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World Insights: How Wall Street "debt vultures" prey on countries in economic distress

As one of the tools the United States uses for its financial hegemony, such vulture funds, have over the past decades held Ecuador, Argentina, Peru, Vietnam and many other developing countries hostage while nabbing astronomical amounts of money.

BEIJING, Sept. 29 (Xinhua) -- The Federal Reserve's latest 75-basis-point interest rate hike has triggered high concern in the global financial markets since the effects of consecutive U.S. interest hikes may ripple through the world.

In previous Fed rate hikes, U.S. interest groups and financial institutions teamed up to create debt crises in several emerging markets so as to fill up their own money bags.

As one of the tools the United States uses for its financial hegemony, such vulture funds, have over the past decades held Ecuador, Argentina, Peru, Vietnam and many other developing countries hostage while nabbing astronomical amounts of money.

PREDATORY BUYING

The term "vulture funds" is a metaphor that compares distressed debt investors' obsession with now-cheap yet highly risky debts to vultures' predilection for carrion.

These activist hedge funds usually buy sovereign debt of countries near or in default at deep discounts from secondary markets, then fiercely litigate with the debtors to claim full payments and employ all possible tactics to bring them to heel, no matter how long such a fight goes; that's why they are also dubbed as "doomsday investors."

Speaking before the UN General Assembly in 2014, then Argentine President Cristina Fernandez accused vulture funds of practicing "economic and financial terrorism," referring to the strife between her country and rogue debt collectors that caused "hunger, misery and poverty."

Back in the 1990s, the optimism and opportunism emanating from Wall Street, combined with a heavy inflow of money into Argentina, made Buenos Aires comfortable issuing more and more bonds, driving its debt to levels that later proved ruinous.

Meanwhile, as part of its neoliberal reform supported by Washington, Argentina pegged its peso one for one to the U.S. dollar, an idiosyncratic fixed exchange rate that rendered its economy uncompetitive, as the appreciation of the currency sparked a massive loss of exports and employment, as well as the 1998-2002 Argentine great depression.

In 2001, Argentina defaulted on 100 U.S. billion dollars of sovereign bonds. The insolvent country offered debt revamps twice in 2005 and 2010, accepted by about 92 percent of the creditors. In contrast, a handful of vulture funds that had snapped up the defaulted bonds at bargain prices shunned the settlement process. In 2005, the funds hauled Argentina to courts in the United States, which had jurisdiction over the bonds, to collect the principal and interest payments.

Martin M. Guzman, an economist at Columbia Business School who once served as Argentina's economic minister, estimated that NML Capital, a subsidiary of Elliott Management headed by Paul Singer, paid 48 million dollars in 2008 for such bonds with a total face value of approximately 620 million dollars.

From the perspective of Buenos Aires, the vulture funds were virtually blackmailing it over the debt issue because they had provided no loans and knowingly bought defaulted bonds at a low cost.

However, the U.S. federal court in 2014 barred Argentina from repaying other bondholders until it paid the holdout creditors, based on the equal treatment clause in contract law, and managed to force the country into an agreement in 2016 with vulture funds involved, paying them 4.65 billion dollars in total, a sum equivalent to 0.83 percent of Argentina's GDP that year, putting an end to the 15-year scuffle.

BACKED BY U.S. JUDICIAL POWER

Although Wall Street vultures were laying debt traps around the globe over the past decades, the "original sin" arose from the U.S. establishment, which created prey and squeezed poor countries dry.

In the case of Argentina, its 2001 default and financial crisis stemmed from the above-mentioned neoliberal reform taken by President Carlos Menem's government from 1989 to 1999 and based on the "Washington Consensus," a set of economic policies promoted by Washington-based institutions that opened the door to Argentina's economic catastrophe. When left-wing politicians took office and attempted to restructure the debt, the vulture investors set off to profiteer from defaulted debt under the aegis of U.S. jurisdiction.

After the holdout bondholders led by NML Captial filed lawsuits, then Judge Thomas Griesa of the U.S. District Court for the Southern District of New York ruled in 2012 that Argentina had to pay them back at full value. The debtor appealed the ruling to the U.S. Supreme Court, but the Court finally decided to uphold the lower court ruling.

In June 2014, Argentina deposited 539 million dollars in the indentured trustee Bank of New York Mellon's account at the Central Bank of Argentina to repay those who had accepted the debt swaps, while Griesa's order blocked the transfer of the money, citing Argentina's failure to pay the holdouts.

Standard & Poor's soon threw another punch at Argentina by cutting its rating to B-minus from B, suggesting a negative outlook on the rating already deep in junk bond territory. The downgrade naturally aggravated Argentina's solvency.

"It was the first time in history that a country was willing and able to pay its creditors, but was blocked by a judge from doing so," wrote Nobel economist Joseph Stiglitz, a full professor at Columbia University, in an article criticizing Griesa's order. The ruling "encourages usurious behavior" and "threatens the functioning of international financial markets," he said.

Clearly, international litigations by U.S. vulture funds are useful for U.S. financial hegemony and long-arm jurisdiction. Given their close ties to U.S. Congress and the White House, Wall Street financiers have the incentive and ability to intervene in legislation and policymaking to secure their own interests, said Zhang Yuewen, a researcher at the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

In U.S. media reports, Singer, Elliott's boss, is always described as a mega-donor for the Republican Party. The New Yorker called him a "donor activist," referring to his deep involvement with GOP candidates and campaigns.

DEEPENING "DEVELOPMENT TRAP"

In the wake of Argentina's settlement with the holdouts in 2016, Griesa lifted the injunction that had barred Argentina from raising new money in the bond market or paying its creditors, allowing the country to be removed from the category of "selective default" and return to international capital markets for the first time after 15 years.

Nonetheless, for indebted countries like Argentina, such a long delay in debt restructuring was a significant drain on national wealth and resulted in missed opportunities for growth and development. With its international credit report seriously damaged and financing channels obstructed, Argentina's road to economic recovery was long and painful.

Juan Pablo Bohoslavsky, former UN independent expert on foreign debt and human rights, said, "vulture fund litigation has come at a significant cost for some States, diverting public funds into questionable forms of debt service, which should better be used for fighting poverty, improving public health care or education, and boost the debtors' economies."

Former Secretary General of the Organization of the American States Jose Miguel Insulza said that national bankruptcy would deal a blow to the impoverished, but that is never a "big problem" for international speculators, for whom other's debt woes are their fortune.

From 2012 to 2016, Argentina's growth rate hovered between -2.5 percent and 2.7 percent, while inflation soared between 22.3 percent and 41.1 percent. Even now, Argentina remains the Latin American country with the highest government debt in relation to its gross domestic product.

Sadly, Argentina is never the only victim that has fallen into traps set by vulture funds, which have repeatedly preyed on distressed countries from Latin America to Asia, Africa, and Europe.

Pierre Jacquemot, who once served as the French ambassador to Kenya and Ghana, said at least 32 African countries encountered legal battles with vulture funds over distressed debt issues. The funds have a win rate of around 75 percent.

Recently, renowned restructuring guru Lee Buchheit has warned that Sri Lanka might be the next in the crosshairs of vulture investors.

Data from Sri Lanka's Department of External Resources showed that as of April 2021, the plurality of its foreign debt is owned by Western, particularly American, vulture funds and banks, which hold nearly half, at 47 percent.

In early June, wielding life-size vulture puppets, a group of activists stormed the venues of Elliott Management and GoldenTree Asset Management, two notorious distressed-debt funds in New York, in protest against the financial predators they represent.

Repulsed by the greed and brazenness of the vultures profiting from suffering nations, the activists' chants were clear: "Not a penny more." ■