Yves here. This important Real News Network segment did not get the attention it deserved
by virtue of running right after Turkey Day. And it is important to note that interviewee
Henry James is far too polite in how he characterized the New York ruling by Judge Griesa
against Argentina. Most bankruptcy efforts regard his calls on Argentina's restructuring
(for instance, in trying to assert that his ruling has force in jurisdictions not subject
to US law) have typically ranged from dubious to utterly batshit.
ESSICA DESVARIEUX, PRODUCER, TRNN: Welcome to the Real News Network. I'm Jessica Desvarieux
Wall Street is celebrating this week after Argentina elected a new conservative president.
Conservative opposition leader Mauricio Macri beat the ruling party candidate by a 51-48
percent margin. The change in government could end a decade-long battle between hedge funds
and Argentina over huge debt payments. You may remember back in 2001 Argentina set a record
by defaulting on $95 billion worth of loans. Their economy tanked and vulture capitalists
like Paul Singer swooped in and purchased nearly worthless debt after the default. Then
they waited while the debt gained value, and now they want full repayment. A plan this new
administration is more amenable to than sitting president Cristina Fernandez de Kirchner.
She and her party have refused to pay the hedge funds for the past twelve years.
Here to give us more context is our guest James Henry. James is a leading economist,
attorney, and investigative journalist who has written extensively about global issues.
Thanks for joining us, James.
JAMES HENRY: You're very welcome.
DESVARIEUX: So James, Paul Singer, who I mentioned in the intro, he wants Argentina to
pay back at least $1.5 billion. Why shouldn't they pay back these hedge funds? I mean, a
New York judge recently said they should. So do you agree?
HENRY: No, I don't. I think, you know, governments don't have a bankruptcy court, unlike
the rest of us. And so when they get into deep debt problems, by virtue in this case of
the previous neoliberal government in Argentina under my classmate Domingo Cavallo, they
ran up a huge foreign debt that they just could not service. And there was no place for
Argentina to go other than to restructure that debt on its own. So they issued new bonds
in 2004, and 95-98 percent of the bond owners, the creditors, that had bought Argentina
debt, Argentine debt before, accepted those bonds and the terms of the bonds.
Paul Singer actually didn't buy the bonds that he owns in 2004-2005. He waited till 2008
and purchased them for $48 million. And today he's claiming the face value of the bonds
he bought back then at $1.5 billion. So you know, that's–it's really a basic fault of the
international system that we don't have a bankruptcy court for a government where they can
work out reasonable payment terms and figure out how to restructure debts. Because every
government in the world, including our own, gets into debt problems. But Argentina has a
history of indebtedness. In the 1970s about half of the 2001 debt, $180 billion, came from
the military junta during the 1970s. Nobody even knows where that money went, about $88
billion was inherited by the succeeding democratic government. And you know, it's outrageous
to deny Argentina the right to restructure those odious debts.
But in fact, one of the good things about the Kirchner government, I mean, you can criticize
them for being, you know, letting inflation getting out of control more recently, and corruption
problems have emerged over a 12-year period. But one of the great legacies of this Kirchner
government is that they reduce the debt to practically nothing. I mean, the current net
public debt over looking at reserves for Argentina is less than $25 billion.
DESVARIEUX: And how did they do that?
HENRY: So I think the fact–what people are really worried about here, in fact, is that
the Macri government might come in and do what previous neoliberal governments and military
junta did, which is to run up the debt as an alternative to raising taxes.
DESVARIEUX: What is the new president proposing? How does he propose to handle the debt,
and can you just speak briefly about how the Kirchner administration handled the debt?
HENRY: Well, they've engaged in this bond restructuring, and they stubbornly refused
to negotiate with Singer, because it would make a, it would set a bad precedent. They were
supported, by the way, with hedge funds all over the country that are basically supporting
the Argentine position, as well as leading economists like Joe Stiglitz. I mean, I don't
know of a single Western economist that, or even at the IMF, who doesn't agree that the
vulture capitalists need to be put out of their misery.
But Macri has indicated that he's going to get beyond this issue and basically settle
with Singer. And so, you know, because discussions will probably lead to a payout for Singer
and he'll realize a huge return on this $48 million.
DESVARIEUX: All right. Let's turn the corner a bit, James, and let's talk about an alternative
plan that would give everyday Argentines a more prosperous future. Considering, as you said
before, massive inflation is happening in Argentina right now, declining cash reserves,
and really a meager economic growth some say due to exclusion from the global markets post-default.
Do you agree with that assessment, and what should be done to address the clear economic
woes that the country currently faces?
HENRY: Well, one of the opportunities for Argentina is that their own citizens have about
$400 billion offshore of private wealth that they've kept outside of the country. So I would
love to see a government that was able to attract that investment back to Argentina. I think
there's tremendous growth potential there. They have enormous resources, including, you
know, some of the largest untapped oil reserves in the south.
This government has talked a good game. But I think in terms of mounting a concrete economic
strategy to compete, they've lost a lot of opportunities, and they've been riding the backs
of the commodity boom and the China growth spurt during the last decade. So you know, Argentina
is a country with a very well-educated labor force. They have enormous natural resources.
It's practically empty Much of the country is, you know, there's enormous agricultural potential
there. But they have a, they've had a consistent–the whole century of sort of bad governance.
The Kirchner government I think was actually relatively adept at solving certain problems,
like I mentioned, with debt.
But on the tax front, one clear thing that they need to do is a tax reform not only reducing
payroll taxes, which are exorbitant, but to have taxes, actually a more fair tax system
that takes advantage of all this wealth that many wealthy Argentines have offshore. I would
say focusing on the tax system would be one of the first priorities.
DESVARIEUX: Okay. James Henry, thank you so very much for joining us.
HENRY: Quite welcome.
DESVARIEUX: And thank you for joining us on the Real News Network.
Last month, a New York court issued a judgment demanding that Argentina settle debts totalling
$1.33 billion, with the sum to be paid into an escrow account by December 15 this year.
The plaintiff was the hedge fund NML Capital, owned by the American billionaire Paul Singer. He
had refused to accept the terms of the debt restructuring by Argentina following the country's sovereign
default in December 2001. Under the debt restructuring plan, 93 percent of creditors were required
to forfeit 70 percent of their investments. Singer's company sued for full payment on its holdings.
On November 27, Fitch Ratings warned that a payment default by Argentina was likely because the
court ruling could have a snowball effect, leading other investors to demand full payment on bonds
totalling an estimated $11 billion. The agency downgraded the long-term creditworthiness of the country
by five levels, from "B" to "CC," and its short-term credit rating from "B" to "C".
On November 28, an appeals court in New York issued a temporary restraining order on the judgment
due to its far-reaching international consequences. Further legal negotiations are due to start on
February 17, 2013.
The legal battles led to a near 15 percent plunge in the value of Argentine government bonds in
November, with the premiums for credit default swaps quadrupling, exceeded worldwide only by Greek
The dispute between the Argentine government and NML Capital sheds light on the criminal methods
employed by international finance capital in times of crisis. It also shows the class character of
the judiciary, which is quite prepared to hang the mantle of respectability on such dubious practices.
NML Capital is a subsidiary of the New York hedge fund Elliott Associates, which has specialized
in speculation related to the threat of state bankruptcy. The modus operandi is very simple. If a
state gets into financial difficulties, its bonds fall in value. Most investors, fearing a default,
sell their holdings and drive down the price even further. When the bonds have sunk almost to junk
status, Elliott Associates intervenes, buying up assets and then employing an army of lawyers specializing
in international bankruptcy law to claim the full face value of the securities.
This strategy was first used by the hedge fund in 1995 in Panama. It bought assets nominally worth
$28.8 million at a price of $17.5 million, began legal proceedings, and at the end of the process
pocketed $58 million, including interest.
A year later, the strategy was repeated in Peru. It purchased bank loans with a face value of
$20.7 million for $11.7 million. After four years of litigation, Elliot Associates pocketed $55.7
The next victim was the Democratic Republic of Congo, which, according to the human development
index of the United Nations, is the poorest country in the world. Here the hedge fund's subsidiary,
Kensington International Inc., bought bonds nominally worth $32.6 million for less than ten percent
of their face value and sued for repayment of $100 million. British courts have so far awarded almost
$40 million of this total.
Elliot Associates and its various subsidiaries are not the only firms that profit from such deals.
According to the World Bank, 26 different hedge funds have rewarded their investors with around a
billion dollars using the same strategy. An additional $1.3 billion in debt repayment is said to
Official political circles have sought to distance themselves from these hedge funds. Former British
Prime Minister Gordon Brown called them "morally abhorrent", and the International Monetary Fund
and World Bank, together with the international financial media, often refer to them as "vulture
funds" and "cutthroats".
Yet nothing has been done to curtail their activities. The reason is that hedge funds like Elliot
Associates function within the prescribed laws of the system and basically do nothing other than
what capitalism asks of them: make profits.
Oh, but the saga portrayed on those panels! Banks, bond investors, and the International Monetary
Fund flood crooked regimes with overpriced credit. The Argentine economy collapses, and the
people suffer. International markets are roiled. It happens time and time again. The story has all
the emotions of a good tango.
The latest was in July 2014, when Argentina defaulted rather than give in to pressure from Paul
Singer of Elliott Management. The fight with Singer has been going on for a dozen years, and the
term vulture investor-rather esoteric in much of the world-is now pretty much universally known in
Argentina. It's so much on people's minds that Buenos Aires toy stores carry a homegrown board game
called Vultures, packaged in a box depicting a pair of the birds picking at a pile of dollars. "We
planted the anti-vulture flag in the world," President Cristina Fernández de Kirchner said in a speech
in mid-May. "We gave a name to international usury and despotism."
One May morning at the debt museum, guide Antonella Fagnano, a 21-year-old business major, describes
Argentines' attitude toward default. She pauses by a black-and-white photo of the late General Jorge
Videla, who led a 1976 coup that ushered in a seven-year dictatorship. Successive presidents in that
period loaded up on foreign debt to finance, among other things, the 1982 Falklands War with the
Today's Argentina, Fagnano says, has no moral obligation to make good on debts like those. In fact,
it would be wrong to pay. "Foreigners financed a lot of leaders, like these dictators. They didn't
do what they were supposed to do with the money, and left future generations the debt," she says,
shaking her head. "So, of course, you cannot allow that."
Fernandez is nearing the end of her term, and it doesn't look like things will change under the next
president. Daniel Scioli, the front-runner for October elections, vows to carry on the fight against
paying the vultures in full.
Billionaire hedge fund managers have called on Puerto Rico to lay off teachers and close schools
so that the island can pay them back the billions it owes.
The hedge funds called for Puerto Rico to avoid financial default – and repay its debts – by collecting
more taxes, selling $4bn worth of public buildings and drastically cutting public spending, particularly
The group of 34 hedge funds hired former International Monetary Fund (IMF) economists to come up
with a solution to Puerto Rico's debt crisis after the island's governor declared its $72bn debt
"unpayable" – paving the way for bankruptcy.
The funds are "distressed debt" specialists, also known as vulture funds, and several have also sought
to make money out of crises in Greece and Argentina, the collapse of Lehman Brothers and the near
collapse of Co-op Bank in the UK.
The report, entitled For Puerto Rico, There is a Better Way, said Puerto Rico could save itself from
default if it improves tax collection and drastically cuts back on public spending.
It accused the island, where 56% of children live in poverty, of spending too much on education even
though the government has already closed down almost 100 schools so far this year.
The report, by Jose Fajgenbaum, Jorge Guzmán and Claudio Loser – all former IMF economists who
now work for Centennial Group, said Puerto Rico had increased education spending by $1.4bn over the
past decade while enrolment had declined by about 25% as hundreds of thousands of families fled to
the US mainland in an effort to escape poverty.
Puerto Rico debt crisis: austerity for residents, but tax breaks for hedge funds
Puerto Rico has actively courted billionaires and hedge fund investors as it has struggled with
its mounting debts. It sold hundreds of millions worth of debt to vulture funds last year.
Fajgenbaum told the Guardian that the Puerto Rico government had been "massively overspending on
education". He said spending had increased by 39% to $4.8bn over the last decade while attendance
had fallen from more than 765,000 to 573,000.
He declined to state by how much the government should cut spending, but said: "The real expense
per student has increased enormously without increasing the quality of education. It's for the government
to decide [how much to cut spending by], but you don't want to waste government resources. There
has to be efficiencies. It is more important to establish a position for growth."
Puerto Rico's current education spending works out at $8,400 per student, below the US national average
Víctor Suárez, chief of staff to Puerto Rico's governor Alejandro García Padilla, said: "The simple
fact remains that extreme austerity [alone] is not a viable solution for an economy already on its
Luis Gallardo, majority municipal legislator for Aguas Buenas, said the hedge fund-commissioned report
was a "typically IMF recipe for radical austerity".
"They are proposing teacher layoffs, cuts in higher education and health benefits, as well as increased
taxes. These proposals have been a disaster for Latin America and would be so for Puerto Rico. Sure,
Puerto Rico could pay its debt, but at what cost? We are literally cutting off our own limbs just
to stay afloat.
"The Puerto Rican government has already closed down almost 100 schools this year and reconfigured
500 more, as well has having closed down 60 the year prior. I am not sure what else they are expecting.
If they expect us to lay off teachers or cut their already-low salaries, they are out of their minds.
"These guys need to chill out and give Puerto Rico some breathing space."
Gallardo said it was shocking that the hedge funds "expect teachers, students and workers to absorb
the hit, and they are not willing to budge themselves".
The hedge fund-commissioned report comes after former IMF official Anne Krueger said, in a report
commissioned by the Puerto Rican government, that the island's crisis could be solved but only if
the bondholders, including the hedge funds, accepted a significant debt restructuring.
The funds, which include New York-based Fir Tree Partners, Davidson Kempner Capital Management and
Aurelius Capital, are known as the Ad Hoc Group of Puerto Rico and hold $5.2bn of Puerto Rico bonds.
Fir Tree Partners, which is named after its multibillionaire founder Jeff Tannenbaum (which means
fir tree in German), made a lot of money by betting on complex debt securities in the 2008 financial
crisis, and from the Greek and Argentinian debt crises.
Aurelius Capital, which is run by billionaire Mark Brodsky, sued Argentina for repayment of debts
and forced the Co-op to give up control of its troubled bank. The company was also one of the investors
that initially objected to Detroit's bankruptcy plans.
Fajgenbaum and Loser said the hedge funds did not influence the content of their report, and declined
to state how much money they were paid for their work.
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