The Vultures of Wall Street: The Financial Firms that Prey on Sovereign Debt
By Saskia Sassen and Lisa Lucile Owens – October 2, 2014
It is a rare event that can put the International Capital Markets Association (ICMA) and the United Nations General Assembly on the same side of a battle. One seeks to protect capital markets and the other seeks to protect sovereign debtors, objectives that are commonly seen to conflict. Yet both have united in a single cause—changing the international principles governing sovereign debt. Each organization has decided to make new rules for the handling of sovereign debt in the aftermath of a particularly disruptive court victory led by a major vulture fund. This, in itself, is historic.
The battle against vulture funds took off in the 1990s and reached a kind of apotheosis in June 2014 with a U.S. Supreme Court decision that ultimately risked Argentine default. The International Monetary Fund (IMF) and other international institutions support the avoidance of sovereign defaults because they can destabilize the global economy. A key strategy for this has been for sovereign debtors to negotiate a discount, or a reduction, of sovereign debt with creditors in the event that they can no longer afford to pay. Prior to the Supreme Court decision, Argentina went through this process of debt restructuring and was prepared to pay all of its creditors the agreed-upon discounted value of its debt. However, it was prevented from making these payments by a court order that required full payment, plus interest and fees, to vulture funds, which held a mere 7 percent of the debt. This created a tremendous risk: were Argentina to comply with the vulture fund’s demands, holders of the remaining 93 percent of its debt would have the legal ability to demand the same, rather than the negotiated value of the discounted debt. In the June 2014 decision, the Supreme Court rejected Argentina’s appeal, resulting in the freezing of the funds meant to make a required payment on the renegotiated debt. Though Argentina would have otherwise been able to make the debt payments, it was prevented from doing so and catapulted into default as a result.
Two months later, the ICMA and the UN General Assembly both voted to bring about a new legal framework for handling sovereign debt, an indirect rebuke of the U.S. Court decision. Historically, the UN has been involved in global economic governance through specialized international economic bodies such as the World Trade Organization. Now, for the first time in its history, the UN General Assembly has taken on a prominent role in international economic issues. That vulture funds have inspired this shared position tells a tale about outsiders and insiders, and about bringing a sort of Wild West deep inside the establishment.
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