No Need to Negotiate with Vulture Funds

22 February 2016 by Renaud Vivien

Since his victory in the November elections, the new President of Argentina, Mauricio Macri, has given priority to resolving the dispute between his country and “vulture funds” – investment funds that buy up heavily marked-down sovereign debt from hard-up States then instigate legal actions with the sole aim of making colossal profits. 1600% was the increase in value that a New York judge saw fit to demand of the people of Argentina in 2012. It is on the basis of this judgement, dubbed “the trial of the century” by some observers, that Macri is now negotiating.

“The trial of the century”

The New York judge Thomas Griesa arrived at this figure of 1600% by merely counting the face-value of the debt paper (bearing no relation to the purchase price paid out by the 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.
 [1]) plus the 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. and then applying an erroneous version of the pari passu principle, which states that all creditors must be treated equally. Traditionally this legal principle means only that the debtor may not alter the conditions initially agreed with the first creditors who accepted debt rescheduling Debt rescheduling Modification of the terms of a debt, for example by modifying the due-dates or by postponing repayments of the principal and/or the interest. The aim is usually to give a little breathing space to a country in difficulty by extending the period of repayment and reducing the amount of each instalment or by granting a period of grace during which no repayments will be made.  [2]. It so happens that the New York judge adopted a completely different interpretation based on a judgement pronounced in the Brussels Court of Appeal in 2000 to settle a dispute between a vulture fund (the Elliott Fund that turns up again in the Argentine case) and Peru [3].

According to this interpretation, applying the pari passu principle would give the minority of creditors who hold out against negotiations the right to be reimbursed at 100% of the nominal value of the bonds, plus interest. In other words, the negative consequences of this judgement on the fundamental rights of the Argentine population are not considered at all; no more than the speculative manoeuvring of those creditors along with their averred abuse of legal process. The fact that Argentina has already made an agreement to reschedule her debt with 93% of her private creditors is also totally ignored, as is the vulture funds’ categorical refusal to take part in two rounds of negotiations instigated by Argentina with all her private creditors in 2005 and 2010.

For Argentina, the negotiations failed before they began

Their position being strengthened by this judgement, the vulture funds are now ready to negotiate. Macri made them an offer of $6.5 billion, which would have meant a reduction of 25% of the amount fixed by the judge. The vulture funds had themselves proposed a discount of 30% to Macri’s predecessor, Cristina Kirchner, who had refused to concede different conditions than those agreed with the other 93% of creditors, who had accepted a 70% haircut following the negotiations in 2005 and 2010.

Among several vulture funds who have already accepted Macri’s offer are Montreux Equity Equity The capital put into an enterprise by the shareholders. Not to be confused with ’hard capital’ or ’unsecured debt’. Partners and Dart Management who also successfully attacked Greece in 2012 [4]. However four vulture funds [5] led by NML (Elliott), which belongs to the US billionaire Paul Singer, have still not accepted the offer and clearly intend to take maximum advantage of Macri’s extreme benevolence towards the holdouts and the financial markets in general [6]. ‎

It should be mentioned that Singer’s investment fund Investment fund
Investment funds
Private equity investment funds (sometimes called ’mutual funds’ seek to invest in companies according to certain criteria; of which they most often are specialized: capital-risk, capital development funds, leveraged buy-out (LBO), which reflect the different levels of the company’s maturity.
is notorious among political leaders and other creditors for bringing actions all over the world in the last twenty years, picking on such victims as the populations of Peru, Ivory Coast, Panama, Poland, Vietnam and the DRC.

Argentina trapped in a vultures’ nest

The deal that Macri has proposed, were it to be accepted, will have dire consequences for Argentina, well beyond the $6.5 billion to be paid. It would open up the way to further payments for all the other holdouts (the 7% of creditors who oppose debt rescheduling) to the tune of $15 billion [7]. This money paid to abusive creditors will automatically be deducted from social spending and will increase the State’s indebtedness. Moreover, in order to “honour” the vultures, the Argentine government has just borrowed $5 billion from a consortium of Wall Street banks [8].

And that will not be the end of it, as there are more repayments to come, such as those related to the transnational company Repsol. Following its nationalization in 2012, Repsol was exclusively compensated with State bonds at a face value of 5 billion dollars. The Argentine State has thus incurred a debt of $5 billion not counting interest. Argentina is also supposed to pay the member States of the Paris Club Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

(the informal group of the twenty richest countries) $9.7 billion, $3.6 billion of which corresponds to interest on arrears! Yet these payments to the Paris Club relate to fraudulent debts which, among other things, served to finance the Argentine dictatorship, as was clearly brought to light by a judgement of the Supreme Court known as “the Olmos Judgement” in 2000. The payment of these debts could therefore be brought into question on the basis of this Argentine ruling and international law. Indeed, under international law, States are not obliged to repay debts in all circumstances, as was pointed out by the UN’s Expert on Foreign Debt and Human Rights [9], Juan Pablo Bohoslavsky, in his last report [10] presented to the UN General Assembly.

Under international law, States are not obliged to pay their debts in all circumstances

Like his predecessor Cephas Lumina, Juan Pablo Bohoslavsky refutes the usual argument that debts must always be repaid. He demonstrates that there are many exceptions inherent in the legal principle pacta sunt servanda (contracts must be honoured) cited by creditors in demanding total and unconditional reimbursement of debts.

[A]n absolutist view of pacta sunt servanda in the sovereign debt Sovereign debt Government debts or debts guaranteed by the government. field cannot be understood to be a feature of customary international law” (paragraph 46). […] “If a State and its population must always repay debt under any circumstance, no matter the purpose for which the funds were borrowed, how they were spent or the amount of effort put into reimbursing them, this idea clearly relies on an overly simplistic notion of sovereignty and contract” (paragraph 49) [11].

Debt audits with citizens’ participation should therefore be carried out in order to elucidate all the ways in which the debts were incurred and to identify all the debts to be cancelled, that is debts that are shown to be illegal, odious, illegitimate or unsustainable [12].

Repercussions which go beyond the borders of Argentina

The fall-out from the current negotiations based on the New York ruling will be felt all over the world. They clearly give the green light to vulture funds to carry on with their nefarious scheme. They give legal validity to the Griesa ruling, with its biased interpretation of the pari passu clause which prevents any effective rescheduling of debt. This concerns all countries, North and South, as the recent attacks on Greece should remind us.

The countries most exposed to immediate threat are those States which are currently over-indebted and those at imminent risk of over-indebtedness. This is especially the case of low to middle-income countries that export raw materials (such as oil) that are experiencing dramatically falling prices. Such countries risk finding themselves in a similar situation to that of the 1980s. Then, the debt crisis that broke out in the South was due to the combined factors of the fall in the prices of raw materials and the rise in interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
decided unilaterally by the US Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
in 1979. Faced with the risk of payment default, present-day creditors are highly likely to shuffle off their debts… which the vulture funds will seize upon, at knockdown prices.

And it is no good expecting institutional creditors to defend the States that the vulture funds have in their sights. For the last ten years 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.
, the World Bank World Bank
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

, the Paris Club, the G8 G8 Group composed of the most powerful countries of the planet: Canada, France, Germany, Italy, Japan, the UK and the USA, with Russia a full member since June 2002. Their heads of state meet annually, usually in June or July. and then the G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). have made a great public show of concern about the damage the vulture funds do and have been promising to put an end to it. However it is glaringly obvious that nothing serious has been done. The number of actions brought by these speculative funds has even increased since 2004 [13]. African countries are the main targets with an average of eight new trials a year.

Urgent action is needed, in face of a new crisis looming and the inertia of the international financial institutions and other cartels of creditors. Fortunately, the tools are available to all States to quickly put a stop to the vulture funds’ strategy. Here, we will limit ourselves to two existing legal tools: the adoption of laws against “speculative creditors” and the application of the UN General Assembly’s resolution on the restructuring of sovereign debt adopted on 10 September 2015.) [14]

How the law can stop the vulture funds in their tracks

States can act fast and effectively by passing laws to neutralize vulture funds; they need not negotiate with them at all. The UN strongly recommends such legal initiatives at the national level. For example, there is a resolution of the UN Human Rights Council (UNHRC) dated 23 September 2014 which “[r]eaffirms in this context that the activities of vulture funds highlight some of the problems in the global financial system and are indicative of the unjust nature of the current system, which directly affects the enjoyment of human rights in debtor States, and calls upon States to consider implementing legal frameworks to curtail predatory vulture fund activities within their jurisdictions;” [15]

This is exactly what Belgium has done by passing a Vulture Funds Act on 1 July 2015 [16]. This act was urged by the CADTM and the CNCD and 11.11.11 groups which represent Belgian organizations for North-South solidarity. The law, of which there is no equivalent elsewhere to date, prohibits any creditor who buys up debt from demanding more than the price he paid to acquire the debt when a minimum of two conditions are met. For the law to be applicable and for a creditor’s case in Belgium to be dismissed, the obligatory condition is “the existence of manifest disproportion between the value paid by the creditor to buy up the loan or the debt and the nominal value of the loan or debt, or else between the value paid by the creditor to buy up the loan or the debt and the amount he demands in payment.

Besides this obligatory criterion, the judge must also identify at least one of the following characteristics:

If the judge observes one of these elements, as well as the obligatory criterion, then the creditor’s claim is judged to be “illegitimate” according to the terms of the law [18]. Consequently, creditors thus designated by the law will only be entitled to repayment of the amount they paid for the State-backed debt. This includes cases where the creditor may have obtained a favourable decision in another country, for example a judgement handed down in the USA ruling that the creditor is entitled to be repaid 100% of the nominal value of the debt, plus interest. Quite clearly, if there is to be a complete stop to vulture funds’ actions, the maximum number of States should pass such laws.

The example of the Belgian law, backed by the UN, shows that it is perfectly possible for States to adopt legitimate unilateral measures against vulture funds. So governments cannot pretend that a solution is required at the supra-national level before they can act, especially as not one Western creditor State voted for the resolution on sovereign debt restructuring processes adopted by the UN General Assembly on 10 September 2015.

A State’s right to restructure its debt in line with the UN resolution of 10 September 2015

The particular aim of this resolution, voted by a very large majority (136 votes for, 6 against and 41 abstentions), is to counter vulture funds by indicating an international legal framework for the restructuring of public debt. Despite the fact that the resolution takes great care to preserve the interests of creditors and fails to lay down any new legal obligation, six States voted against it (the United States, Canada, Germany, Japan, Israel, the United Kingdom) while other European Union countries, including Belgium, abstained. By doing this they were contravening a resolution adopted by the European Parliament on 19 May 2015 which demands that the European Union should construct a multilateral legal framework for the restructuring of sovereign debt [19].

The obvious absence of political will to solve the problems of debt outside existing frameworks dominated by the creditor nations (the IMF, the Paris Club) may well encourage the government of a debtor country to take the lead not only in adopting laws against vulture funds but also – and this concerns all their creditors – in asserting “the right, in the exercise of its discretion, to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures,” in line with the UN Resolution of 10 September 2015.

Translated by Vicki Briault, Mike Krolikowski and Snake Arbusto (CADTM).

Voir aussi


[1For example the funds NML Capital (a subsidiary of Elliott Management) and Aurelius purchased $222 million of Argentine sovereign debt for only $48 million.

[2See G. Mitu Gulati and K. Klee, “Sovereign Piracy” in The Business Lawyer, University of Maryland, vol.56, February 2001, p.640.

[4In May 2012, in order to avoid threatened legal actions, Greece decided to repay €436 million of its debt contracted under foreign jurisdictions that came under foreign law. The fund Dart Management is thought to have received 90 % of that amount.

[5NML Capital (Elliott), Aurelius Capital Management, Davidson Kempner Capital Management and Bracebridge Capital.

[6After the failed negotiations between Eurogroup and the Greek government (which had refused to use all legitimate means of pressure at its disposal against its creditors, such as the Audit Report of the Greek Debt Truth Committee) the Argentine case shows once again that the government of a debtor State has every interest in taking unilateral actions before negotiating begins, if they wish to reset the balance of power with regard to their creditors. The unilateral actions may be the suspension of debt payments, setting up a debt audit committee, establishing strict control of capital flows or even – as was the case of Argentina under Kirchner – refusing to obey a decision (judgement or statutory rule) that would disserve the population and/or that was a blatant violation of the right of peoples to self-determination. Such acts are thus in line with international law, which places the protection of basic human rights at the top of the hierarchy of standards.


[9His precise title is: Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights.

[10Report of the Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights (A/70/275).

[11United Nations A/70/275* General Assembly Distr.: General 4 August 2015 Original: English
15-12541* (E) 031215 *1512541* 70th session, Item 73 (b) of the provisional agenda.

[12See definitions for these different notions in the Preliminary Report of the Greek Debt Truth Committee

[13Schumacher, C. Trebesch and H. Enderlein, “Sovereign Defaults in Court: The Rise of Creditor Litigation”, 23 June 2013, p.4.

[14United Nations A/70/275* General Assembly Distr.: General 4 August 2015 Original: English
15-12541* (E) 031215 *1512541* 70th session, Item 73 (b) of the provisional agenda.

[17The law mentions “a State or a territory taken from the list of non cooperative States or territories established by the Financial Action Task Force (FATF)”.

[18Excerpt from the Belgian law relative to the fight against the activities of vulture funds: “When a creditor seeks illegitimate advantage through buyback of a State-backed loan or debt, his rights regarding the debtor State shall be limited to the price that he paid to buy back the said loan or the said debt. Whatever the law applicable to the legal relationship between the creditor and the indebted State, no enforcement order can be obtained in Belgium and no protective or forced execution measures can be taken in Belgium at the behest of the said creditor with a view to collecting a payment in Belgium if that payment would procure the creditor an illegitimate advantage within the terms of the law.” (Trans. VBM)

[19 point 46. “Insists that sustainable debt solutions, including standards for responsible lending and borrowing, must be facilitated through a multilateral legal framework for sovereign debt restructuring processes, with a view to alleviating the debt burden and avoiding unsustainable debt; asks the EU to engage constructively in the UN negotiations on this framework; urges the EU to push for the implementation of the UNCTAD principles of responsible sovereign debt transactions for both borrowers and lenders;”

Renaud Vivien

member of CADTM Belgium, member of the Truth Commission on Public Debt.

Other articles in English by Renaud Vivien (21)

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