Argentina's debt: the vultures won the battle but might lose the war

26 April 2016

The fifteen-year long saga of Argentina´s debt to the so-called “vulture funds” has finally come to an end. The recently inaugurated right-wing government of Mauricio Macri has agreed to pay 4.5 billion dollars to four hedge funds which refused to accept a 2005 debt restructuring proposal, agreed by 93% of creditors, that involved repayments of about 30 cents of the face value of bonds bought around the time of the Argentine default of 2001.

Image of Mauricio Macri, president of Argentina. Credit: Nico Bovio y Guillermo Viana-gv/GCBA (Flickr - CC BY-ND 2.0)

The funds were decisively helped by rulings of a U.S. federal judge which prevented Argentina from implementing the restructuring unless the holdouts agreed, a situation described by Martin Wolf of the Financial Times as "extortion backed by the US judiciary" .The holdouts reportedly had purchased the bonds at 20 cents on the dollar, and stood to reap a profit of between 10 to 15 times what they initially paid.

The deal was approved by a large majority in the Argentine Congress, reflecting the fact that, according to several opinion polls, around 60% of the population wanted some sort of settlement.

Doubts, however, were expressed as to whether a more favourable deal could have been struck by a government who was in a strong bargaining position, as its pro-market approach had been praised by the Western governments, the international financial institutions and the federal judge himself.

More generally, there has been widespread concern about the implications of the deal for future sovereign debt restructurings. The point was put forcefully in a 2012 U.S. Government brief to the Court of Appeals for the Second Circuit (PDF).

The brief states that allowing holdout creditors to thwart the implementation of an internationally supported restructuring plan “would have adverse consequences on the prospects for voluntary sovereign debt restructuring, on the stability of international financial markets, and on the repayment of loans extended by international financial institutions”.

Putting an end to the scandal of vulture funds

As many observers have remarked, the neatest way to prevent this difficulty is the setting up of an international system for the orderly restructuring of sovereign debt

This, however, is no easy task.

In its absence a devastatingly simpler proposal has been put forward by none other than the Argentine Minister of Finance, Alfonso Prat-Gay, who himself negotiated the deal with the vulture funds.

In a talk at the Atlantic Council on April 14, Prat-Gay announced that the Argentine government is considering to propose a rule to be included as a clause in sovereign bonds or as an international agreement whereupon in order to be able to litigate against a sovereign, the creditor must hold the bonds at the time the default is declared. This would obviously put the vulture funds, whose business is to buy bonds of governments already in default at heavily discounted prices and then litigate claiming the full face value, out of commission.

The idea has obviously alarmed those who feel that financial speculation has a role in contemporary capitalism.

A piece in Bloomberg Gadfly entitled "Save Argentina's Vultures", ends with a veritable call to arms: "Finance ministers and chief financial officers can't be blamed for seeking the best terms they can get. It's up to investors to draw the line and require security for their money. They'd do well to send a clear message to Argentina and all other nations that have defaulted that they can't bar vultures."

In fact, developing country governments would do well to act collectively to put an end to the scandal of vulture funds. The Argentine proposal might be a way forward.

Image: Argentine President Mauricio Macri. Credit: Nico Bovio and Guillermo Viana - gv/GCBA (Flickr)

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