Newspaper article International New York Times

The Debt Vultures

Newspaper article International New York Times

The Debt Vultures

Article excerpt

A small group of 'holdout' bondholders has used U.S. courts to hold Argentines ransom over their country's 2001 default.

Last week, the United States Supreme Court decided not to review a ruling in the Second Circuit Court of Appeals whose effect is that Argentina must pay "holdout" creditors who refused to participate in debt restructuring agreements that Argentina reached with the majority of bondholders following the 2001 default on its sovereign debt. Argentina's lawyers warned that the court's decision created "a serious and imminent risk" that the country would again be forced to default. But the ruling also has profound and disturbing implications for the functioning of the international financial system, and even the United States would most likely be adversely affected.

Parties as diverse as the International Monetary Fund and leading religious organizations wanted the Supreme Court to overturn the decision, and briefs supporting this position were filed by the governments of France, Brazil and Mexico, as well as by the Nobel Prize-winning economist Joseph E. Stiglitz. The I.M.F. -- which has had mostly sour relations with Argentina since its involvement in that country's 1998-2002 recession -- was also planning to file a brief on Argentina's side to the Supreme Court, but was blocked by the American government from doing so. This action may have influenced the court's decision not to hear the case.

Argentina defaulted on its international debt at the end of 2001, following a deep recession. After years of negotiations, the government reached a restructuring agreement with its private creditors, in which the bondholders accepted a loss of about two- thirds of the value of their bonds. In 2005, 76 percent of the creditors had signed on; by the end of 2010, more than 90 percent had. Argentina has made all of its payments on the new, restructured bonds, on time.

The complication was over a group of "holdout" bondholders who did not agree to the restructuring. The plaintiffs in the New York case are widely known as "vulture funds," because they bought the bonds after the default at a fraction of their value, hoping to use court rulings like this one to force payment at the bonds' original face value.

The appellate court ruled that if Argentina was paying the holders of restructured bonds, it must also pay the holdout or vulture fund creditors in full -- and its decision implies that the punishment for an attempted default could be never-ending. This raises the question of how many decades a people should be forced to suffer for the mistakes or transgressions of earlier leaders -- whether elected or, as is often the case, unelected. …

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