Saturday, 5 January 2013

Watch out – vultures about

By Mick Brooks

Argentina’s President Cristina Kirchner is having a little difficulty with vultures. ‘Vulture funds’ are trying to suck Argentina dry. A case in point is hedge fund Elliott Associates, run by American billionaire and Republican supporter Paul Singer.  

This is their modus operandi. In 2001 Argentina defaulted on foreign debts and 93% of bondholders agreed to take a loss. The vultures are the ‘holdouts’, the 7% of bondholders who refused to take a loss on their bonds and are now pursuing Argentina through the courts to get all their money back. They are vultures because they want to pick the carcass clean even though they don’t have the strength to kill the creature outright.

Argentine debts have been rolled over many times but they were ultimately incurred by military dictatorships that tortured and murdered thousands of Argentinean citizens. Why should ordinary Argentineans have to pay for their debts?

Whatever the outcome of the present quarrel, the existence of these vultures is evidence of the useless and parasitic forms of capitalism knocking around. It is normal under capitalism for failing firms to go bankrupt and for creditors to take a loss. Yet this process is not allowed to happen in the case of nation states.

In the old days they used to send a gunboat to collect the debts. Now the pressure is more subtle. The Argentinean case has been taken to a US court. Judge Griesa found in favour of the vultures. Among other things the judgement depended on his novel interpretation of the Latin phrase ‘pari passu’. It seems that an obscure New York judge can ignore the wishes of the elected government of Argentina and tell an entire country of 41 million people what they must do. He is acting as the hired gunslinger of Singer and the rest of the holdouts. An Argentine naval vessel has already been impounded in Ghana by an American court order. Such is the global reach of US law and US imperialism.

The USA is the most powerful country in the world. How did it build up this wealth and power?  Nobody now remembers that states such as Mississippi in the 1830s repudiated its debt to British bankers – and got away with it.

If the American judgement is confirmed, Argentina may have to repudiate all its debts, since the 93% who took a ‘haircut’ (a loss) on their bonds will be back for the rest of their money too. This could cause an international crash, and send the world economy back into recession. The USA would then lose, as well as the rest of the world. And all because some greedy speculator was let loose by a maverick American court!

Mainstream economists are unhappy at the judgement. Anne Krueger, former chief economist at the World Bank, comments, “Unless the Griesa ruling is overturned, this will open a can of worms that will have to be dealt with.”

The problems posed by the vultures pursuing Argentina are of general application. Greece is trying to buy off its creditors at a discount and bring down its mountain of debt. Again the perverse incentive applies: let everybody else cash in their bonds so the risk of Greek default fades and bond prices rise; then demand your money back. As economist Gabriel Stern notes, “The more you raise the price and the more you encourage participation, the better it is for those who don’t participate.” It’s a free ride for the vultures.

Already hedge funds have been in operation applying this principle. They bought Greek bonds when they were regarded as most useful as toilet paper and sold for just 11% of their face value. They gambled that the authorities would do all in their power to prevent a default and therefore Greek bond prices would rise one day. They were right. The rumour is that they stand to make 200% profit in six months.

The good news is that the European authorities intend to introduce Collective Action Clauses (CACs) to whip holdouts into line in debt restructuring deals in future. The bad news is that the main lawyer dealing with the Greek debt problem affirms that it will take decades before CAC clauses are fully incorporated into a government’s debt stock.

The shenanigans of the vulture funds are all instances of what Adair Turner, head of the Financial Services Authority called “socially useless activity.” At least vultures keep the veldt clean. The vulture funds are a case of capitalism devouring its own entrails.