Vulture Capitalists Hover Over Argentina
By Mike Andrew
On November 3, Argentina barred the US-based consumer products giant Procter & Gamble from doing business in the country.
The move was only the latest incident in an ongoing fight for Argentina’s economic survival. Only a month before, on September 30, a US court held the Argentine government in contempt for refusing to obey an order to pay off two US hedge funds that own Argentine government bonds.
The two hedge fund outfits – NML Capital and Aurelius Capital Management – are examples of what are often called “vulture funds,” and their beef with Argentina goes back to 2001 when the country was fighting its way out of a disastrous fiscal collapse.
When Argentina defaulted on about $100 billion of debt in 2001, the country’s banks seemed to be collapsing like a house of cards. Nevertheless, the Argentine government fought back with an aggressive stimulus program, financing new low-cost housing, roads, bridges, and schools. The government also offered low-income families a monthly allowance to help support their children.
Argentina also renegotiated its debt, agreeing with the majority of its bondholders to repay at least a portion of the $100 billion it owed them. More than 90% of the country’s bondholders accepted swaps for lesser-valued bonds and agreed to forego interest on those bonds.
As it turned out, bondholders who accepted restructuring did pretty well. They were offered 30 cents on the dollar, but by 2012 they received returns of about 90 cents, according to estimates by Morgan Stanley.
So far so good. But not all Argentina’s bondholders were so accommodating. NML and Aurelius Capital bought up Argentine bonds at a big discount after the 2001 default. These funds then rejected the terms of restructuring and demanded a full repayment of the debt – with interest.
Although they represent only 7% of Argentina’s bondholders, they sued Argentina in US courts, trying to prevent the country from paying any of its more cooperative creditors until they get everything they demand.
NML is owned by American citizen Paul Singer, but is based in the Cayman Islands so Singer can evade US taxes on his earnings. Aurelius Capital is owned by Mark Brodsky, one of Singer’s former employees.
In July, a US court froze Argentine assets in American banks to prevent them from paying other investors before the vulture funds were paid off. Singer and Brodsky have also tried to seize Argentine assets, including an Argentine Navy ship that was detained for several weeks in Ghana.
Argentina’s president, Cristina Fernandez de Kirchner, went on national television to say her country would not honor the US court’s ruling.
Her government was willing to negotiate with the vulture funds, she said, but “What I cannot do as president is submit the country to such extortion.”
In September, only days before the US courts found Argentina in contempt, the United Nations Human Rights Council (UNHRC) passed a resolution condemning NML and Aurelius.
“The vulture funds will not stop unless we stop them ourselves,” Argentine Foreign Minister Hector Timerman told UNHRC before the vote. “The billions that these vulture funds grab in countries in the south lead to school closures, hospitals without medicines, political instability, insecurity and violence.”
The resolution was approved by 33 votes to 5, with nine countries abstaining. Shamefully, the United States joined Britain, Germany, Japan, and the Czech Republic in voting against it.
If vulture capitalism wins, Argentina’s remarkable economic recovery may be at risk. Unlike the US “recovery” from the 2007-2008 recession, Argentina bounced back from near collapse by reducing rather than increasing economic inequality and now has the lowest inequality index in Latin America.
In the mid-1970s, the richest 10% of Argentina’s population had an income 12 times that of the poorest 10%. That figure had grown to 18 times by the mid-1990s, and by 2002, the peak of the crisis, the income of the richest segment of the population was 43 times that of the poorest.
However, because Argentina’s recovery was fueled by social spending, these high levels of inequality were reversed. By 2006 the ratio was down to 26 to 1, and by 2010 it was only 16 to 1.
Remarkably, the Argentine economy has grown by over 6% a year for seven of the last eight years; unemployment has been cut to 7.2% from a whopping 20% in 2002; and the poverty level has fallen by almost half over the last decade.