Argentina, “vulture” funds, and the U.S. Supreme Court

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The U.S. Supreme Court struck two blows against the Republic of Argentina on June 16.  The high court refused to hear Argentina's appeal of an appeals court decision which forces the South American country to appease predatory "vulture" funds. The appeals court also allowed those funds to use U.S. law to try to grab Argentine state assets io satisfy their claims. Only Justice Ruth Bader Ginsburg dissented from the Supreme Court ruling, while Sonia Sotomayor recused herself.

Argentina's woes go back to the bloody military dictatorship which ruled from 1976-1983. That regime dealt with its critics by making them "disappear.". This made possible the unaccountable running up of international debts which the Argentine people were obliged to pay.

Civilian governments which followed found themselves in financial difficulties. This did not stop President Carlos Menem, who ruled Argentina from 1989 to 1999, from running a particularly corrupt administration which put Argentina even more in the red.  Menem's and his successors' response to mounting economic problems was a neo-liberal privatization and austerity program, including mandatory pay cuts for public workers and retirees, which left many unemployed and destitute.  In 2001 the economy hit bottom, with more than half the population under the poverty line, workplaces shutting down, rioting in the streets and no way to pay the bills or get more credit. In December 2001, the public uproar forced President Fernando de la Rua from office.  Immediately afterward, Argentina defaulted on $132 billion of sovereign debt.  

In 2003, a new president, leftist Nestor Kirchner, got to work painstakingly reconstructing what his predecessors had allowed to be destroyed. Rejecting neo-liberal policies, he held off creditors while he built up the spending power of ordinary Argentines by improved social welfare measures and replacing foreign imports with domestic production.  While the health of the Argentine economy improved sharply, Kirchner's government worked to restore Argentina's credit standing by negotiating with creditors on the outstanding debt.  After two debt restructuring agreements, in 2005 and 2010, the owners of 93 percent of the defaulted bonds had agreed to accept new bonds at about a third of the original face value. Kirchner also paid off all of Argentina's debt to the International Monetary Fund (IMF) with the help of $300 million from Venezuela.  Argentina began to play a key role in the regional "Bolivarian" process, designed to make Argentina and its neighbors much less dependent on the United States by creating new regional agencies for developmental aid and credit.

However, some of the original Argentine bonds were bought up by "vulture capitalists" who specialize in purchasing such debt at super-cheap prices and then trying to sell the assets at the original value, making huge profits.  Several such predatory firms went after the Argentinian bonds, most notably Elliot Management, and its subsidiary, NML Management.   

The principal of Elliot Management is Paul Singer, who is closely tied in with some powerful U.S. politicians, mostly of the right wing of the Republican Party.  Singer and his associates, working through their lobbying entity, the American Task Force Argentina, have been major campaign donors to a number of Republican politicians who have gratefully introduced legislation in Congress to try to force Argentina to give in to Elliot's demands, and who have made speeches slandering the South American country and its government, now headed by Nestor Kirchner's widow, Cristina Fernandez de Kirchner.

In 2012, Elliot Management tried to seize an Argentine navy training ship, the ARA Libertad, which had docked in a Ghanaian port, but this was stopped because the Law of the Sea exempts sovereign states' navy vessels from such seizures.

Elliot Management/NML is claiming up to $1.6 billion from Argentina, and the June 16 Supreme Court decision not to hear Argentina's appeal means that Argentina must pay this amount in full. Payments to all the holdout creditors could amount to $15 billion, half of Argentina's reserves.  But a much bigger problem now faces Argentina, because the language of the original bond sale indicates that Argentina cannot continue to pay those bondholders who had agreed to the restructuring agreement unless it also pays the holdouts in advance and in full. Even worse, the holdouts could go to court to attach Argentina's payments to the non-holdout bondholders. A complicating factor is that Carlos Menem's government had agreed, at the original issuance of the bonds in 1994, to waive Argentine sovereign immunity.   

On June 30, Argentina is supposed to make a payment of $2.3 million to its foreign creditors, but it now appears highly probable that the Supreme Court's decision to let the lower court rulings stand will push it into a new default (at the end of a 30 day grace period). The Argentinian government says it will now negotiate with Elliot and the other holdouts, but the prospects that they will give an inch are slim.

The precedents that this situation might set are very bad for poorer countries, who might now find it much harder to restructure their sovereign debt after a default. For this reason, the Obama administration and the International Monetary Fund opposed Elliot Management's suit.

Photo: Linda Tanner CC

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