G-77, Vulture Funds and a Default Workout Mechanism

Vulture Man: NML Capital's Paul Singer v. Argentinian President Cristina Fernandez.

File this under: dream on, buddy. A few weeks ago I discussed the quandary faced by Argentina as a US court prohibited it from paying off restructured loans until it had compensated holdouts. To Argentina and the latter's critics, these are "vulture funds" who picked up defaulted debt for a few cents on the dollar, refused to participate in debt restructuring, and succeeded in using American courts to wangle a huge payday. Martin Khor of the South Centre, which my country and most other developing countries contribute to, offers this recap:

The vulture funds want their pound of flesh.  The main fund, NML Capital, would make an estimated 1,600% profit. Argentina’s President Cristina Kirchner refused to bow to these funds.  If she did, the country might have to also repay all the creditors the full value, which is US$120 billion, and that is impossible to do.

This incredible turn of events has caused outrage among many public interest groups and anger among developing countries’ governments.  The South Summit of the G77 in June in Bolivia criticized the vulture funds and called for a proper global debt restructuring mechanism. Finance Ministries of developed countries have been concerned as well.

After all, developed countries like Greece also went through debt restructuring, in which private creditors agreed to take a loss, a few years ago. Accepting the court decision as the new template would make it quite impossible for any country to restructure their debts, since the now emboldened vulture funds would pounce, and of course even more investors would imitate the behavior of such funds, since there is big and easy money to be made.  

The disorder caused by the American court has set into motion measures aimed at ensuring orderly debt workouts for sovereign defaults:

Influential Financial Times commentator Martin Wolf has supported Argentina in its battle with the vulture funds, even saying that it is unfair to the real vultures to name the holdouts such since at least the real vultures perform a valuable task! At the end of August, the Swiss-based International Capital Market Association, a group of bankers and investors, issued new standards aimed at reducing the ability of holdout investors to undermine debt restructuring.

Which brings us to the logical solution: why not create a restructuring mechanism for sovereign defaults? It makes sense, but the problems are manifold. First, LDCs want to house this mechanism at the UN which countries like the US, its ostensible host nation, deplores. Second, LDCs being the ones likely to experience financial distress lack the political-economy clout to push for the creation of such an organization unlike, say, the US promoting the G-20. So, we remain stuck in no-man's land:

On 9 September, the Group of 77, representing developing countries, succeeded in promoting a resolution at the United Nations General Assembly which recognized that a state’s efforts to restructure debt should not be impeded by hedge funds that seek to profit from distressed debt. The General Assembly, by a vote of 124 in favour, 11 against and 41 abstentions, also decided to set up a multilateral legal framework for sovereign debt restructuring by the end of 2014, to increase the stability of the international financial system.

A global system for debt restructuring will be a systemic solution, since countries with debt crises can have recourse to an international court or system and would not need to do debt restructuring on its own. Although the developing countries as a whole championed the resolution, there will now be an uphill battle to get it implemented, since the United States, Germany and the United Kingdom (which are key countries in global finance) were among those which objected.

Another resolution, initiated by Argentina and others, is now being considered by the UN Human Rights Council, aimed at setting up legal frameworks to curtail vulture funds’ activities and for sovereign debt restructuring. One good thing is that the UN, which is a universal body in which developing countries have a greater say in decision-making, is now at the center of the debt discussion. The negotiations ahead to set up a global system will be tough but well worth it since preventing and managing a debt crisis is now a priority for a growing number of countries.  

IMHO the developing countries are well-intentioned and their proposal generally makes sense. However, the reality remains that the UN General Assembly is a totally lame body in comparison to the Security Council. Ditto for the Human Rights Council. It is here where LDCs' lack of clout in global economic governance becomes obvious. The US, for instance, is hindering quota (voting rights) reform at the IMF. Things are not that much better at the World Bank where the US still gets to choose its president.

As it was at the G-77's creation, the UN General Assembly is a pretty useless venue to clamor for global economic governance reform that is LDC-friendly, and I am afraid things are not much different this time around. The rich countries will not play ball, and the poor countries are not strong enough to take it away from them after all these years.