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How Argentina is Taking on Rapacious Vulture Funds in the 'Debt Trial of the Century'

Could an upcoming U.S. court decision put an end to the extortion of poor countries?
 
 
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Last October, soldiers from the West African nation of Ghana boarded an Argentine naval ship called the Libertad. They overtook the crew and brought the ship to port in the town of Tema. This was not an act of piracy, at least not in the sense we normally understand it.  The detaining of the Libertad took place after hedge fund NML Capital convinced a Ghanaian court that the ship, which was sailing in Ghanaian jurisdiction, should be held ransom for a debt the hedge funds claimed Argentina owed them.

The saga began in 2001, when Argentina was thrown into economic crisis and defaulted on its loans.  Hedge funds swooped in and bought Argentine debt for almost nothing and circled until the country was in recovery to collect the debt in full.

The case is set to be decided in the coming days in the U.S. 2nd Circuit Court, the jurisdiction in which the original loans were contracted. The decision will impact whether certain hedge funds commonly known as "vulture funds"—funds that buy a struggling country’s debt for pennies on the dollar and then sue for the full amount when a country is in recovery—will continue to extort poor countries.

The long 2nd Circuit Court proceedings between Argentina and hedge funds NML Capital and Aurelius has propelled the international debt crisis into the spotlight. It’s been called the “debt trial of the century,” and the proceedings could have the most far-reaching impacts on global poverty in our lifetime.

The U.S. 2nd Circuit Court is the case's last stop before the U.S. Supreme Court, and if the vulture funds win, it will mean these funds will be allowed to more aggressively target poor countries in financial recovery. Argentina would possibly default. But if Argentina wins, it will be much harder for these types of hedge funds to exploit poor countries in the future, destabilize emerging economies, and target assets that should be improving the lives of the world's most vulnerable people.

Because the U.S. government acknowledges that this behavior hurts legitimate investors and poor people, the Obama Administration filed a friend-of-the-court brief that argued that a ruling against Argentina could make it much harder for poor countries or countries in financial recovery to access credit and restructure debts. The International Monetary Fund and the  World Bank are similarly critical of vulture funds.

How they work

Vulture funds create an international version of a situation that often takes place on the individual level: You lose your job and you can’t pay your debts. You file for bankruptcy and restructure your debts, but the owners of your hospital debt and credit card debt refuse to negotiate. Instead, these debts are sold for almost nothing to collection agencies when  it could have been resolved directly with you. The collection agencies hover while you are trying to get back on your feet. When they find out a relative gave you 200 hundred dollars to take your daughter to the dentist, the collection agencies seize the money.

The equivalent impacts on a poor country just getting on the other side of a financial crisis are devastating. In 1999, a vulture fund called  Donegal International bought a debt owed by Zambia for a knock-down price of $3.3 million. Most of Zambia's debt was canceled and the country began saving $40 million a year when they stopped repaying loans to the World Bank and International Monetary Fund. After Zambia received this debt relief, Donegal sued the African nation for  $55 million and in April 2007, the court ruled that Zambia must pay $15.4 million—roughly 65 percent of the debt relief that was specifically directed for development projects. A huge profit for the vulture fund and a theft from the poorest Zambians.

 
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