What are the Vulture Funds?
Vulture funds, the name conjuring up circling vultures patiently waiting to pick over the remains of a rapidly weakening country, are hedge funds who typically buy up debt of poor nations at low prices and then seek full payment often by filing lawsuits against the debtor while seeking a high return, including interest.
They are companies that do not hesitate to use the law to leverage profit out of sovereign nations. The goal is high returns at bargain prices.
The vulture funds often have secret accounts in tax free havens, such as the Cayman Islands and in some cases the accounts are so secretive that the owner remains unknown.
Although the actions of vulture funds have been characterized by many as unethical, unlawful and exploitative, they remain protected by the law, and generally win their lawsuits.
Interviews from Washington – Mark Weisbrot
Do South American bonds represent an investment opportunity for the business community? Is the business media misleading potential investors by being sour on debt instruments from countries with progressive governments such as Venezuela, Argentina or even Brazil? What was behind the uproar over the dispute between Argentina and US courts over vulture funds? How will the fall in oil prices affect the economies of countries such as Ecuador and Venezuela? In this edition of Interviews from Washington, Jorge Gestoso discusses these and other questions with Mark Weisbrot of the progressive think tank Center for Economic Policy Research.
A History of Argentine Debt
Much of the debt originates from the time of Argentina’s brutal military dictatorship, lasting from 1976 to 1983 and disappearing an estimated of 30,000 people.
Argentina's debt history begins after the death of Juan Perón in July 1974, and the political vacuum left by his passing. His wife Isabel took over the presidency and was an ineffectual leader. She was overthrown by a military dictatorship in 1976, and by the time the dictatorship relinquished power in 1983, the Argentine economy was in disarray. Economic liberalization lead to inflation and increased foreign borrowing, thus the Argentine debt skyrocketed.
Under the government of Carlos Menem (1989-1999), the economy continued its downward spiral as the debt burden increased, due in large part to the shrinking of government tax revenue from increased privatization, tax breaks and capital flight that characterized Menem's neo-liberal policies.
During this period the International Monetary Fund (IMF) made it clear they were not inclined to bail Argentina out, denying an advance payment on a previously agreed loan so as to allow Argentina to make its next debt payment.
Decades of liberalization and privatization led to a severe crisis in December of 2001, leading to the largest sovereign debt default in history. While some argue that Argentina had over-borrowed and fell victim to its own economic policies, this was at least compounded by questionable lending and policy advice by the IMF, a global recession, and international credit markets determined to chase high-yielding debt with inadequate regard to risk.
Together, these factors had propelled Argentina toward a position of unsustainable debt that ended in financial crisis, unprecedented default, and by 2003 under the government of Nestor Kirchner an (almost successful) restructuring scheme.
In 2005 under President Nestor Kirchner, after prolonged, contentious, and unsuccessful attempts to restructure the debt, Argentina abandoned the negotiation process and made a unilateral offer. The terms were not the full amount creditors had asked for, but US$62.3 billion of the US$81.8 billion in principal owed was exchanged for a lower price, which represented one of the most successful negotiations in history. At this point, a diverse group of “holdouts” representing US$18.6 billion did not tender their bonds and opted to litigate instead. Another US$12 billion was renegotiated in 2010 with most of the holdouts, but still around US$6 billion remained.
Led by hedge funds Elliott Management and Aurelius Capital Management, this small group of investors constitutes 6.4 percent of the total value of Argentina’s 2001 debt. The group refused to consent to the 2005 and 2010 debt restructurings, while Argentina was able to negotiate discounted repayment rates with the other 92.4 percent of creditors. Argentina has vowed not to pay off its loans leading up to 2001 at face value, considering the terms by which they were imposed. “We’re going to keep paying as we have until now, on the same terms,” stated Argentine Minister of Economy Axel Kicillof, who went on to call the court ruling “an attempt to bring the country back to [the economic hardship] of 2001.”
Axel Kicillof | Photo: Reuters
As part of the struggle with the vulture funds, the Argentine navy frigate “Libertad” was impounded in Ghana in October 2012, at the request of U.S. hedge fund NML Capital Ltd, which says Argentina owes it US$300 million on bonds which have been in default since 2002. The International Maritime Organization (IMO) said the ship couldn't be seized.
In a ruling by the U.S. Supreme Court this June, Argentina was ordered to pay the holdout vulture funds, who had demanded to be repaid in full. The U.S. Federal Judge Thomas Griesa also ordered that the country could not pay its other creditors, without also paying the vulture funds. As a result, the US$539 million payment made by Argentina in June 30 to the other 92.4 percent of creditors was blocked by Judge Griesa.
U.S. Judge Thomas Griesa | Photo: AFP
And under the restructuring deal, Argentina is supposed to pay all its creditors the same. Therefore, if Argentine pays the vulture funds the full US$1.3 billion they are claiming, it could be forced to pay all the other creditors in full also if the Rights Upon Future Offers (RUFO) clause is enacted. RUFO would change the conditions of those creditors who originally agreed to the debt restructuring agreements, and force Argentina to pay upwards US$15 billion, which accounts for half of total national reserves. Argentine President Cristina Fernandez de Kirchner said that the country would be forced into default if subject to pay this amount.
Cristina Fernandez | Photo: Reuters
The IMF along with other international organizations and governments have supported Argentina on the grounds that the ruling could set a precedent, making the restructuring of unmanageable debt more difficult for struggling countries.
But with a US$900 million payment due on July 30, Argentina is looking down the barrel of another debt default.
Vulture Fund Energy Interests
The international community has denounced the very real possibility that the vulture funds are after Argentine natural resources, principally the second largest shale oil gas field in the world, Vaca Muerta, which is located in the Neuquen province of southwest Argentina.
On the oil field, Chevron spokesman Kent Robertson said that Argentina has won the “geological lottery.” Vaca Muerta covers a total area of 30,000 square kilometers, and is 1,000 feet thick. Vaca Muerta is seen as being able to make Argentina energy independent, as it is expected to increase Argentine hydrocarbons by 50 percent by 2019. The Argentine state-owned energy company YPF has undertaken the venture with Chevron who signed an agreement to invest US$1.24 billion. If successful, it will yield about 10,000 barrels of oil equivalent each day. Vaca Muerta has the potential to make Argentina a net exporter of energy, which would greatly stimulate the national economy.
Speaking about the vulture funds, Argentine economist Andrés Asiain said in an interview with teleSUR English that, “these actors want in exchange strategic assets, like what could be the second largest reserve of unconventional gas which is found in Vaca Muerta, and is not a direct bond exchange for these assets, but could be an indirect method where investments of lets say dollars that enter the national economy through investments in Vaca Muerta could force the country to use this to pay the debt invented by the courts.”
The idea that the vulture funds are looking to make Argentina pay with its natural resources is widespread in the international community.
Various Argentine government officials have recognized and denounced suspected vulture energy interests in Vaca Muerta. Cabinet Chief Jorge Capitanich has warned that “the vulture funds have never invested in the country and Argentina has always honored its debts. The real interest of the vulture funds is the appropriation of national strategic resources, such as Vaca Muerta.”
A report from the U.S. Department of Energy reveals that Argentina has more natural gas in shale rock than all of Europe, with an estimate of 774 trillion cubic feet.
Victims to Vultures
The Argentina vs. NML Capital has been called the “trial of the century,” as it has international implications for those countries wishing to restructure their debts.
The International Monetary Fund has warned that “[…] the Argentine decisions, if upheld, would likely give holdout creditors greater leverage and make the debt restructuring process more complicated for two reasons. First, by allowing holdouts to interrupt the flow of payments to creditors who have participated in the restructuring, the decisions would likely discourage creditors from participating in a voluntary restructuring. Second, by offering holdouts a mechanism to extract recovery outside a voluntary debt exchange, the decisions would increase the risk that holdouts will multiply and creditors who are otherwise inclined to agree to a restructuring may be less likely to do so due to inter-creditor equity concerns.”
The international community has stood by Argentina in the case, as countries in financial crisis throughout Latin America, Africa and Asia have similarly been taken advantage of by financial speculators, who have had their debt bought up for cents on the dollar by hedge funds looking to extort debtors through litigation, demanding payment well beyond their investment.
Peru, like Argentina, fell under the talons of Elliott Management. After defaulting in 1983, in 1996 Elliott Management bought up US$20.7 million of Peru´s defaulted debt for US$11.4 million. Later, Elliott Management demanded full repayment plus interest of its original investment, yielding a settlement of US$58 million, representing a 400 percent return.
The owner of Elliott Management, Paul Singer, said in court that, “Peru would either pay us in full or be sued,” which was the first and last time he would testify in court. Peru, unable to repay the full US$58 million amount, wished to honor its debt and maintain its commitments to to other investors. Like in the Argentine case, Elliott enacted the “pari passu” clause which prohibited Peru from paying off its restructured debt without also paying the vulture fund, as Elliott held small portion of Peru's defaulted debt which fell outside of debt restructurings. The ruling put Peru at risk of another default, and in 2001 it was eventually forced to settle with Elliott Management to continue paying off its debts to other creditors.
Numerous other countries have fallen prey to by vulture funds including Zambia, Brazil, Liberia, the Democratic Republic of Congo, Ethiopia and Cameroon.
As the Argentine Minister of Economy Axel Kicillof wrote, “the vulture funds never wanted to abide by the terms accepted by the overwhelming majority of creditors. They seek to extort a sovereign country. They want privileged conditions and they will stop at nothing... they will cause irreparable damage to the international financial system rendering all future debt restructurings impossible. Vulture funds do not negotiate: that is why they are vultures.”