Originally published on the CGS blog on February 24, 2014.
On Tuesday, the government of Argentina appealed to the United States Supreme Court in a landmark case against predatory creditors seeking more than $1 billion in old debts.
With wonkish phrases like “bondholder” and “sovereign debt restructuring” peppered throughout the news coverage, following this case may not be as exciting as others before the court. That’s a shame because for millions of people living in extreme poverty the implications are enormous.
In 2001, Argentina defaulted on its obligations and reached agreement with around 92% of its creditors to restructure the country’s debts. Some creditors held out, however, including a number of hedge funds that had bought Argentine debt for pennies-on-the-dollar. These colorfully named “vulture funds” operate by buying up old debts of poor countries cheaply from creditors and then swooping in when the debtor country has been granted debt relief, demanding the original loan amount plus interest and fees. They target debt relief funds that otherwise are generally earmarked to fund social services like health care, education, and AIDS prevention.
In Zambia, for instance, such funds purchased $15 million worth of debt for $3.3 million, then sued the Zambian government for $55 million when debt relief allowed that country to save about $40 million a year and use much of that to fight poverty. A court awarded the funds $15.4 million, a 467% profit for its shareholders at the expense of Zambia’s poorest. In many cases, the people tasked with repaying these loans had little say in contracting them in the first place, further exacerbating the injustice of having debt relief monies snatched away.
Many jurisdictions have cracked down on these predatory hedge funds in some form. New York, however, has not, and the funds have won two court cases against Argentina in New York State. What is feared by anti-poverty groups is that if these funds win in court, it will set a global precedent that will imperil millions of the world’s poorest people, leaving them vulnerable to continued indebtedness.
The Argentine case has made clear that, on this issue, there is global consensus: the actions of these funds are wrong. The US government has expressed support for Argentina’s arguments, as has France. German courts have ruled against the vulture funds, and British lawmakers have passed laws regulating them. The IMF and World Bank have spoken out forcefully against these funds, noting that their actions imperil the debt relief process. These funds have hired lobbyists and PR firms to paint themselves as legitimate investors dragging deadbeat countries to account in court, but in reality they are extreme actors profiting in the global financial equivalent of the Wild West.
Whether or not these funds win at the Supreme Court, the real issue is that heavily indebted poor countries do not have access to a fair and transparent bankruptcy system where they can have their debts restructured or even audited for legitimacy. Such a system could include the participation of civil society, thus giving voice to the very people most directly impacted by the decisions being made. It could include a mechanism for determining the legitimacy of past debts, a concept furthered by Norway’s unilateral audit of its own loans last year. And it could establish rules that would preclude predatory behavior and ensure that all legitimate creditors are treated equally.
In the meantime, such countries are left to the mercy of powerful creditors, and vulnerable to predatory behavior. Their last line of defense may be the U.S. Supreme Court. Wonky economic lingo might detract from the curb appeal of this case, but it is difficult to overstate its importance.
