Debt Justice Campaigners Call for Regulation of Vulture funds

19 June 2014 by Nessa Ní Chasaide

Nessa Ni Chasaide, Co-ordinator of Debt and Development Coalition Ireland commented,

“Yesterday’s US Supreme Court decision shows the urgent need to curb the power of vulture funds Vulture funds
Vulture fund
Investment funds who buy, on the secondary markets and at a significant discount, bonds once emitted by countries that are having repayment difficulties, from investors who prefer to cut their losses and take what price they can get in order to unload the risk from their books. The Vulture Funds then pursue the issuing country for the full amount of the debt they have purchased, not hesitating to seek decisions before, usually, British or US courts where the law is favourable to creditors.
. The Supreme Court chose to allow the vulture funds in question to trample over Argentina’s previous debt cancellation agreements with bondholders, signalling to the world that, if allowed, profiteering vulture funds can bring a country back into default.“

Over 10 years ago, Argentina defaulted on its debt. Mired in economic and political crisis, compounded by the devastating policies of external lenders such as the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
, Argentine President Kirchner offered the state’s creditors about 25 cent in the dollar. Most creditors, seeing the writing on the wall, eventually accepted debt swaps worth about 50% of their original value. However, opportunistic creditors, coined ‘vulture funds’, which seek to buy distressed debt in order to claim the full value later on, did not participate in the swaps and have been suing Argentina since as a route to reclaiming full payment. In February, a New York court ruled that the Argentine Government must pay US$1.3 billion to the vulture funds. The Argentine Government sought to appeal this ruling. This week the US Supreme Court indicated that it will not hear an appeal.

DDCI colleague, Dr Alan Cibils, Professor and Chair of the Political Economy Department of Univerisidad Nacional de General Sarmiento in Buenos Aries commented,

“Argentina is now stuck between a rock and a hard place. If it complies with the court ruling and pays up out of Argentine Central Bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
international reserves, it will risk facing thousands of law suits from defaulted bondholders who entered the 2005 and 2010 debt swaps.One of the clauses of the debt swaps indicated that if Argentina ever made a better offer, bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. holders would be eligible for the improved terms. |1| If it ignores the US court ruling, and defaults on the vulture funds’ claims, the vulture funds may seek to impound Argentina’s Bank of New York account from where Argentina pays the bondholders who entered the previous debt swaps.” |2|

Ms Ni Chasaide continued,

“Regulating vulture funds is possible. In 2010, due to pressure from campaign group Jubilee Debt Campaign UK, the UK Parliament passed the Debt Relief (Developing Countries) Act. It limits any entity in the UK engaged in suing a developing country that has previously been given debt cancellation, to getting the amount they would have received if they’d been subject to that debt cancellation scheme. Governments around the world could adopt an even more decisive stance than this, and initiate legislation across jurisdictions that limits vulture fund claims to a low multiple of what they paid for the original debt. This would be a step toward putting vulture funds out of business.”

She continued,

“In Ireland, mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
holders from zombie Anglo Irish Bank are already in the hands of vulture funds and have lost their consumer protections as a result. In March 2014, as estimated 13,000 mortgages owned by the defunct Anglo Irish Bank / Irish Nationwide Building Society (IBRC) were sold to Shoreline Residential Limited, an indirect affiliate of Lone Star Fund VIII and Mars Capital Ireland Limited funded through funds managed by Oaktree Capital Management LP. After the sale IBRC indicated to mortgage holders”the Purchasers have confirmed that they will be directing that the mortgages are serviced in accordance with the terms of the Code of Conduct on Mortgage Arrears (CCMA)". However this is a voluntary indication of agreement by the vulture funds and not a legal obligation. IBRC also indicated to mortgage holders that, as IBRC are no longer the beneficial owners of the mortgages, they have no influence over any future changes to contractual interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate levels or repayment schedules.

In March 2014, as estimated 13,000 mortgages owned by the defunct Anglo Irish Bank / Irish Nationwide Building Society (IBRC) were sold to Shoreline Residential Limited, an indirect affiliate of Lone Star Fund VIII and Mars Capital Ireland Limited funded through funds managed by Oaktree Capital Management LP. After the sale IBRC indicated to mortgage holders “the Purchasers have confirmed that they will be directing that the mortgages are serviced in accordance with the terms of the Code of Conduct on Mortgage Arrears (CCMA)”. However this is a voluntary indication of agreement by the vulture funds and not a legal obligation. IBRC also indicated to mortgage holders that, as IBRC are no longer the beneficial owners of the mortgages, they have no influence over any future changes to contractual interest rate levels or repayment schedules. |3|.
Vulture funds should not be allowed to purchase mortgage loan books in Ireland as they are not subject to the same legal regulation as Irish resident banks through the Central Bank of Ireland’s Code of Conduct on Mortgage Arrears."


For interviews contact:

Nessa Ni Chasaide Coordinator DDCI 01 6174835 / 087 7507001 or to set up an interview with Dr Alan Cibils in Buenos Aires

Footnotes

|1| This would mean that Argentina would have to pay the full amount of the original debt according to the original terms which would essentially mean another massive default.

|2| To avoid this, Argentina needs to find an alternative payment arrangement. Until that is done, Argentina may have to temporarily enter a technical default, not due to an inability to pay but because the payment channels have been interrupted

|3| In March 2014, as estimated 13,000 mortgages owned by the defunct Anglo Irish Bank / Irish Nationwide Building Society (IBRC) were sold to Shoreline Residential Limited, an indirect affiliate of Lone Star Fund VIII and Mars Capital Ireland Limited funded through funds managed by Oaktree Capital Management LP. After the sale IBRC indicated to mortgage holders “the Purchasers have confirmed that they will be directing that the mortgages are serviced in accordance with the terms of the Code of Conduct on Mortgage Arrears (CCMA)”. However this is a voluntary indication of agreement by the vulture funds and not a legal obligation. IBRC also indicated to mortgage holders that, as IBRC are no longer the beneficial owners of the mortgages, they have no influence over any future changes to contractual interest rate levels or repayment schedules

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