Policy Research in Macroeconomics

Feeding the vultures

Gyps Bengalensis , Thomas Hardwicke, Illustrations of Indian Zoology - Volume I

Gyps Bengalensis, Thomas Hardwicke, Illustrations of Indian Zoology – Volume I

A slightly abridged version of this article is published in today’s Morning Star newspaper .  It is the latest in PRIME’s series on Argentina’s debt, the US courts’ persistent bias in favour of the vulture funds – now stretching to finding Argentina “in contempt of court” for daring to pass its own laws – and the crying need for an independent, impartial international process for deciding on sovereign debt disputes.

Paul Singer is one of the USA’s richest billionaires, owner of Elliott Associates and its Cayman Island “vehicle” NML. He financially backed Mitt Romney in the 2012 Presidential election, and is (says Fortune magazine) “a passionate defender of the 1%”.

His speciality is buying up distressed sovereign debt (bonds) dirt cheap, and then, through “vulture funds” like NML, relentlessly litigating to enforce judgments for the face value of the original bonds, plus compound interest. This usurious outcome is only possible because states and their (usually poor) peoples, cannot – unlike companies and individuals – go bankrupt.

Argentina’s economy collapsed in 2001 due largely to the foolish policy of tying the peso one-to-one to the US dollar, with full convertibility.  With IMF support, it borrowed large sums at ever-increasing interest rates to defend dollar parity – to no avail.  GDP fell 25%, and the peso’s value with it.  But external debts were payable in dollars.  Unable to pay, in 2002 Argentina defaulted.

Between 2005 and 2010, 93% of Argentina’s creditors accepted a deal to receive new exchange bonds paying about 30% of the original. Singer, on the contrary, bought up chunks of defaulted original debt on the secondary market at around 20% of face value.

Argentina since 2005 has paid exchange bond-holders their interest as and when due. No question. Until, that is, last month when it “defaulted” again – thanks entirely to decisions by the US Courts (the original bonds give the New York courts’ jurisdiction) that give extraordinary preference to Singer’s financial interests. How come?

Aha, “pari passu”!

NML long ago obtained judgment against Argentina for the full sum due under the original bonds – this was not in dispute.  But how to enforce?  That was the vultures’ problem. Try as they might, they could not lay hands on juicy Argentine assets. Finally, in 2012, they hit upon the “pari passu” (equal step) clause in the bond contract, which states:

 “the payment obligations of the Republic under the Securities shall at all times rank at least equally with all its other present and future External Indebtedness.”

 New York Judge Griesa interpreted this – in a way no other court had done – as meaning that Argentina was obliged to pay NML at the same time as it paid exchange bond-holders.  This reversed the international bond markets’ understanding of the law, and strengthened vultures’ hands everywhere.

But Judge Griesa went further, and in a truly partial decision, made an injunction forbidding Argentina paying a cent of interest to exchange bond-holders, unless at the same time it paid NML the entirety of principal and rolled-up interest under the original bonds – $1.5 billion!

Judge discriminates in favour of Singer

Far from providing equal treatment between the sets of bond-holders, the Judge did the precise opposite – patently discriminating in favour of Singer, and against the exchange bond-holders.

This was not required by law.  An injunction is a discretionary remedy. The judge did not have to make an order, or if he did make one, he could have ordered Argentina to pay NML in the same reduced proportion, and extended timeline, as the exchange bond-holders. But Judge Griesa’s moral compass is so well-attuned to Singer’s that he openly defended this unequal treatment.

The story does not end there. Argentina has refused on principle to pay the vulture funds. It deposited interest due to exchange bond-holders in the Buenos Aires branch of the US Bank acting as trustee for the innocent exchange bond-holders – which however is barred by Judge Griesa from distributing it to them!

The “contempt” proceedings

This has led to another absurd episode in an increasingly surreal legal drama. On 21st August, NML’s counsel applied to Judge Griesa to find Argentina in contempt, and to punish it for “cumulative violations” of his order, most recently:

 “the introduction of legislation in the Congress of Argentina that would have the effect of gutting the order, [by providing] a mechanism to pay the exchange bondholders interest payments in Argentina and outside the control and jurisdiction of this court.”

 This is imperial overreach in the guise of “law” – condemning a sovereign state for introducing legislation into its elected Parliament to authorise it to pay money due to creditors!

Judge Griesa, for his part, stated that the President’s announcement was

 “invalid, illegal, and in violation of current court orders and injunctions. To nullify that proposal of the president of the country, that’s the measure that is really required this afternoon.”

 But aware perhaps of the quagmire he was invited to set foot in, he declined on that occasion to find Argentina in contempt.  But NML refused to let go, and on 29th September, Judge Griesa finally held that Argentina was in contempt of his court: “the problem is that the republic of Argentina has been and is now taking steps in an attempt to evade critical parts of” his injunction, by getting its elected Parliament to pass legislation.  At the time of writing, he has yet to decide on the penalty to impose – NML are seeking a fine of $50,000 per day.

 Losing respect

Judge Griesa is not a crazy outlier in today’s US judiciary.  His injunction was upheld by the Appeals Court, and the Supreme Court refused to accept a further appeal by Argentina.  The Supreme Court, however, made its own dubious decision in favour of NML on the interpretation of sovereign immunity, with transnational implications; the effect is to limit sovereign states’ protection from seizure of assets.  The clever but extremely conservative Justice Scalia, appointed by G.W. Bush, gave the majority decision; Justice Ruth Bader Ginsburg delivered a lone – legally persuasive – dissenting judgment.  In Joseph Stiglitz’s recent words (Project Syndicate, 7th August),

 “Sovereign borrowers will not – and should not – trust the fairness and competence of the US judiciary.”

 Not so long ago, the US Supreme Court was widely respected internationally for its general adherence to norms of justice.  No longer. The Argentina litigation demonstrates just how far the US courts – as well as the political system – have now been captured by the ideology of neoliberalism, and actively promote the interests of finance capital.

Need for fair sovereign debt-resolution process

The sorry NML v Argentina saga highlights the pressing need for an internationally recognized system for resolving sovereign debt disputes, fairly balancing debtors’ and creditors’ interests.  While new bond “collective action clauses” are under discussion, such technical measures will not alone put an end to the ruthless politico-legal aggression of the vultures.

In a letter to US Secretary of State John Kerry a day before the contempt finding, the government of Argentina recalled that its political organs are “subject only to the sovereignty of the people and the principles set forth in the Argentine Constitution.  In no case can they be questioned by the organs of any foreign State.” Any breach by the US courts of this would be “an unlawful interference in the domestic affairs of the Argentine Republic”.

International opposition to vultures 

Meanwhile, international opposition to the US courts’ abuse of their powers is growing, with recent resolutions of the UN General Assembly and of the influential G77 + China group of states. The GA called for a new legal framework (Resolution 68/304) for restructuring of sovereign debts, which will also act as “a deterrent to disruptive litigation that creditors could engage in…”  Only 11 states votes against – shamefully, they include the US, UK, Germany and Japan.

Similarly, the G77 in its Declaration of Santa Cruz (Bolivia) in June affirmed that

 “Recent actions of vulture funds in international courts have revealed their highly speculative nature. Such funds pose a risk to all future debt-restructuring processes, both for developing and developed countries.”

 It stressed

 “the importance of not allowing vulture funds to paralyse the debt-restructuring efforts of developing countries”.


At a time when economic supremacy is slowly but surely seeping away from the United States, the US courts have decided to claim ever greater extra-territorial jurisdiction, not only over individuals and companies, but also over other sovereign states. But this legal “land-grab” is also destined to fail. Perhaps, in due course, we will have cause to thank Judge Griesa for having so patently and publicly contorted legal principles in the service of Paul Singer’s interests.

Jeremy Smith is Co-Director of PRIME, and a Vice-President of the Haldane Society of Socialist Lawyers.

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