behave as a humble subject to Griesa’s mandates, but it remains unclear whether they are just playing hard so as to reach a better agreement in the near future, or if they are ready to confront the US judiciary altogether. Griesa is by now part of the problem, while vultures have no reason to be flexible and understanding. It seems that this would be the perfect moment for the international community to step in and redefine the rules that currently enable and stimulate predatory financial capitalism. But so was the 2008 subprime crisis, which led to no serious changes in international regulations; there is no reason to believe that this time will be different.

There is a lot more at stake in this dispute than just (lots of) money. For Argentina, it is about maintaining a fragile economic recovery and a renewed sense of national confidence vis-à-vis global financial forces. For the vulture funds, it is a matter of confirming the continuity of the rules that allow them to pursue their immoral business. For the US, it seems to be about finding the right balance between the display of an unquestionable national power and the need to ensure the global rationality of financial flows. Although some outcomes would certainly be fairer than others, no visible ending would mean that “justice” was done. In any foreseeable scenario, rich greedy people will continue to get money out of working people’s pockets. One thing is for sure: the consequences of this dispute will reach far beyond the people, institutions and countries directly involved in it. For good or evil.

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