Argentina's Vulture Fund Odyssey: An End to Latin American Debt Dependence?

October 11, 2016

On July 31st 2014 the clock ran out on the deadline for Argentina’s government to make a $539 million interest payment to the 93 percent of its bondholders which had agreed to debt restructuring in the years since the country’s 2001/2 economic and political crisis. At that time Argentina had been forced to declare the largest sovereign default in world history, but with the latest deadline having been missed, the South American nation is now once again in ‘technical default’ with the doom merchants forecasting profound economic upheaval.

What has made the situation somewhat Kafkaesque is that the government actually deposited the bondholders’ payment into its Bank of New York Mellon account, only to have its transfer blocked by US judge, Thomas Griesa. This was merely the latest twist in what the Financial Times has labelled the ‘sovereign debt trial of the century’ – a lawsuit brought about by billionaire Republican Party donor Paul Singer on behalf of two hedge funds, NML Capital and Aurelius. These entities deliberately hoovered up cheap Argentine bonds after the 2002 collapse, then refused to renegotiate the debt terms when the country was on its knees, in the hope of making exorbitant 1,400% profits out of its people’s misery. Better known as ‘vulture funds,’ they have been holding Argentina to ransom for several years by demanding the full value of the debt on which they had originally speculated – repeating the same arduous process to which Elliot Management (NML’s parent company) also condemned Peru between 1983 and 2001 (Monteagudo, 2010).

So how did this latest episode in Argentina’s turbulent history arise? Having adopted a somewhat austere interpretation of pari passu (the legal concept of ‘equal treatment’ for all creditors) which effectively means that either all bondholders are paid the original pre-renegotiated bond value (which would have bankrupt Argentina), or none of them receive a penny, Judge Griesa’s ruling in a New York court (where the bonds were issued) declared Argentina’s restructured bond payments illegal. In legal proceedings that were fraught with allegations of abuse of authority (Griesa effectively sought to nullify restructured debt contracts that had earlier been subject to lawful and consensual agreement by Argentina’s government and its creditors) and lack of judicial independence (although a lifelong Republican- he was presiding over a case brought by one of the same Party’s largest donors), Argentina refuses to accept the Court’s jurisdiction today.


Global ramifications of the ruling

Yet the ruling will have enormous ramifications for the global debt system. Effectively affirming that the right of a handful of wealthy investors to reap multi-million dollar profits from financial speculation supersedes the right of sovereign nations to protect their citizens under international law, it also establishes a legal precedent that removes any incentive for investment funds to agree to restructure the value of their distressed debt bonds following developing country defaults. As the IMF has warned, this will create far-reaching financial instability, having given the green light to the vulture funds to continue attacking some of the poorest countries in the world and to drain their economies of already depleted treasuries that could be used to provide education, food and protection against disease.

Yet the lack of political will from either President Obama or the United States Congress to follow the example set by the British Parliament in 2010 (which as a result of a Jubilee Debt Campaign initiative, approved a landmark law that restricts vulture funds from suing the poorest countries in UK courts), represents Washington’s tacit approval for unregulated speculative capitalism. This is barely surprising given the vultures’ growing influence over elected representatives and the media in the US, as well as their potential to inflict political damage upon political opponents. Indeed, the vulture funds’ lobby group, American Task Force Argentina has already spent $4 million persuading US Congressmen to support them. The US State Department’s refusal to accept Argentina’s lawsuit against it at the International Court of Justice for violating its sovereignty and immunities further illustrated the futility of existing global governance institutions. That was until the events of more recent weeks which have opened up new opportunities to re-write the rules of global finance capitalism as a direct result of the vultures’ intervention in Argentina’s tumultuous debt affair.

On September 9th 2014, an Argentinean, Chinese and G77 coalition-led proposal led to a historic vote at the UN General Assembly which overwhelmingly approved the establishment of a legal framework to create an international convention that regulates the restructuring of foreign debt. Further, in October, perhaps concerned about how to preserve its hegemonic role as global ‘lender of last resort’, the IMF released a new memorandum aimed at preventing predatory hedge funds from blocking debt restructurings by strengthening "collective action" clauses in such contracts. However, whilst these moves represent progress, they do little to question the dubious legitimacy of these debts in the first place.


Debt illegitimacy in Argentina and Latin America

Whilst in Buenos Aires interviewing local people about their feelings surrounding the “default”, I am greeted with almost universal stoicism. Argentineans, I concluded, had become used to living with “crisis” and “instability” – each shot of it making them more immune. The lack of rage against the vultures that had provoked the default was finally counterbalanced when I visited the City’s main square - the Plaza de Mayo to where I was greeted by the white-scarf clad Mothers who were marching around the Square-as they had done every Thursday since 1977- to demand justice for their children who were among the 30,000 young men and women abducted, tortured, then “disappeared” by Argentina’s brutal military dictatorship in the 1970s and 80s. The systematic slaughter of political opposition, muzzling of the trade unions and imposition a police state by the governing regime in order to impose neoliberalism under the National Reorganisation Process, was shamefully backed by ideologically sympathetic western governments including those of Thatcher and Regan.

As Co-founder of the Mothers’ Founding Line faction, Nora Cortiñas reminded me, much of Argentina’s current debt is illegitimate- due to having been recycled from interest payments that accrued unconstitutionally from loans the military used to arm their concentration camps, purchase the weapons with which they tortured their sons and daughters and to pay the salaries of the functionaries who administered the genocide. However, the debt is also immoral and potentially illegal for other reasons.

Firstly, former finance minister and president of the Central Bank, Domingo Cavallo, had transferred millions of dollars of private debt liabilities into state coffers and during the “Mega bond-swap” of April 2001. This added $54 billion to Argentina’s long-term debt in a colossal fraud to public finance for which Cavallo is currently under criminal investigation. Secondly and most crucially, Judge Ballesteros’ 2000 Olmos Case ruling identified that the debt had been accrued due to 477 separate “fraudulent and arbitrary” acts – bringing its very legality into question. The basic legal principle is that no illicit action can later serve as the basis for a legal act such as NML and Aurelius’ bond purchases. On that premise, all the successor debt falls, nullifying the value of investments made in it, including the vulture funds’ bond purchases after Argentina’s 2001/2 economic crisis. A pending federal court decision may well declare the debt null and void.


Ending Latin America’s Debt Dependence

However Argentina is far from alone. National debt burdens continue to impede growth, development, and poverty alleviation in many other Latin American countries. These remain trapped in a historical cycle of dependence upon western financial capital’s institutions - the IMF, the Paris Club, and hedge funds and which also lock them into a politically subservient relationship with G8 countries. Indeed, debt servicing represents the 21st century manifestation of Dependency Theory (Gunder Frank, 1966).

Yet like Argentina - Bolivia, Brazil, Chile, El Salvador, Guatemala, Honduras, Panama, Paraguay and Uruguay are among those whose historic debts also have highly questionable legitimacy (Toussaint and Millet, 2010). Repayment of which must also be challenged.

With developing countries’ total outstanding external debt having doubled to $5 trillion since 2005 (World Bank, 2014), how might Latin America’s governments seek the necessary finance to uphold their central role as health, education and, social protection providers, without perpetuating the conditionality and dependence upon western financial hegemony that has so profoundly harmed their prosperity?

Alternative and ostensibly less harmful funding sources have been proposed. Firstly, what of the potential for the People’s Bank of China to fulfil this role? As China asserts its political and economic authority in the global south through foreign direct investment, bilateral trade deals and loans, the problem is that it presents the danger of old relationships of dependence being replicated. October’s $11bn loan and currency-swap agreement with Argentina exemplifies this. Whilst bolstering failing currency reserves in the short term, it will ominously aggravate longer-term indebtedness.

Secondly, the recently-formed BRICS development bank has been hailed as the potential saviour of the global south. Yet as details of its borrowing arrangements emerge, it appears that it would leave debtor countries with little room for manoeuvre to escape neoliberalism’s financial infrastructure. Requiring an existing “on-track-arrangement” with the IMF in order to qualify for financial assistance, the BRICS bank would be far from the counter-hegemonic institution that many had hoped for.

Neither of these are viable alternatives to debt dependence for Latin American nations and the system will keep generating debt crises regardless of who plays neoliberalism’s “banker”. Meanwhile, although the Bank of the South (BancoSur) would offer favourable lending terms from close regional allies for the construction of infrastructure and financing of social programmes, progress towards establishing this project has stalled as it awaits ratification by several states.

Instead, what is urgently required is fundamental change in the rules of the game for preserving the status quo is leading even global south countries like Ghana, which initially benefited most from debt cancellation in 2005, to head back towards high debt payments.


Public Debt Audits – Emancipation In Sight?

However, there remains one other possibility. Conduct citizens’ audits in Argentina and the rest of Latin America to determine the amount of debt in each country that can be deemed “illegitimate,” then refuse to pay that amount. In this way, a large proportion of national debts could be legally written off, ushering in a new era of economic emancipation for the vast majority of the region’s population. There is currently an unprecedented groundswell of global solidarity for Argentina against the vulture funds from the G77+China, to the Union of South American States and a multitude of internationally respected economists, politicians and NGOs. This momentum must be seized upon to openly challenge the legitimacy and indeed legality of both external debts themselves and subsequent speculative investments made in them on the table of casino capitalism.

Ecuador has proven that public debt audits work. In 2008 President Correa established a Commission which found 70 percent of its debt to be illegitimate. By partially defaulting and selectively buying back bonds, the country’s debt burden was slashed by $3bn. Today, the country is currently thriving as one of region’s fastest-growing economies. Public debt audits are feasible and refusing to pay does not mean financial Armageddon.

Argentina has moved a step closer to this with its Congress having passed the Sovereign Payments Law a few weeks ago. On the one hand this allows the New York Court’s jurisdiction to be circumvented by encouraging restructured bondholders to transfer their debt contracts under Argentinean or French law so that they can be paid (declared to be in contempt of court by Judge Griesa) and on the other it has finally established a commission to investigate the origins of the country’s debt. Whilst this body has been slow to deliberate and its cross-party character raises the spectre of neoliberal advocates watering down any findings about the debt’s odious nature, Olmos’ findings must urgently be upheld and the corresponding debt unilaterally cancelled.

Such a solution represents a win-win outcome for all but the multimillionaire private hedge fund executives, international financial institutions and banks which hold debt liabilities. Meanwhile the regional and global benefits of growth, job creation, poverty reduction, and wealth redistribution that result from a once-and-for-all vanquishing of the debt burden would be truly unimaginable. The people of Latin America have nothing to lose but their (debt) chains.


Gunder Frank, Andre (1966) The Development of Underdevelopment, New York: Monthly Review Press

Manuel Monteagudo (2010) ‘Peru’s Experience In Sovereign Debt Management And Litigation: Some Lessons For The Legal Approach To Sovereign Indebtedness’. Law and Contemporary Problems (73) 201-214

Toussaint, Eric, and Damien Millet (2010) Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers. New York: Monthly Review Press.

World Bank (2014) International Debt Statistics. Washington DC: World Bank.

About Author(s)

danozarow's picture
Daniel Ozarow
Daniel Ozarow is a Senior Lecturer at Middlesex University, London where he received his PhD. He is co-editor of Argentina Since the 2001 Crisis: Recovering the Past, Reclaiming the Future (Palgrave Macmillan, 2014) and De la crisis al Kirchnerismo: cambios y continuidades (Prometeo, 2016). Daniel is Co-Chair of the Argentina Research Network and has recently published articles on workers’ self-management, Argentina’s debt and resistance to the NAFTA agreement.