Since Argentina defaulted on $15 billion in sovereign debt last July, the battle between hedge-fund billionaire Paul Singer and the Argentine government has climaxed in 2014 and headlined the financial world.
In its latest move to thwart off so-called “vulture funds,” Argentina has voted to allow its government to pay international debt bonds in either Buenos Aires or Paris, or through other bondholders.
Paul Singer has spent years trying to collect on an estimated $3 billion that he is owed after he bought up some of Argentina’s distressed debt following its last default in 2001. But while the government has committed to repaying some 92% of its “exchange” bondholders, President Cristina Fernández de Kirchner defends that she will not give into the predatory behaviors of vulture funds and “subject the country, [and] its people to extortion.”
When Argentina last defaulted in December of 2001, it owed more than $100 billion to private creditors worldwide and recorded the largest sovereign debt default in history. Journalist Jeremy Roos writes, “By late 2001, many of Argentina’s bondholders were small retail investors… [who] sold their bonds to Wall Street hedge funds at greatly discounted prices in the wake of the default.”
As time progressed, the country slowly climbed out of recession and restructured many of its debt agreements in 2005 and 2010, allowing Argentina to reclaim some 70% of its debt from 92% of its creditors. A few “holdout” creditors, however, did not negotiate new deals, and instead, waited for their investments to be paid in full.
At age 70, Paul Singer has a history of preying on developing countries. For more than a decade, Singer has successfully collected hundreds of millions of dollars from countries like Peru, the Democratic Republic of the Congo and Greece. Investigative journalist Greg Palast writes of Singer’s “modus operandi” in which he buys up debt of poor nations, waits for their debts to be forgiven and then demands heavy ransoms or else face default.
For Singer, vulture capitalism is just good business; for Argentina, Singer’s business is extortion. One example of this came when Argentina’s military vessel ARA Libertad landed on the shores of Ghana in mid-2012. After following the ship’s movement across the Atlantic, Singer successfully seized the naval vessel through court in Ghana and demanded Argentina to pay $20 million before it would be released. Months later and the Law of the Sea president Judge Shunji Yanai of Japan ordered the ship to be released, citing the immunity of warships under customary international law.
According to fellow hedge-fund manager, Daniel Loeb, Singer “doesn’t get into fights for the sake of fighting. He believes deeply in the rule of law and that free markets and free societies depend on enforcing it.”
Breaking the global financial system
If Singer is successful in his efforts, Argentina would be forced to pay in full the rest of the exchange bondholders due to the Returns Upon Future Offers (RUFO) clause that was included in the restructured bonds. By triggering the RUFO clause, the country would be forced to payout $15 billion or roughly half of its reserves. To this, Kirchner argues that “it’s not only absurd, but also impossible for a country to give over 50% of the total reserves in its Central Bank in one payment to creditors.”
She adds, “[T]his is not an economic problem, or a financial problem, it’s not a judicial or legal problem; it’s the result of a business model on a global scale that, if it continues, will produce unbelievable tragedies.”
In terms of the global economy, Argentina’s case underscores the issue of sovereign debt and the absence of an effective mechanism that allows countries to enter into bankruptcy. According to the International Monetary Fund, global debt has grown by 40% since 2007 and now totals over $100 trillion, with a majority of debt issuers being central, state and local governments.
In June, the International Monetary Fund (IMF) proposed a new lending framework for countries in trouble with sovereign debt; the key to this new framework would allow governments to ask for a “reprofiling operation” together with a credible adjustment program that “tends to be less costly to creditors than debt reduction, less disruptive to financial markets, and hence less contagious,” according to IMF officials.
On September 9, 2014, the United Nations General Assembly passed a resolution (124-11) to begin treaty negotiations to enact a global bankruptcy process and prevent hold-out investors from stopping countries restructure their debt agreements. Speaking on behalf of the religious financial reform coalition known as Jubilee USA Network, executive director Eric LeCompte stated that “The strong majority vote shows how powerful the global consensus is to stop predatory financial behavior. If we are going to solve what global leaders believe is the root cause of inequality, we need a bankruptcy system in place.”
Similarly, Argentina’s Cabinet Chief Jorge Capitanich told reporters in Buenos Aires, “If 124 countries in the United Nations support the Republic of Argentina, it means that Argentina is right in its claims.”