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Don’t ​(cry for me) pay up now, Argentina

“I had to let it happen
I had to change
Couldn’t stay all my life down at heel
Looking out of the window
Staying out of the sun
So I chose freedom
” (lyrics – Tim Rice)

Few of our readers (we suspect) will have heard of NML Capital Ltd – a company which today is at the centre of an extraordinary and damaging New York court judgment relating to the sovereign debts of Argentina. NML Capital was founded by Republican-funder Paul Singer, of the US$19bn hedge fund Elliott Management Corporation. Here is how Fortune magazine describe Mr Singer:

Over the past 35 years Singer, 67, has produced an extraordinary 14% average annual return after fees…He’s achieved that record in large part by buying the debt of bankrupt companies and nations — a strategy that has earned him considerable opprobrium in some circles. His firm, which is engaged in a costly, protracted legal war with Argentina over its defaulted sovereign debt, is so influential that fear of its tactics helped shape the current Greek debt restructuring. Among the sophisticated investors who have placed their confidence in Singer is Mitt Romney himself. According to Romney’s financial disclosures, the trust managing his more than $200 million fortune has at least $1 million invested with Elliott.

In recent years Singer has emerged as a quiet force in the Republican Party. He’s one of a handful of moneymen who have given $1 million to the Romney super PAC “Restore the Future,” which so far [March 2012] has raised $37 million and spent some $34 million.”

Not only do ‘vulture funds’ as they are called buy the debt of bankrupt companies and nations, they buy the outstanding debt at a considerable discount, and then ‘hold out’. In other words, they sit and wait until the sovereign debtor (inevitably) recovers from economic crisis – and then pounce. They demand repayment in full, with compounded interest added – of bonds that were bought in the first place at a ‘firesale’ rate.

Today – no fair process for debt crises

This would be bad enough. But in the absence of fair and independent international law for the resolution of sovereign debt crises – an insolvency framework for sovereign debtors – there is no independent arbitrator (as in domestic bankruptcy law) to settle claims between debtor and creditors on the one hand; and on the other, to adjudicate between the differing claims of creditors. In other words, there is no fair, independent process for writing off, or re-structuring claims in an orderly way. One that is fair to both creditors and debtor.

Instead creditors seek out the jurisdictions – and judges –  that might favour their interests. The most blatant is Elliott Associates application to the courts of Accra,  Ghana for an enforcement of its claims on Argentina. A Ghanaian judge, with perhaps little knowledge of international bond markets, helpfully agreed that the Argentine government had to hand over an asset – a military training ship that happened to port in Ghanaian waters – to NML Capital… an Argentine ship that happened to linger in a Ghanaian harbour.

Freedom from dollar parity, devaluation and default

Back in 2002, Argentina chose freedom from bondage to the ‘Washington Consensus’ and its tacit support for a fixed parity dollar-peso exchange rate. This monetary policy, as many predicted, finally brought its economy to its knees – and (with a huge fall in the value of the peso) Argentina defaulted on its dollar-denominated debts.

After the disorderly default in 2001/2, Argentine began negotiations with a range of private creditors. In successive steps, around 90% of creditors accepted a haircut of around 70%, in return for which they would be – and have been – paid on the reduced basis by the Argentine state.

Less than 10% of creditors, the “hold-outs”, declined to accept the deal.  Much of the hold-outs’ debt has ended up in the hands of vulture funds, who in principle buy up debt cheap and then use aggressive legal techniques to try to get payment on the whole 100% debt plus compound interest.

Argentina has refused to pay the hold-outs, a policy enforced by national legislation.  The bonds come however under NY law.

To remind ourselves, there is no international law of insolvency or bankruptcy for sovereign states. In pure market theory, the citizens of poor countries remain infinitely liable to pay international debts incurred by their governments, even if their exchange rate has collapsed and the debt therefore has a hugely higher value than when it was incurred.  This was why the Jubilee 2000 Campaign, of which Ann Pettifor was the director, worked with considerable success to “Drop the Debt” of the poorest countries.

Back to now. In recent weeks, the New York courts have – through their interpretation of the ‘pari passu’ clauses included in the bond contract – decided that the hold-outs are entitled to be paid on the same percentage basis of their total debt as the haircut creditors… This is in our view wildly unjust, since the vast majority of creditors had accepted the reality that Argentina was de facto (but of course not de jure) ‘insolvent’, and came to an agreement to receive less.  This achieved (if in a rough and ready way) a form of fairness between a de facto insolvent debtor and its creditors.

Judge Griesa backs the vultures

But the New York courts are trying to force the banks, through whom Argentina makes payments to the haircut creditors, to pay out to the vulture funds and other hold-outs a sum which by definition would be more (pro rata) than the haircut creditors would get. And Judge Griesa has made this clear in his decision:

The obligation to [the hold-out] plaintiffs under the February 23, 2012 Injunctions accrues whenever Argentina ‘pays any amount due’ under the terms of the Exchange Bonds [those of the haircut creditors]. The next time this will occur will be in December 2012, when Argentina is scheduled to make interest payments on the Exchange Bonds of about $3.14 billion: $42 million on December 2, $3 billion on December 15, and $100 million on December 31.

When this occurs, Argentina will be required to make a ‘Ratable Payment’ to plaintiffs. Assuming that Argentina pays 100% of what is then due on the Exchange Bonds, this is the “Payment Percentage” referred to….. Argentina would be required to pay 100% “multiplied by the total amount currently due” to plaintiffs. There is no question about what is “currently due” to plaintiffs. The amount that is currently due is the amount of the unpaid principal, the due date of which has been accelerated, and accrued interest…

The total of these amounts due to plaintiffs is approximately $1.33 billion. Thus, at some time in December 2012, when Argentina makes the interest payments on the Exchange Bonds, amounting to a total of about $3.14 billion, Argentina will be required to pay plaintiffs approximately $1.33 billion.”

All this flows from his interpretation of pari passu, which is Latin for “by equal step”, and it has a range of definitions – Wikipedia summarises it thus:

This term is also often used in bankruptcy proceedings where creditors are said to be paid pari passu, or each creditor is paid pro rata in accordance with the amount of his claim.”

And that led Judge Griesa (supported by the US Appeal Court for the 2nd District)  to uphold the hold-outs.  He not only did not see the injustice of his one-sided approach to (a) the debtor and (b) those (the exchange bondholders) who had settled for a ‘haircut’ or lesser sum as part of the settlement with Argentina. Instead he positively relished supporting the vultures (the “other owners” and plaintiffs in the excerpt below):

In accepting the exchange offers of thirty cents on the dollar, the exchange bondholders bargained for certainty and the avoidance of the burden and risk of litigating their rights on the FAA Bonds. However, they knew full well that other owners of FAA Bonds [the vulture funds] were seeking to obtain full payment of the amounts due on such bonds through persisting in the litigation. Indeed, the exchange bondholders were able to watch year after year while plaintiffs in the litigation pursued methods of recovery against Argentina which were largely unsuccessful. However, decisions have now been handed down by the District Court and the Court of Appeals based on the Pari Passu Clause, which give promise of providing plaintiffs with full recovery of the amounts due to them on their FAA Bonds. This is hardly an injustice. The exchange bondholders made the choice not to pursue the route which plaintiffs have pursued. Moreover, it is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes. After ten years of litigation this is a just result.” (our emphasis)

Imagine if this judge were presiding over the outstanding debts of say  New York’s famous department store, Macy’s, which in 1992 sought ‘protection from its creditors’ under Chapter 11 of US bankruptcy law. Macy’s debts were subsequently restructured; creditors took losses, and Macy’s was severely disciplined. But as a result of this proper legal process, Macy’s was restored to economic health.  Or think General Motors, in a more recent example.

Judge Griesa’s concept of justice (which seems alas to be supported by the US Court of Appeals) is truly as perverse as the Supreme Court’s when that august body decided that corporations are really people, and thus able to fund their favoured political candidates.

He could, let’s be clear, have interpreted pari passu otherwise, either to exclude the hold-outs as not being in the same class as the haircut creditors, given the particularities of sovereign debt, or for example by using a principle of no greater benefit for the holdouts than for the vast majority of creditors. It is an area of law which needs an element of judicial interpretative discretion– for as all lawyers know, judges often have a wide margin of policy choice even while applying the law to the facts.   The question is always – in whose interest?

By going down the route of 100% support for the hold-out vultures who gorge on the tax revenues used to repay debts (which come from the citizens of much poorer countries), and entirely to the benefit of the 1%, Judge Griesa has shown the world that in America, justice favours the most powerful creditors, the highest finance interest, the most odious of hedge funds.

This is why we disagree also with Felix Salmon in his Reuters blog article Elliott vs Argentina is a domestic Argentine issue who argues that there is really no difference between the exchange bondholders and the hold-outs. The “exchangers” may also be, in general terms, greedy hedge funds, but they have accepted the write-down as an overall solution to the sovereign debt crisis.

Is it too much to hope that Argentina finds allies in the international institutions and legal system, so that this crisis can be resolved in a just and orderly way? Is it too much to hope that the rule of law can be invoked to avoid the unjust enrichment of Elliotts and other vulture funds?

And finally  let us hope that this example of injustice at work acts as catalyst and wake-up call for the development of a just system for dealing with sovereign insolvency which at long last fairly balances the interests of creditors and debtors.

This article is by Ann Pettifor and Jeremy Smith and first appeared at Prime Economics.

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