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Debt Trial of the Century in the Hands of the Supreme Court

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Crossposted on TikkunDaily

By Andrew Hanauer

Last Tuesday, Argentina appealed to the US Supreme Court in its landmark case against predatory hedge funds seeking to collect more than $1 billion in old debts. With phrases like “bondholder” and “sovereign debt restructuring” peppered throughout the news coverage of the filing, following this case may not be as easy as following some of the other high profile proceedings before the court. And that’s a shame. Because for millions of people living in extreme poverty, the implications of this case are enormous.

In 2001, Argentina defaulted on its obligations and reached agreement with around 92% of its creditors to restructure the country’s debts. Some creditors held out, however, including a number of hedge funds that had bought Argentine debt for pennies-on-the-dollar before the default, hoping to cash in later on. These funds were participating in a calculated global strategy of speculative profit seeking that threatens the ability of poor countries to emerge from the burden of high levels of debt – behavior that has earned them their colorful nickname: “vulture funds.”

So-called vulture funds operate by buying up the old debts of poor countries cheaply from creditors, and then waiting until the debtor country has been granted debt relief before swooping in and suing for the amount of the original loan, plus interest, plus fees, often seeking upwards of a 1200% profit in the process. They target debt relief funds that otherwise are generally earmarked to fund social services like health care, education, and AIDS prevention.

In Zambia, for instance, hedge funds purchased $15 million worth of debt for $3.3 million, then sued the Zambian government for $55 million at a time when the country was saving about $40 million a year because of debt relief and using much of that money to fight poverty. Debt relief, for instance, allowed Zambia to get rid of health fees at rural clinics, benefiting some of its poorest citizens in the process. A court awarded the funds $15.4 million, a 467% profit for speculative predatory behavior at the expense of some of the poorest people in the world. In many cases, of course, the people tasked with paying back these debts had little say in contracting them in the first place, further exacerbating the injustice of having debt relief monies snatched by hedge funds.

International lending is contracted through a handful of jurisdictions, most of which have cracked down on these predatory hedge funds in some form. New York, however, has not, and the funds won two court cases against Argentina in New York State, arguing that if Argentina is paying back the 92% of its creditors who negotiated, it needs to pay back the holdouts as well, even if they are seeking preferential treatment. What is feared by anti-poverty groups is that if these funds win in court, it will set a global precedent that will imperil hundreds of millions of the world’s poorest people, leaving them vulnerable to continued indebtedness as creditors balk at restructuring. After all, what incentive would a lender have to restructure if profit-seeking hedge funds can simply demand payment in full? And why grant debt relief if the funds are going to end up being grabbed by hedge funds?

What is remarkable about the Argentina case is that it has made clear that on this issue, there is global consensus: the actions of these funds are wrong. The US government has expressed support for Argentina’s arguments, as has France. German courts have ruled against the hedge funds, and British lawmakers have passed laws regulating them. The IMF and World Bank have spoken out forcefully against these funds, noting that their actions imperil the debt relief process. These funds have hired lobbyists and PR firms to paint themselves as legitimate investors dragging deadbeat countries to account in court, but in reality they are extreme actors profiting in the global financial equivalent of the Wild West.

And therein lies the real problem. Whether or not these funds win at the Supreme Court, the real issue is that heavily indebted poor countries do not have access to a fair and transparent bankruptcy system where they can have their debts restructured or even audited for legitimacy. Such a system could include the participation of civil society, thus giving voice to the very people most directly impacted by the decisions being made. It could include a mechanism for determining the legitimacy of past debts, a concept furthered by Norway’s unilateral audit of its own loans last year. And it could establish rules that would preclude predatory behavior and ensure that all legitimate creditors are treated equally.

In the meantime, such countries are left to the mercy of powerful creditors, and vulnerable to predatory behavior. In the meantime, their last line of defense is likely the US Supreme Court. Wonky economic lingo might detract from the curb appeal of this case, but it is difficult to overstate its importance.

 

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