Running the free world like a real estate business?
Argentina has been pushed into a crisis that reveals the might of global debt holders.
"The hedge fund firm of billionaire Paul E. Singer has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, into a position where it now has to contemplate a humbling surrender," reports The New York Times.
The story goes back to more than a decade ago, when Argentina, facing an economic meltdown, defaulted on its debt. A few years afterward, the country offered repayment to creditors, albeit in reduced amounts. While most of the original creditors accepted the offer, Singer's Elliott Management, which had acquired its debt holdings after the fact at bargain basement prices, stubbornly held out.
"The plaintiffs in the case purchased Argentine bonds on the secondary market after default, often for less than 20 cents on the dollar," states a letter from the Center for Economic and Policy Research signed by more than 100 economists, including Nobel Laureate Robert Solow. "While these actors could have accepted the restructuring and still made a very large profit, they instead have fought a decade-long legal battle, seeking exorbitant profits in excess of 1,000 percent and creating financial uncertainty along the way."
Such practices have led critics to call hedge funds like Elliott "vulture funds."
"Vulture funds like Singer's firm buy bonds at a fraction of their face value, after default or similar depressing of the price, or in this case after the vast majority of bondholders have agreed to a debt restructuring," Dan Beeton, international communications director of Center for Economic and Policy Research, explained to The Progressive. "They then sue for the full value of the bond plus accumulated interest. In this case Argentina has recently offered them a 300 percent return for their investment (which they have held for six years), but they want something several times bigger."
In a 2012 ruling that surprised most everybody, a Manhattan district court ruled in Elliott’s favor. The U.S. Supreme Court declined to hear the case in June, setting the stage for the current imbroglio, which could have wide-reaching implications.
"We've had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system," Nobel Prize-winner and Columbia University Professor Joseph Stiglitz told The New York Times. "We don't know how big the explosion will be -- and it's not just about Argentina."
The repercussions could be far-ranging.
"First, it may affect the prospects for future negotiations between sovereign governments and debt holders, as agreements that governments make with the great majority of creditors may, as in this case, be undermined by a tiny minority of holdouts," Beeton says. "Second, if the rulings are left to stand, then vulture funds will have won a tremendous victory, and their strategy -- of buying debt as cheaply as possible in order to later force governments to pay back the full value of the bonds -- will turn out to be a winning one."
Beeton views the episode as an instance of the upward redistribution of wealth.
"It's a very ugly, naked example of the global one percent taking money from people who have much less," he says. "This is money that Argentina could use on public spending, but instead may be forced to pay to a few individuals who never made risky investments in Argentina, prior to the 1998-2002 depression, in the first place."
Ironically, as Beeton points out, the ruling could also rebound against the United States itself.
"The decision could reduce the U.S. share of global bond issues," he says. "Instead of New York, where it is now clear there are no safeguards against such predatory behavior by vulture funds, governments may choose to issue debt in places where there are such safeguards."
Beeton and his organization are urging the U.S. Congress to remedy the judicial decision.
"Congress could pass legislation that would prevent this kind of extortion by vulture funds and holdout creditors in the future," he says. "For example, this could be done by amending the Foreign Sovereign Immunities Act to make it clear that sovereign debtors cannot have their assets in the United States seized or their payments to creditors blocked."
"This was an interesting case because while the IMF filed an amicus brief in favor of Argentina in the lower court, it was blocked from doing so at the Supreme Court -- apparently at the direction of the U.S. Treasury," he adds. "So in the end, it appears that the U.S. government effectively sided with Paul Singer and the vultures. Congress could push Treasury and the IMF to take a position on the side of Argentina and the 93 percent of its bondholders whose assets have been taken hostage."
Argentina has been declared by the credit agencies in default as a result of the ruling. Talks to resolve the impasse have broken down for now. The consequences for the country’s economy -- and for the world at large -- could be severe in the weeks and months to come.