By John Lawrence
Argentina is the latest country to suffer at the hands of US vultures. Paul Singer of the Elliott Management hedge fund will reap a huge sum based on his purchase of Argentinian bonds in 2001. His firm has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, to its knees.
Hedge funds like Singer’s play a big part in the financialization of the global economy, making money off of money with no productive labor involved. They are making the inequality gap between the wealthy, the 1%, and the rest of us, the 99%, even bigger. Singer’s money will be deposited into the account of one of his subsidiaries in the Cayman Islands, a tax-free jurisdiction, which means he will pay no US taxes on his windfall.
During the Argentine Great Depression from 1998 to 2002, Argentina took on a lot of debt from US bondholders. The economy shrank by 28 percent from 1998 to 2002. After Argentina defaulted on its bonds, Singer and others snatched them up for pennies on the dollar. Singer will get back $2.28 billion, equal to about 369% of the face value $617 million in principal, under the terms of a settlement announced February 29, 2016. However, Singer bought the bonds for pennies on the dollar and then insisted in being paid back full face value in US Courts which agreed with him. So his return on investment is more likely around 2000%.
Argentina tried to restructure or write down its debt in 2005. While most investors agreed to receive less than full face value, Singer was a holdout demanding he be paid 100 cents on the dollar for full face value for bonds he had purchased for pennies on the dollar. Most of the speculators who had purchased these bonds agreed to a 76% payout, but not Singer. He saw a chance to make a killing. By 2013 his NML affiliate in the Cayman Islands (a no tax jurisdiction) had spent about $49 million for Argentinian bonds which had a face value of perhaps $250 million.
A second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, but Singer was still a holdout. Bondholders, who participated in the restructuring, accepted repayments of around 30% of face value and deferred payment terms, and began to be paid punctually. On the other hand Singer sued in New York federal court to get full face value of the bonds he owned plus accrued interest and expenses amounting to $832 million. Because the bonds were denominated in dollars, as part of the restructuring process, Argentina had agreed that repayments would be handled through a New York corporation and governed by US law. So Argentina had to accept this federal court’s jurisdiction whether it liked it or not.
Clever lawyering on the part of Singer and the other holdouts noticed that Argentina had omitted to provide for holdout situations and had instead deemed all bonds repayable on pari passu (equal) terms. This is fancy lawyer lingo that prevented preferential treatment among bondholders. The holdout bondholders therefore sought, and won, an injunction in 2012 that prohibited Argentina from repaying the 93% of bonds that had been renegotiated unless they simultaneously paid the 7% holdouts their full face value for the bonds they possessed as well.
According to Michael Hudson in his book Killing the Host – How Financial Parasites and Debt Destroy the Global Economy:
These funds are called “vultures” because they feed on “dead” bonds in default. Complaining that “these hedge finds who have bought the bonds at 20-30 cents to the dollar … now want to be repaid in full citing contractual obligations,” Argentine Minister of Economics Axel Kiciloff pointed out that the vulture funds had bought the bonds “with the sole purpose of obtaining a favorable judgment [from a US court in order] to make an exorbitant profit.”
In addition to demanding 100% of the bonds’ full face value, Singer asked for twelve years of accrued interest (compounded), punitive damages, and reimbursement for the legal expenses incurred in his approximately 900 attempts to embargo and seize Argentine assets in any countries that would recognize his claim.
Singer’s ploy had worked before. In 2008 British Courts had awarded his fund full face value principle plus interest on Congo debt. Since that time Britain has passed laws protecting highly indebted countries from being attacked by Singer’s modus operandi. The US, however, has no such protection.
After failing to seize Argentine assets, Singer’s lawsuit came before Second Circuit Court Judge Thomas Griesa. It was his lucky day because Griesa agreed with him that he should be able to stop Argentina from settling with 92.4% of its bondholders until Singer was paid full face value for his bonds. In 2012, Griesa directed the Bank of New York Mellon to stop disbursing Argentina’s payments to the vast majority of its bondholders which had agreed to accept lower than face value for the bonds they possessed.
Even though international law has outlawed the pari passu principle, Judge Griesa insisted on it thereby placing Argentina in what amounts to a position of debt servitude and forcing them to default on the bonds they had already renegotiated with the 93%. Financial Times columnist Martin Wolf called Griesa’s ruling “extortion backed by the USA judiciary.”
Even though Argentina appealed to the US Supreme Court, it was of no avail as the conservative majority led by Justice Scalia ruled in favor of subjugating a government power – Argentina – to Wall Street. Scalia insisted that Singer could go after Argentina’s assets if it couldn’t pay up treating it just like a debtor who couldn’t pay his mortgage or credit card debt.
Furthermore, the Supreme Court ruled that Argentina had to provide Singer’s hedge funds with a list of assets it possessed anywhere in the world so Singer could go after them and Argentina would be responsible for his legal bills in so doing. Even after Argentina deposited money in the Bank of New York Mellon to pay interest due on June 30, 2014, Judge Griesa directed the bank to return the money and ordered Argentina to send representatives to New York to negotiate with Singer.
In an article in the New York Times, Argentina Finds Relentless Foe in Paul Singer’s Hedge Fund, it was reported:
“We’ve had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system,” said Joseph E. Stiglitz, the economist and professor at Columbia University. “We don’t know how big the explosion will be — and it’s not just about Argentina.”
As a hedge fund, Elliott’s pursuit of Argentina is motivated by a desire to make money. Having bought its Argentine bonds for well below their original value, the firm stands to make a killing if Argentina pays the bonds in full. Legal filings indicate that the face value of its Argentine government bonds was around $170 million, but the firm most likely acquired many of them for much less than that. Elliott and other investors are now seeking more than $1.5 billion, which includes years of unpaid interest.
Michael Hudson commented:
As shaped by Judge Griesa, the Court of Appeals and the US Supreme Court, current US law forms a financial vise to prevent countries from escaping from debt deflation, rentier serfdom and seizure of their assets by creditors. Griesa’s ruling threatens that without restructuring onerous foreign debts, entire economies will be driven into depression, unemployment and emigration of young labor, capped by pressures for insider privatization.
In the summer of 2014, over 400 banks, bond investors and debtor countries worked via the International Capital Market Association to limit the ability of vulture hedge funds to block settlement and compromises using the pari passu principle. Judge Griesa’s ruling would be rendered obsolete and the pari passu would be defined to mean “equal treatment but not equal payouts for bondholders.”
Judge Griesa’s rulings had made it impossible for any debtor country to renegotiate its debts down to within its ability to pay. Any vulture fund could demand to be repaid full face value even if the majority of bondholders are willing to negotiate and receive less. Argentina’s President Cristina de Kirchner called the holdouts “vultures” and “financial terrorists.”
Is it any wonder then that the BRICS countries are forming their own fund from which countries could borrow in other than dollar denominated assets carrying with them the restriction that any negotiations would have to go through the US judicial system controlled by conservative judges and a conservative Supreme Court. Thankfully, Scalia is no longer there to squeeze every penny out of debtor countries for the benefit of Wall Street.
So why was Argentina able to settle now? It has not been able to borrow more money in the bond markets because of this long-running situation and it is hurting. The new administration of President Mauricio Macri has taken a more conciliatory tone than did the Kirchners, who called Singer a vulture and a financial terrorist. Macri decided that, rather than be forced out of the bond markets, he would rather borrow the money to pay off the vultures as long as they could then get back in the business of borrowing even more money to run the country. On Feb. 19, Judge Griesa dealt the holdouts a setback by agreeing to lift an injunction that had prevented Argentina from raising new money in bond markets or paying its creditors which led to the settlement with Singer and the other vultures. One caveat: Argentina’s legislature still has to approve the deal.
However, by borrowing even more money to pay its debts, Argentina is being led down the road to insolvency and debt deflation. Borrowing money to pay off debts amounts to a huge Ponzi scheme which, when it eventually collapses, will allow the vultures to profit even more off of Argentina’s carcass.
So what will Paul Singer do with his ill-gotten gains which will force Argentina into debt servitude? Will he use the money for philanthropic purposes? Hardly. Currently, he’s supporting Marco Rubio for President.
1. Rubio wants to repeal Obama’s executive order to expand background checks and close gun sale loopholes.
2. When asked about closing down mosques, Rubio said he wants to shut down “any place radicals are inspired.”
3. He denies humans are responsible for climate change.
4. His tax plan gives the top 1 percent over $200,000 in tax cuts every year. That’s as bad as Donald Trump’s tax plan.
5. He wants to cut $4.3 trillion in spending, including funds from Medicare and other programs, essentially freeze federal spending at 2008 levels for everything except the Pentagon.
6. He wants a permanent U.S. presence in Iraq, and would end the nuclear deal with Iran, putting us on a path to war.
7. We have no way to know where he is on immigration because he’s flip-flopped — first working on legislation to regularize citizenship for undocumented immigrants, and now firmly anti-legalization.
8. He wants to repeal Obamacare.
9. He’s against a woman’s right to choose, even in cases of rape and incest.
An excerpt from Paul Singer’s New Bible:
Commandment 1: Thou shalt PAY UP.
Commandment 2: (If you disobey Commandment 1,) Thou shalt relinquish thine property.
Commandment 3: Thou shalt have no mercy for debtors.
These are the precepts to live by that take precedence over every other consideration such as “Love your neighbor as yourself” and “Do unto others as you would have them do unto you.” These commandments apply both to individuals and nations. Bankruptcy is getting more difficult for both individual debtors and nations, easier for corporations. Case in point – next to impossible for student loan debtors. The goal is perpetual debt servitude presided over by a rent-extracting parasite class – the 1%. In the vulture class’s sights: Greece, Brazil, Spain, Italy and finally American college graduates.
The game plan is for the Fed and the European Central Bank to encourage more debt by going to negative interest rates. This is the only way they can think of to get consumers to borrow and spend more (and go into more debt) in order to keep GDP going up. US GDP consists of 70% consumer spending. Once the debtor is unable to pay, then seize or privatize (as the case may be) their assets, erect a toll booth and charge rent. This turns neighbors into beggars, provides austerity for all and allows private corporations to profit from providing essential services like water as is the case in Detroit.