The Organization of American States (OAS) has declared its solidarity with Argentina in its debt repayment dispute with a U.S.-based hedge fund. Venezuela meanwhile has argued that the case underlines the need for a new regional financial architecture.
The NML Capital hedge fund is leading a group of bondholders seeking payment of unstructured debt mainly bought for just cents on the dollar during Argentina’s default crisis in 2001. While 92 percent of Argentina’s creditors accepted debt restructuring and payment agreements in 2005 and 2010, the group in question declined these offers, and is now demanding immediate repayment of the bonds in full, which are now worth close to US $1.5 billion.
According to the Jubilee debt advocacy network, such venture capital funds are often referred to as “vulture funds”, because they “buy the debt of poor countries or countries in financial recovery for pennies on the dollar and then sue to make upwards of a 400% profit”.
The Argentina vs. NML Capital case has received global attention, with financial institutions regarding the outcome as an indicator of how sovereign government debts will be restructured and repaid in the future, especially in countries experiencing vulnerable situations such as economic crises and recovery.
NML Capital argues that Argentina should pay out the full value of the bonds owed to its affiliates at the same time as it begins to pays back creditors which have agreed to restructured debt. Argentina has instead offered the hedge fund similar repayment conditions accepted by the other 92 percent of creditors, arguing that if it is obligated to pay all of this debt at once then the South American country could be forced to default. NML Capital has refused the offer.
“It’s our obligation to take responsibility for paying our creditors, but not to become the victims of extortion by speculators,” said Argentine president Christina Kirchner to national media recently.
However a U.S. Supreme Court ruling last month went against Argentina, requiring the country to pay the full amount to NML Capital & related creditors. This was based on an interpretation of a parity clause in U.S. law which says that all creditors should be treated equally, and thus paid as one bloc, rather than negotiations and payments being made with separate creditors, which gives more flexibility to debt repayment.
Under the ruling, if Argentina does not pay up by 30 July then it will be considered as having defaulted on its debt obligations.
On Thursday, 32 OAS member states issued a declaration against the U.S. Supreme Court ruling and in solidarity with the Argentine position in the dispute.
The resolution stated that Argentina had the right to restructure and repay debt with different bondholders, as it had done in 2005 and 2010, to allow “that payment streams be distributed to cooperative creditors following agreements made with them in the process of consensual readjustment of debt”.
The statement also underlined the organisation’s “full support for reaching a solution that seeks to facilitate the wide process of restructuring Argentina’s sovereign debt”.
The only countries in the hemisphere to not support the resolution were the United States and Canada. The U.S. government said that it had to abstain on the motion because the issue “continues being a judicial matter in the United States”. Canada did not offer an official reason.
OAS general secretary Jose Miguel Insulza referred to the situation as an “unjust aberration” that prevented Argentina from meeting its debt obligations and threatened the stability of the global financial system.
“When there is such a serious situation, such a painful problem, where there is a risk of crisis in the international system, we have reached a very solid agreement [in the OAS],” the official of Chilean origin said.
Venezuela also offered its strong support for Argentina, and said that the situation demonstrated the need for a “new international financial system”.
“Argentina cannot be compelled to pay a debt under unacceptable conditions, one that is immoral anyway. That’s why we’ve supported Argentina, and we will continue supporting her,” said Venezuelan foreign minister Elias Jaua during the OAS meeting in Washington.
Jaua called for the creation of a regional financial architecture which would prevent such cases in the future by building on existing initiatives such as the Sucre currency and the Bank of the South.
“We’re going to support each other, we’re going to strengthen the Bank of the South, we’re going to create a Latin American tribunal to settle differences, we’re going to advance toward the creation of a financial centre of economic power,” he said.
The director of Venezuela’s Central Bank (BCV), Eudomar Tovar, has also commented on the case. In his opinion, the way the case has evolved suggests that there is “an entanglement of political and economic links between big international capital and even financial institutions. If they [NML Capital] don’t want to negotiate it’s because they believe that there is a possibility that they will be paid 100%”, he argued.
The BCV director also reported on the advancement of the Bank of the South regional development bank, whose administrative council was installed in the BCV’s headquarters last week.
It is hoped that the bank will begin functioning in the medium term. Brazil, Argentina, Bolivia, Ecuador, Paraguay, Uruguay and Venezuela are shareholders in the bank, while Chile and Peru are currently participating as observers.