By: Andrew Hanauer
The “Debt Case of the Century” took a surprisingly positive turn this past week when a U.S. Court of Appeals ruled that Argentina has more time to appeal a ruling against it in its battle with vulture fund creditors. Argentina had faced a December 15 deadline to make a terrible choice: pay the vulture funds that are holding the country hostage or default on all of its creditors. For now, at least, that choice will not need to be made.
The appeals ruling was made in response to a ruling by U.S. Judge Thomas Griesa that Argentina could not pay back the creditors which had accepted a debt renegotiation with the country after its 2002 default unless it also paid back the small minority of creditors that refused to accept the deal. Those creditors are largely so-called vulture funds that swooped in and bought Argentine debt at rock-bottom prices and then sued for repayment of the full amount of the original loan. Griesa ruled that if Argentina did not pay back the vultures along with its other creditors, any bank that accepted repayment on behalf of those other creditors could be found to have violated the law. As a result, Argentina would have to choose to abide by the ruling and pay the vultures or not pay anybody and default.
The appellate ruling now gives Argentina more time. But the ruling itself may have had little to do with Argentina’s compelling moral arguments against the vultures and more to do with the complaints of Argentina’s other creditors, which argued that it was unfair for the vultures to receive 100% payment when the vast majority of stakeholders were accepting only 25-30%. As Business Insider points out, this argument has far-reaching implications for international debt: “After all, why should any creditor accept a restructuring deal at all if another bond holder can hold out and get all their money?”
Confused? You’re not alone. One of the struggles of the debt relief movement is that clear and compelling moral issues, often determining the fate of some of the world’s poorest people, are shrouded in the technicalities of international finance. Argentina’s battle with the vultures is no exception: the issues are confusing and the stakes are high. In the hopes of providing some clarity, here is some historical background on the situation.
The plot of Argentina vs. The Vultures is captivating enough for a Hollywood movie. Such a movie, to accurately capture the essence of this story, would need to start with Argentina’s brutal military dictatorship of the 1970s, during which time 30,000 Argentineans “disappeared.” The dictatorship borrowed heavily from foreign creditors, racking up large sums of debt largely in an effort to fund repressive institutions and enrich corrupt leaders. By the time the dictatorship ceded power in 1983, the country was more than $45 billion in debt.
When dictatorships borrow money, the subsequent debt is often labeled as “odious” or “illegitimate” on the grounds that the loans were not incurred with the consent of the nation’s people and were often spent on projects that brought little public benefit. Such lending also has been shown to fuel capital flight (the act of sending money abroad where it cannot be taxed or later recovered) and to incentivize leaders to loot natural resources. It also has helped tyrannical regimes maintain power longer.
In Argentina, lending did all of the above, but it also led to more lending aimed at paying off the dictatorship’s debts. Such lending is not odious in the classical sense because it was borrowed by a democratic government, but it is the direct result of illegitimate loans. This is crucial in the Argentine case because some of the country’s creditors are claiming that Argentina’s current debt is legitimate because most of it came after the military regime was ousted; however, new loans are used to repay old loans, which is how the debt cycle continues.
As Argentina’s debt grew ($148 billion by 2001), the country implemented a number of austerity measures at the behest of the International Monetary Fund, and its economy only got worse. In 2002, the Argentine government dramatically altered course, rebuffed the IMF, and initiated a remarkable economic turnaround. The government “re-nationalised key productive sectors like aviation, pensions and most recently oil, increased social protection and income transfers to the poor, and reduced poverty substantially. Real wages have increased, and wage inequalities have been reduced.” Argentina is now a dazzling economic success story, one of the strongest economies in the world just a decade after a period of instability so severe that at one point the country had five different presidents in two weeks.
At this point we reach the beginning of the current drama. Argentina defaulted on its debt, but offered to renegotiate it and even paid off the IMF in one lump sum (to achieve economic freedom) rather than declare its debt odious and repudiate it. Despite only being offered 25 to 30 cents on the dollar, roughly 90% of creditors accepted the deal, and Argentina has been paying them back, mostly from its currency reserves. Under United States bankruptcy law, if 70% of creditors accept a certain course of action, the so-called “hold-out” creditors must do so as well. And yet a group of hold-outs, mostly hedge funds that bought Argentine debt at record-low prices, have refused to accept any rescheduling and continue to demand that Argentina pay them back in full. These are the vulture funds.
The lead vulture fund in this case is NML Capital, led by billionaire vulture capitalist Paul Singer. Singer has gone to such great lengths to try to compel Argentina to pay him (which Argentina’s president has vowed she will never do) that he even recently orchestrated the seizure of an Argentine naval vessel by authorities in Ghana on the grounds that Argentine property was subject to confiscation given its outstanding debts.
Do Singer and his fellow vultures have any standing whatsoever to demand repayment on these debts? No. Aside from the fact that the debt was largely illegitimate in the first place, the vultures refused to accept the terms of the vast majority of Argentina’s creditors. They could have received repayment, but chose instead to be intransigent. More importantly, they are merely speculators, not legitimate lenders. They bought the loans at rock-bottom prices, illustrating the risk they were willing to take as multimillionaires gambling for either a large payout or a loss of insignificant proportions to them.
Argentina is not the only entity to take issue with the vultures. In the latest court case, the country’s other creditors - the ones who accepted the renegotiation - argued that it was unfair that the creditors who negotiated with Argentina in good faith should have to accept 25 cents on the dollar for their loans while the vultures received repayment in full. They further argued that Judge Griesa’s ruling was harmful in that non-holdout creditors would be completely denied even the lower rate of repayment if Argentina refused to pay the vultures and opted for default.
In this sense, “hold-outs” is truly an apt phrase for Singer and his fellow vultures. Because of their refusal to accept large profits on loans they never made rather than the astronomical profits they now seek, the hold-outs are dragging an entire country and its creditors through a drawn-out legal process, threatening an entire sub-set of international financial norms in the process. All the while, they continue to hold Argentina hostage, both figuratively in American courtrooms and literally in a west-African port. Hostage-taking: even actual vultures don’t do that.
 Business Insider, “Now We Know How Argentina Wants to Resolve Its Battle with Hedge Funds,” by Linette Lopez, November 29, 2012. http://www.businessinsider.com/argentina-solution-to-hedge-fund-lawsuit-2012-11#ixzz2E9uwSRtA
 Dearden, Nick, “Argentina Showed that Justice Means Standing up to Financial Markets,” Huffington Post, August 8, 2011. http://www.huffingtonpost.co.uk/nick-dearden/argentina-showed-that-jus_b_920872.html
 World Bank, 2012. http://data.worldbank.org/indicator/DT.DOD.DECT.CD?page=5
 World Bank, 2012
 UK Guardian, “Why Argentina is Now Paying for its Dangerously Successful Economic Story,” by Jayati Ghosh and Matias Vernengo, December 3, 2012. http://www.guardian.co.uk/commentisfree/2012/dec/03/argentina-paying-economic-vulture-fund
 Dearden, 2011