Comments 17

Despicar a los buitres

Oct 1, 2014 Joseph E. Stiglitz , Martin Guzman

NUEVA YORK – En medio de la disputa entre la Argentina y los “fondos buitre” que son tenedores de los bonos emitidos por este país, ha surgido un amplio consenso relativo a la necesidad existente de tener mecanismos de reestructuración de la deuda soberana (MRDS). De lo contrario, el dictamen del juez federal estadounidense Thomas P. Griesa que ordena que Argentina pague a los buitres en su totalidad (después de que el 93% de los otros tenedores de bonos acordaron una reestructuración) dará rienda suelta a comportamientos oportunistas que sabotearán las reestructuraciones futuras.

Muy recientemente, la Asociación Internacional del Mercado de Capitales (ICMA) recomendó nuevas cláusulas para los bonos de deuda pública. Aunque la propuesta de la ICMA deja sin resolver los cientos de miles de millones de bonos suscritos bajo las antiguas condiciones, el nuevo marco dice, en efecto, que la interpretación de Griesa estuvo equivocada, y reconoce que mantener firme dicho dictamen haría que sea imposible llevar a cabo reestructuraciones.

Las cláusulas contractuales propuestas por la ICMA clarifican la cláusula pari passu que estaba en el corazón del confuso dictamen de Griesa. La intención de la cláusula – un componente estándar de los contratos de bonos soberanos – fue siempre asegurar que el país emisor trate a los tenedores de bonos de forma idéntica. Pero siempre se ha reconocido que los acreedores séniores – por ejemplo, el Fondo Monetario Internacional – reciben un trato diferente.

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Joseph E. Stiglitz

Writing for PS since 2001
254 Commentaries

Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University and Chief Economist at the Roosevelt Institute. His most recent book is Globalization and Its Discontents Revisited: Anti-Globalization in the Era of Trump.

Martin Guzman

Writing for PS since 2014
12 Commentaries

Martin Guzman, a research associate at Columbia University Business School and an associate professor at the University of Buenos Aires, is a co-chair of the Columbia Initiative for Policy Dialogue Taskforce on Debt Restructuring and Sovereign Bankruptcy and a senior fellow at the Centre for International Governance Innovation (CIGI).

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0 Comments on this paragraph, 24 in all 24 Comments on this article

ROBERT BAESEMANN Oct 6, 2014

I remember when First Chicago Bank skated along the rim of the abyss because of the Brazilian bond crisis--1977 or so. Ever since my first concern is for the integrity of US banks when a new issue arises of sovereign-debt-restructuring. Unlike past sovereign-debt crises, the current ones threaten a US financial sector that seems to already be dysfunctional. I do not pretend to know how seriously the Argentine problem threatens the balance sheets of US Banks, but I would really like to know how Judge Griesa's decision might play out on those balance sheets.
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Per Kurowski Oct 6, 2014

The best way for “Debeaking the vultures” as Joseph Stiglitz and Martin Guzman and so many other want, must surely be avoiding the creation of carcasses.

For instance any sovereign debt that is traded above a certain risk premium should be deemed a pre-defaulted sovereign and there should be incentives for that debt not to grow and create larger problems. Most often those who would most appreciate such limits are the citizens who will be suffering the excessive indebtedness of their government.

And it is there, in the ex ante and not in the ex post world, where efforts to solve the thorny issues of restructuring sovereign debt should begin.

But try to tell that to those with other political agendas, or to those investment bankers wanting a deal, or those sovereigns intend on contracting debt no matter what!
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Claudio Migliore Oct 4, 2014

When I challenged the title "Gouging the gauchos" of Mr. Nourini's recent article, the editor was kind enough to clarify that the titles are not chosen by the authors. Again in this case, the imagery in the title debases the value of the content, or, alternatively, highlights its partisan or promotional intent.
In my humble opinion, there are three separate issues here.
First, whether Argentina deserves to win its legal battle with the holdouts or not. Second, whether it makes sense to introduce legal or institutional changes for other new cases. This, in turn, has two flavors, namely existing debt that might default and new debt issues to be sold in the future.
Argentina's current case is one of little importance, other than for the domestic tragedy of a government that is trying to hold on to its power and corrupt interests and a people who cannot elect rationally and preserve its liberty and property.
For existing debt securities, changes that facilitate default smack of moral hazard and modification of contracted terms.
For new issues, I suspect that the markets would adjust one way or the other. If the likelihood of collecting deteriorates, rates will go up, credit will be less forthcoming and more expensive, but not necessarily more or less so because such likelihood is dictated by the regulatory environment rather than freely contracted terms. In any event better creditors will still deserve lower rates and better terms, lousy payers will get whatever they can.
In this context, why give more power to international bureaucracies? Who really benefits from this? Peasants in a poor country or international academic consultants? Not to speak of highly paid salespeople who will get salaries and bonuses based on loans that are less likely to go into investment for the aforementioned peasant, as there will be less pressure to put the funding to productive use, and who will not be there when their shareholders have to collect the pieces.
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Khalid Aziz Oct 4, 2014

Privatization with good governance and regulated markets is the right way to go - I agree. But it is a difficult choice between the rich in the developed world and the political elite in the developing world. If you look at it from that perspective it becomes a rich man's club. Does it really matter if the money goes into filling the coffers of the corrupt elite or the rich who own the US Presidency, its Congressmen and its large Corporations. It is the less than 1% who benefit. The Argentinian crisis will perhaps take this argument a step further.
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Khalid Aziz Oct 4, 2014

Judge Griesa's ruling is flawed and is a prescription for chaos for the developing world; the judiciary is best left to look into interpersonal claims and claims within a country involving its corporations. The precedent of her Argentinian ruling will play havoc with the fiscal well being of the international monetary system and needs to be recalled. Congress should restrain the US judiciary from interfering in sovereign matters.
- Jonathan Lam Oct 4, 2014
  
  Gamesmith94134: Khalid Aziz
  
  Congress should restrain the US judiciary from interfering in sovereign matters, or question on the discounted bonds were traded privately under the holding company or shadow bankers and traders; conversely, many would consider the deal is the litmus test on its successor in Argentina that would make Hugo Chevez turns in his grave. Why not trade off the oil field with no labor, instead on the transfer or property in Paris? Russian suffered the same illness; but Mr. Putin put Reminbi to use for his allies; and it is expanding while equity is depreciating in other currencies. Should the FED re-evaluate the exchange system and the burden of 5 trillion debt of its own? It has an adverse effect on the stronger dollar.
  
  This is all this lawsuit is all about? Privatize or die. The show is on………
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KC LOH Oct 3, 2014

Stiglitz and Guzman have voiced views that many people share, although most would not be able to articulate their views as succinctly.

We wish that all contracts reflect accurately and completely the wishes of the contracting parties. Alas contracts are human constructs. They can cover only eventualities that the drafters imagined at the time of their construction. When disputes later arise, we realise that many more clauses should have been included but weren’t. So courts often have to fill in the gaps.

With that preamble in mind, let’s turn to the matter of Argentina and its holdout bondholders. Ninety three percent of bondholders have agreed with Argentina to restructure the bonds. But two bondholders, which presumably have purchased their bonds at deep discount from original holders, have held out and pursued Argentina in courts for the full value of their bond holdings.

Having learnt from Argentina’s troubles, bond issuers today have become wiser. Bond issuers now realise that they had all neglected the now obvious fact that, unlike loan agreements with one lender or a syndicate of a few lenders, bonds involve agreement with thousands of creditors.

Therefore, if circumstances unexpectedly change, it would be near impossible to secure 100% agreement of all bondholders to amend the terms. In other words, issuers now realise that they had neglected to insert a Collective Agreement Clause (CAC) that would have bound all creditors provided that more than 75% agree to a change in a term of the contract.

Now, if a court had asked Argentina at the time of drafting its original bond contract whether it intended that all bondholders be bound by a CAC, I think Argentina would have said, “Oh, we hadn’t thought of that. Yes, of course. Let’s include a CAC.” Well, that would have been how a reasonable person would have responded. And perhaps that should have been how a reasonable judge would have filled in the gap.

With hindsight, we now know that CAC is a clause that should always have been included.

The District Court of the Southern District of New York ruled in favour of the holdout bondholders, to the disappointment of the other bondholders (97%) who had accepted Argentina’s offer. The court could have constructively inserted the missing CAC in the original Argentinian bond agreement, but it didn’t.

France, Nobel Laureate Joseph Stiglitz and others filed their amicus briefs in support of Argentina, alas to no avail.

Let's hope future sovereign bonds will not suffer the fate of the Argentinian bonds. For starters, they should incorporate the collective action clause and the aggregation clause. Perhaps, additionally bonds henceforth should be denominated in Euros or GBP, with English Law as the choice of governing law, to be heard in an English or EU court.
- Jonathan Lam Oct 3, 2014
  
  Londoner cries, ex-Londoner laugh…….LOL
  
  May the Buddha bless you?
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- Jonathan Lam Oct 3, 2014
  
  European Commission Denies EU Public Right To Express Views On TAFTA/TTIP And CETA
  It is all business as Usual; that non-elected officials bore no responsibilities on the democracy. TAFTA/TTIP and CETA allow the use prosperity index to raise their equity as double your residence value in few years. If you can't afford to pay popped tax or utility; considerably, you may earn your first bucket of gold and move on. Perhaps, you would let those, know-how to sell your national reserves at a price that elected can retire earlier and wealthier; because election cost much and it demands a better return if they qualifies tax exemption for the Corporation sovereigns.
  Besides, it cut dependency from government; it accumulated and accelerated government debts; so, you can be more independent without social services like medical and education and so on. Aren’t you lucky if you are selected to leave your home with its prosperity index? Growth or grow up.....
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Andrew Arbenz Oct 3, 2014

Prof. Stieglitz made his career consulting to Third World nations, and the other author, according to a post below, is Argentine. Fact of the matter is that Argentina has a long history of defaulting on debt and once again does not want to pay because it is inconvenient.
- MK Anon Oct 3, 2014
  
  ad hominem argument .. besides that, emptiness.
  
  By the way, Pr stiglitz made his carreer first as an academicain, then working for Clinton and served as chiefeconomist of the WB, Biography is written above the text.
  
  You lend to argentina or greece, you have higher return than lending to germany or the US.. but then you have a higher risk as well, especially if you buy AFTER the crisis becomes obvious to everyone: they played poker. If vultputre win, fine, if they loose, they sue
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Nathan W Oct 2, 2014

How come the citizens of the country, who have paid taxes and work for entire lifetimes in part with expectations of a fungible social security system, come last, behind all other creditors?

These creditors should come first.
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G M Oct 2, 2014

Written by a former economist and by an Argentinian... nice...
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Dallas Weaver, Ph.D. Oct 2, 2014

This seems to be a classic tragedy of the anticommons type problem < http://en.wikipedia.org/wiki/Tragedy_of_the_anticommons > , where everyone has veto power.

It seems that different rules are being proposed for different classes of people. It appears that a law firm can buy debt claimed (unpaid invoice with the wrong box checked on a collect shipment on one form and not another) and sue, avoiding small claims court, for an amount less than legal fees. It seems that vulture funds are just the same game at a larger scale and why should they have different rules that what has been applied daily to individuals, with debt being sold to law firms and collection agencies as a common business practice?
- Jonathan Lam Oct 2, 2014
  
  Dallas Weaver, Ph.D,
  
  I am not criticized the parties, as in vulture fund, who have violated the champerty; but based on the equality trading. It is questionable risk factor like interest rate and equity; it varies by the regions. Often, foreign investors like American could have derivative gain by region; therefore there should be a balance in the transaction when foreign fund integrate in the destiny region; and I emphasize justice for all does not mean Argentina deserves another ruling but, at present, the ambiguity of the Argentina bonds’ status may cause debacle in dissolve the Vulture funds in the common law and its sovereignty right as in the pari passu clause. It means two sets of law.
  
  Nonetheless, I would not say I own a percentage of Argentina if I buy its bond by quantity by comparison to its net worth; so, sovereign debt must be respected as in a status that is separated from commercial deed and law must yield to its populace and productive means like currency. In addition, sovereign bonds are not commercial paper; and it deserves another treatment and law. Specifically, it debased the US court in a way in transferring the reserves to another bank because the holders did not accept roll-over and demand cash in. There are rumors on the appeal to the International Court of Justice to settle the debacle. I am not sure which side will win; but I think these vulture funds and shadow banking deserve another look.
  
  There are classes of stock as in common and preferred also rule 144 stock; why can’t sovereignty bond have classes as well? Common for the locals for saving capital, preferred for the institutional investors with coupon for tax credit and Rule 144 bonds for the sovereign buyers with currency exchange stabilization and security. Perhaps, I oversimplified the usages of the bond system; but the present monetary system need a better law and smoother execution. Then, we can have rules and law that everyone understands.
  
  May the Buddha bless you?
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jim bridgeman Oct 2, 2014

Be careful what you wish for. If the restructuring regime is too easy and too automatic some sovereign borrowers will find it more expensive, more difficult and maybe impossible to borrow.
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Gary Palmero Oct 2, 2014

Argentina may be one of the most European nations in the Western Hemisphere and should be very mindful of how the economic system works. Its record of paying back sovereign debt on a timely basis is not good. Therefore, it has been required to borrow internationally outside its own legal jurisdiction (primarily New York). The investor funds that put Argentina's feet to the fire in New York were just exercising their legal perogatives by being able to buy sovereign debt at favorable prices and going forward with the rights they had acquired. Calling them "vulture funds" in the first sentence diminishes the suthor's stature.

Argentina is blessed with excellent geography, fertile soil and a Western culture. To operate as it does boggles the mind. One day the proper government structure will be put in place and Argentina could prosper. We await the day!
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Jonathan Lam Oct 2, 2014

Gamesmith94134: Debeaking the Vultures

In the midst of the ongoing dispute between Argentina and the “vulture funds” that hold its bonds, a broad consensus has emerged concerning the need for sovereign-debt restructuring mechanisms (SDRMs). I see the similarity of the Elliot Associates, LP v. Banco de la Nacion and the Republic of Peru; that the remaining 7% as the plaintiff’s intent in purchasing the discounted debt was to be paid in full or otherwise to sue; that is Champerty must apply even though Atrgentina sold more bonds afterward and chapter 9 of the bankruptcy law fits for private property and not sovereignty. It is why the ICMA’s proposed contractual terms clarify the pari passu clause that was at the heart of Griesa’s muddle-headed ruling that
“The intent of the clause – a standard component of sovereign-bond contracts – was always to ensure that the issuing country treated identical bondholders identically. But it has always been recognized that senior creditors – for example, the International Monetary Fund – are treated differently.”
I sensed the CDC law may mislead the hedge fund managers if Argentina would bankrupt after default; but it is not true. Even for the central bank of Argentina since they prove that they are willing to pay the rest in rollover of the debts, if those vulture funds apply to the stand component of the sovereign-bond contracts in the secondary tier to CDC that discount may be needed in a collective term agreement. Perhaps, I would emphasize the dollar-pegged bonds are not posting in securities of the Argentina sovereign, but it was a theme in allurement in liquidating the Argentina currency and its assets which I regrettably said the QE with lower rate made the vulture fund plausible. In addition, many sovereigns suffer in degrading of assets through inflation and eroding of the reserve capitals from outflow through the accountability of value in dollars.

In a way, the current debacles of the BRICS are forced to stabilize their currencies by investing in the Developed nations. Perhaps, the development peaked now for the advanced low interest rate lending from BRICS; it has showed the bubble in the equity market and the conflict of interest in the FED in an alarming way that inversion seemed inevitable under the monetary politics as in currency war. It is time to restore the sovereignty securities like it used to in restoring its currencies and investments. I am not predicting the following defaults in EU or breaking down of the monetary union; but we must come to term that money is another commodity that deserves a second look in the World Trade Organization. In a way, we can preserve the sovereignty right on bonds that the linkage to the currencies can be regulated under the current floating rate system; because it is how the down draft that eroded the local currencies by 3-10 percent like rupees, rubles and so on in a year; and it dislocated the securities from circuitry normalcy; and it is how inflation grew within under the floating rate system; In reaction to the microeconomic sense, it creates the credit crunch; and comes following as the inevitable “beggar thy neighbor” through the contrast of the solvency on its debt or based on the strength of the reserves. It all end tragically.

Finally, I must agree with United Nations’ establishment of SDRMs that sovereign debt must be preserve in a way that the investment must be treated like commodity that a similar Sherman Act should be proposed. I have suggested the homestead law on the entry of foreign investment like cash funds; that 1% to enter in the transcontinental transfers; and these homestead tax can remand the loss when outflow caused credit crunch and depreciation of the local currency. It may not stop these vulture funds; but the accumulated 1% can compensate or help the local trade groups like OAS, EU, AU, ASAEN or even North America; if the worse arises. Moreover, why should those buy those discounted bonds if you ask? Why there isn’t a law allows the regional trade groups to reconcile in use of those homestead funds to buy back or refinance the bonds?

Perhaps, as we discuss over the Russian-Ukraine conflict, I think Eastern Block can be a homestead law anticipant partner too in the transcontinental transfer if EU cannot work with Russia and its partners over the vulture funds and insurance on the securities that they felt being victimized.

In retrospect, these investors did not trade sovereign securities only; and they bought off the basis on sovereign currency as well. In some cases, inundation of foreign investment that prompts up the cost of living through the leverage of another class of equity security could cause devastative cycle of stagflation and depreciation; they often gives suppression the local economy in falling off to recession.

To-day, Dow Jones fell off 1.4% 238.19 off to 16,804, it sounds like a warning on the revenge of the vulture fund. May be not; but does anyone think about the risks in putting all the eggs in one basket? I may rethink again since the real estate has already peaked two months ago; and US trade deficit is not coming down at all. No inflation but a lot of conflict of interest here in the FED.

Vulture Funds must be grounded…………..

May the Buddha bless you?
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Zsolt Hermann Oct 1, 2014

Debeaking the vultures, or even shooting them would only draw in new vultures, but wouldn't change anything.
It is not the vultures presently sitting on top of those bonds, it is not the far cats manipulating financial flow, financial institutions, it is not even the politicians that need replacing, regulating.

They are simply the "lucky ones" sitting on top of the human pyramid, which pyramid is the creation of our inherently self-serving, egoistic human nature.

Even the fact countries are in intolerable debts, needing bonds and other magical financial interventions are the result of the same nature driving us into the unsustainable, excessive over production, over consumption paradigm, into exclusive, ruthless, explosive competition, thriving to succeed at the expense of others.

Without "regulating" changing our human nature, starting to operate "above it" in a mutually complementing manner, using our global interconnections in a positive, benevolent way, no manner and amount of tinkering with the system or with individual parts can yield benefits.

Until the root cause is cured the disease rages on.
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Scott Doyle Oct 1, 2014

Countries should not be able to restructure their debt easily. The main fact is these countries borrowed the money and used the money and now do not want to pay it back in full. Restructurings force investors to accept something over nothing. Argentina wants to have the restructuring in place so they can borrow more money from capital markets. Argentina is shut out from capital markets because of the bond default.
I love how Argentina keeps taking out full page ads in the Wall Street Journal disparaging the vulture investors and BNY Mellon their custodian bank. Bottom line is Argentina borrows money and has no intention of paying the money back in full. I think governments should only borrow money they can reasonably expect to pay back.
- Odysseas Argyriadis Mar 18, 2015
  
  "do not want to pay it back in full" Therein lies your fault. Most of the time, countries that default CANNOT pay back. You do not see sovereigns like the US, UK, Russia default. And since the entities are sovereigns and not companies, you cannot and should not apply the same rules, since the general populace, which gets to pay the bill, cannot be held complicit to decisions concerning debt. That is why countries and unions have central banks and rules defining them, and is why the countries you see defaulting have high corruption indexes.
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- Jose araujo Oct 2, 2014
  
  Would you apply the same principles to businesses?
  
  A world without bankruptcies, maybe institute slavery as a form to repay debt....
  
  Debts are made with a collateral, when a debtor fail to pay you get the collateral. If you have no collateral, then you made a bad loan. Simple as that.
  
  Bankruptcies are a fundamental mechanism of business and markets.
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Horacio Schreyer Oct 1, 2014

There is no question about your saying that "the vultures must be grounded". But your champerty argument is wrong, since vultures won that broadly on appeal. Back then, the interpretation by common law was impeccable, going all along the way back into history cases. It would be absurd to generalize champerty to cover every kind of secondary market purchase of securities. What has remained of it since circa 1800 in the US has been restricted to cases where litigation is done merely for the legal fees, or malfeasance regarding the use of privileged knowledge of others' private matters, like about trust funds, inheritances or alike. Hence, whatever vultures wanted or tried to provoke amending on that was useless. The wording of the code clause is now as confusing and unworkable as it was, and it can only be read as before by common law reasoning.
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Federico Glodowsky Oct 1, 2014

Thanks
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