The Vultures’ Circle

3 years ago ccwa 1

argentine-pesosThe nation of Argentina is broke, and nobody can agree on who to blame. In late September, the United Nations Human Rights Council passed a resolution condemning the American hedge funds that precipitated Argentina’s sovereign debt default, which is now well into its fourth month of legal proceedings in New York courts and shows little sign of a resolution.  Shortly thereafter, Judge Thomas Grisea, the district judge presiding over the case, ruled that the nation was in contempt of court for attempting to skirt New York law and pay some of its creditors directly. If these events weren’t cause enough for Argentine grief, than the resignation of the country’s central banker Juan Carlos Fabrega, who had long butted heads with the Kirchner administration, surely is.

Pesos continue to flood out of the country despite the government’s best efforts to suspend the currency’s convertibility, the bank’s foreign exchange reserves look more meager by the day, and the Argentine economy remains stagnant. The country needs to reach a deal urgently, but each day brings new legal hurdles to resolution. Just what has made Argentina’s latest debt crisis so intractable?

A bit of context first: Argentina is in this legal quagmire because it chose to sell its government bonds under New York contract law. It placed its head under the axe of the US legal system in order to build investor confidence (which the troubled nation is sorely lacking) and fetch a better price on its bonds. All of this matters because when the country attempted to restructure its nonperforming debt earlier this year, it ran into a nasty little provision of bond law known as the pari passu clause.

Pari passu, put simply, means that a debtor must treat all its creditors equally – if it offers a deal to one, it must offer that same deal to all. This meant that when the Argentine government sought to renegotiate the terms of its debt, a few holdouts – the hedge funds NML Capital and Aurelius Capital Management – were able to sink the whole deal by forcing litigation and sending Argentina into default. This is how a sovereign nation ended up on the bench of a New York district court.

The Argentine government and popular press have blasted the holdouts as “vulture funds”, with some critics even calling them the agents of a new kind of imperialism. It is perhaps unsurprising, then, that pari passu did originate as a tool of hegemony, dating back to a time when sovereign debt claims were just as likely to be collected with cannons as they were in court. Legal scholars Benjamin Chabot and Mitu Gulati recently found that the clause first appears in bonds sold by Santa Anna, former President of Mexico, to Britain and France. Britain was upset by the fact that France was extracting favorable repayment terms from Mexico, and wanted equal terms on its bonds. The pari passu clause was meant to appease the British government, which Santa Anna saw as a strategic ally.  As Chabot and Gulati point out, however, France’s special treatment had not come peacefully:

“Indeed, General Santa Anna (of the Alamo fame), had lost a leg to the French marines in [a] bombardment. Nothing, we suspect, focuses a debtor’s mind on creditor rights like the loss of a limb in a naval bombardment.”

Pari passu, then, is a legal device designed to placate opposing imperial powers which is now used to resolve the claims of recalcitrant hedge funds. This is not an accident: capital has always followed where warships led. Indeed, as Leo Pantich and Sam Gindin argue in their book The Making of Global Capitalism, control over the international financial system is the substance of contemporary American world power, not just a consequence of it. While the creditors in this case may be private and their only weapons legal briefs, the structure of global North-South financial relations has changed little since the days of Santa Anna.

This isn’t to say that the Kirchner administration has always acted wisely or responsibly, or that the bondholders don’t have a legitimate claim to repayment. However, when a handful of malcontents can block the restructuring process and the Argentine government’s attempts to circumvent them by paying creditors in local-law bonds are shot down, the full absurdity of the international financial system becomes apparent. Latin America has become synonymous with debt crises; it’s time to ask whether some of the responsibility for this ignominious fate should be shared by its neighbors to the north who write their vultures’ contracts.


by Max Mauerman

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