Argentina versus the Vultures – simple solution but leave morality out of it

There are several petitions circulating around the Internet at present condeming the US Supreme Court’s decision on June 17, 2014 to reject the appeal by the Argentine government against a prior US court ruling in favour of NML Capital Ltd, which effectively denies the Government access to the US banking system until it repays the outstanding liabilities that NML holds. The implication of the decision is that the Government can no longer service any liabilities is has which require payments being made via the US banks. That means the vast majority of the so-called ‘exchange’ bond holders, who took settlements in 2005 and 2010 after Argentina defaulted on its public debt obligations, cannot be paid until NML, who has a small amount of so-called ‘hold out’ Argentine government debt, is paid in full. What can the Argentine government do in this situation, given it has been fully servicing the exchange liabilities but claims it cannot meet the original liabilities held by NML? The answer is simple and doesn’t involve putting advertisements in US newspapers pleading the fairness of the situation. There is no sense of fairness involved.

NML is a so-called vulture fund or as the petition E-mail tells me, represents a “small rogue group of hold-out shareholders who reject a debt reconstruction deal concluded after year of patient negotiation”.

The E-mail also informed me that the US Supreme Court decision has “has profound implications for the financial system as well as the management of sovereign debt and the fate of many newly-indebted nations including Greece and Portugal.”

I guess the word ‘informed’ was poorly chosen by me in this context. Misinformed is a better description. There are no negative implications for Greece and Portugal of what is going on with Argentina given that the former duo uses a foreign currency (the euro) and Argentina is sovereign in its own currency, and therefore has opportunities available to it that neither Greece or Portugal have under their current membership of the EMU.

The only parallel is that Argentina has shown other beleaguered nations such as Greece and Portugal what a country that is locked into currency arrangements that prevent the national government from acting in the best interests of its own people can do if they have sufficient courage.

In other words, when Argentina defied the IMF and the hedge funds in 2002 and defaulted on its liabilities and broke the currency peg with the US dollar, it was acting like a nation that is sovereign in its own currency. Greece and Portugal should take heed of that example and exit the euro-zone as soon as possible to escape the stifling stagnation that EMU membership has delivered.

Further, the US Supreme Court decision really undermines any hope that the vulture funds have of reaping profits on their bargain-basement buying of distressed public debt although one wouldn’t gain that impression by reading the wording of the petition and many of the press reports that followed the decision. I will come back to that point presently.

One petition I received in the last week from a progressive group claims that:

Finally, the Supreme Court claims to have acted in the interests of preserving New York’s status as a major capital market.

Sometimes, progressive rhetoric gets ahead of itself. The wording of the Supreme Court decision – Republic of Argentina v. NML Capital, Ltd. – tells me that they were operating consistently according to the legal framework they are bound by.

I actually wonder how many journalists and progressives etc who are now claiming the vultures are at the bottom end of the moral ladder have read the decision.

The Court was ruling as to whether there is foreign sovereign immunity in this matter under the terms set out in the US Foreign Sovereign Immunities Act of 1976 (FSIA) to limit the “the scope of discovery available to a judgment creditor in a federal postjudgment execution proceeding against a foreign sovereign”.

That is, Argentina wanted the process via which NML sought to “discover” (locate) other Argentine assets, which could be seized, stopped. Specifically, NML wanted access to documents held by the Bank of America, after they worked out that Argentina was using the bank to channel funds.

The US District Court refused to cancel the subpoena, which compelled the Bank to provide NML with the information sought. The Court ruled that this action within the US (“the extraterritoral asset discovery”) “did not offend Argentina’s sovereign immunity”.

Argentina appealed that decision and the US Supreme Court threw the appeal out last week. I will leave it to the lawyers to debate the finer points of the decision in relation to the legislative code that constrained it. There was one dissenting judge.

Lets clear up another matter. The petitions are being circulated by so-called progressive groups and the language in the E-mails exhorting the recipient to sign up and express outrage at these vulture funds, which are constructed as preying on defenseless nations and prevent Argentina from having good-standing in international public debt markets.

The appeals for signatures are laced with moral overtones about fairness and equity. Apparently, these vulture funds are predators who have no rights under the rule of law and the Argentinean government is an honest, debt-repaying nation that just wants to be fair to the majority of its creditors.

I cannot see any morality in any of this – on any side. The stupid Argentine government borrowed in foreign currencies and was in league with the disastrous IMF in the 1990s to shackle their citizens in arrangements that were always going to crash.

They had solicited funds, which were provided from a host of creditors acting in good faith and expecting the rule of law to apply, as it does in all contractual arrangements. The Government clearly held out that it would repay the debt and service the interest obligations along the way.

They defaulted. Hardly a very ‘honest’ thing to do. But it was the only thing they could do given the crazy decisions of the regime that got them into the mess in the first place. Sure, they were probably seduced by flash marketing schemes common in products being offered by ‘Wall Street’.

Sure, the political leaders probably enjoyed mixing with IMF officials at swank hotels with sumptuous dinners and good wine flowing freely. But, the fact remains – they defaulted on their obligations and there is no moral higher ground for the Argentine government to take in this matter. They are not defenseless nor in need of our sympathy.

The big banks and hedge funds who loaned the Argentine government the cash were presumably using appropriate risk-management techniques to judge the risk-return calculus of their financial investment. Eyes presumably were open and big commissions paid to brokers etc. They are not defenceless nor in need of our sympathy.

The small group of creditors who would not agree to the massive discount that was required by the Argentine government in the default negotiations had their eyes opened too. They decided, for whatever reason, that they would not settle just to get some cash instead of no cash from their prior bond purchases. They are not defenseless nor in need of our sympathy.

The so-called vulture funds, including NML Capital didn’t break any laws but realised that the small group would accept a certain settlement for their bonds. The vultures knew that the Argentine government had made some stupid errors in offering the ‘exchange’ bonds (for example, rendering payments in US dollars through the US banking system) and therefore had some leverage through the legal system.

They are not evil just rapacious financial capitalists acting to form – totally within the law but involved in a high risk strategy, which could deliver nought. Risk and return. They are not defenseless nor in need of our sympathy.

I cannot see any immorality in NMLs decision to refuse to swap its old (defaulted) bonds for the new heavily deprecated assets that the Argentine government offered. The fact that the vast majority of bond holders agreed to the deal doesn’t alter any of the rights of the minority, even if that minority was a single person or investment firm.

Some brief history. In 2005 and again in 2010 (as debt became due for repayment), the Argentine government persuaded the vast majority of its bondholders to exchange them for new bonds, which were discounted by 70 per cent. Since then the Government has been servicing the exchange bonds without issue.

The exchange-type solution to a default arises because there are no formal rules governing sovereign default. One aspect of the exchange deal was that the Argentine government held out that it would not honour the old debt to the hold-outs. But there was a crucial mistake made by then in the “drafting” of the exchange bonds (they left the word “settlement” out), which would have protected the holders of the exchange bonds under the so-called Most Favoured Creditor Clause (Source). The question is: who was advising them?

The problem then was that the old bonds contained the ‘pari passu clause’, which “is a standard clause in public or private international unsecured debt obligations” (Source). It is this clause that has given NML Capital the avenue to mount its lawsuit against the Argentine government.

If you are interested in more detail – the BIS published a paper – The pari passu clause in sovereign debt instruments: developments in recent litigation – which will satiate your curiosity.

The clause basically means that in this context that all liabilities and obligations rank equally across all creditors. This was the determination of the Brussels Court of Appeals in 2000 when Elliot Associates LP (which is NML Capital is part) took on Peru over some defaulting debt.

The Brussels decision said on this matter:

The basic agreement regulating the reimbursement of the Peruvian foreign debt, also indicates that the different creditors enjoy a ‘pari passu clause’, which has as a result that the debt should be paid down equally towards all creditors in proportion to their claim.

The US District Court had ruled that NML Capital’s bonds were being “subordinated” against the exchange bonds because Argentina was honouring the latter and refusing to pay up on the former.

Further the pari passu clause protects a bond holder (with that clause as part of the contract) from being disadvantaged by “the issuance of other superior debt” and “the giving of priority to other payment obligations”.

That is why the US Supreme Court rejected the appeal by Argentina. I am sure a lawyer in international finance and contracts would have a lot more detail to add, but that essentially is what the judgement was about.

The Court’s decision prevents any third-parties (like a bank) helping Argentina get money to the exchange bond holders. So by the end of this month Argentina will be in default of its exchange bond obligations as well as the original bonds held by the vultures.

So what should it do? That depends on what it wants to achieve of-course.

One of the E-mail petitions said:

This decision poses a serious threat not only to Argentina and its people, but to all developing and developed countries.
We join this international body of opinion in calling on relevant regulatory bodies to reject the court’s decision and begin work to create a fair, independent and transparent arbitration mechanism for sovereign debt.

Why would a progressive group be calling for more multilateral bodies to oversee a nation’s debt? Why aren’t they advocating the cessation of debt-issuance altogether and the banning of any speculative financial transactions that are not related to improving the real economy of a nation (meaning about 96 per cent of financial market activity)?

There is no serious threat to Argentina and its people. NML Capital is not an army that can invade it with military force. In fact, if some thought is given to the decision, it becomes obvious that NML Capital are the losers.

Why is that? Answering that question helps us understand the way forward for Argentina.

The Argentine government has a simple response available to the US Supreme Court’s decision. First, recognise they can no longer service outstanding debt obligations via the US banking system.

Second, let all the exchange bond holders know that fact.

Third, if they want to keep paying the exchange bond holders, they should redenominate all outstanding liabilities in the local currency under a specially enacted Argentine law, therefore bringing all resolution claims etc under the aegis of the Argentine legal and banking system.

The US court system then becomes irrelevant and the US Supreme Court’s decision is rendered moot. NML Capital lose 100 per cent and the Argentine government not only saves millions in legal fees but also reasserts its currency sovereignty.

Some might argue that the redenomination is unnecessary and that the Government could still alter the legal status of the exchange bonds and keep the US dollar as the currency unit. The Government should, in general, stop issuing debt in foreign currencies and so redenomination is preferable to Argentina although it would not be so for the bond holders, who would then be exposed to exchange rate risk.

The peso has been fairly stable against the US dollar this year but steadily depreciated over the last five years (diving earlier this year).

The other option is to just default outright. The mainstream press is claiming that the Argentine government cannot afford to default because it needs the foreign capital.

That is one of those lies that divert the problem away from the obvious solution. The Government of Argentina issues its own peso. It doesn’t need to borrow in order to spend. Why then get tangled up in these complex arrangements with bond holders?

The best thing for Argentina would be for its government to announce to the world that it will never borrow again and that it will therefore not provide ‘investment’ opportunities for hedge funds etc who have no interest in the welfare of the Argentine population and only want to get financial returns.

Why should the Government spending, which is intended to maximise the welfare of the people, also, unnecessarily, provide returns to foreign creditors, especially when the nation falls on hard times these creditors turn nasty and try to avoid the fact they invested poorly?


The Argentine government should stop placing advertisements in American newspapers crying poor and making out this is a moral power play.

It should just assert its currency sovereignty and declare the world capital markets irrelevant – all those rapacious financiers who have no moral stake in the nation – and get on with creating work for its citizens and ensuring they all have access to education and other public services than enhance their lives.

Such a more would wipe out the claims of NML Capital. What could they do then? The only thing they can currently do is stop Argentina honouring the exchange bond liabilities. If they were brought under Argentine law then that hold is lost.

Then NML capital would have to continue scouring the world for Argentine military ships to seize along the lines of its seizure in October 2012 of an “Argentine Navy training vessel … in West Africa” (see Seizure of Ship From Argentina Forces Shake-Up).

But the aftermath of that fiasco was that NML Capital lost out too because the UN International Tribunal for the Law of the Sea – ruled in December 2012 that “in accordance with general international law, a warship enjoys immunity” and that “any act which prevents by force a warship from discharging its mission and duties is a source of conflict that may endanger friendly relations among States”.


Ghana shall forthwith and unconditionally release the frigate ARA Libertad, shall ensure that the frigate ARA Libertad, its Commander and crew are able to leave the port of Tema and the maritime areas under the jurisdiction of Ghana, and shall ensure that the frigate ARA Libertad is resupplied to that end.

The Decision – is interesting reading.

The next amusing aspect of this was that the Ghana Ports and Harbours Authority sought recourse from NML Capital for the costs of the exercise.

That is enough for today!

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.

This Post Has 19 Comments

  1. It is my understanding that NML bought the bonds on the secondary market and were not an original holder of the bonds. They purchased an interest where they previously had none with an eye on the main chance. If this is the case they are vultures and there is a moral case to be made.
    The solution offered by Mr Mitchell is of course impeccable.

  2. Dear Bill40 (at 2014/06/24 at 18:53)

    Yes, the Vultures round up distressed debt at bargain prices in the hope they can pursue the governments for a better outcome. They legally buy the debt for open sale in the secondary markets. Many transactions are going on every day in those markets. Why is that immoral? One can say the whole capitalist system is immoral – but that is not the argument that is made in this case. Somehow, their purchases are evil and other bond purchases are not.

    best wishes

  3. Hi Bill,
    You are of course right it isn’t illegal and there is no need for it to happen. The feeling of moral outrage is emotional rather than logical. It is the fact they purchased an interest where they had none that really gets me but I can’t articulate why. It just stinks, not a very scholarly observation, just a gut reaction.

  4. Dear Bill

    I agree that a government should as a rule borrow only in its own currency, it it has to borrow at all, but there are exceptions. Suppose that Ruritania needs to build up an electricity-generating capacity and that to do so it has to import turbines and other equipment from abroad. Then it may have to borrow dollars to obtain the funds for the purchase of those imports. Once the power plants are in operation, they can facilitate industrial exports or replace imports and thereby help the government of Ruritania get the dollars necessary to pay the debt it contracted when it built the power plant.

    Borrowing abroad should be like accepting foreign investment. It should only be done in the tradable sector, and preferably all foreign investment should be green-field investment. A factory owned by foreigners which exports or reduces imports generates the foreign exchange necessary to finance the repatriation of profits. A service company that sells in the domestic market doesn’t do that.

    Foreign investors and lenders can play a constructive role in development. Speculative financiers of course can’t.
    Regards. James

  5. Dear Bill,
    The simple problem of Argentina and many other developing countries is that the only way of getting financing is in external currency. Not even the locals want to hold peso assets unless they are forced to because the economy is so mismanaged that peso assets are not a good store of value.

  6. Sorry Javier,

    but you’re getting this wrong. The Argentinian government can get all the peso “financing” it needs, as the post states:

    The Government of Argentina issues its own peso. It doesn’t need to borrow in order to spend.

    so whether the Argentine populations wants to hold peso-nominated “assets” is immaterial as long as they accept pesos as payment from the government, which they do because of their debt obligations.

    What I am wondering about though is the impact of

    which effectively denies the Government access to the US banking system until it repays the outstanding liabilities that NML holds.

    Does this mean that they couldn’t import anything from the US for which they would have to make payments via US banks? Because then even the redenomination doesn’t resolve this problem, which could be challenging…

  7. Dear Bill et al:
    This issue of how a developing country can bring in more advanced resources is one I have been thinking about, a little, off and on for a bit. It seems to challenge, or stress test, MMT applicability to developing nations. One critique of MMT is that only “wealthy” nations can create their own currency without diminishing its value, which is not true, of course. If currency is issued in line with MMT principles, to create full employment, but not high inflation, then a developing country will have a stable currency value. And a population with full employment will attract foreign businesses that can sell appropriate levels of technology to the domestic population.
    The development issue, it seems to me, often involves the unstated assumption that the developing country “needs” to acquire advanced technology rapidly. That this is essential to the welfare of its people, and that the only means to do this is to borrow in a foreign currency, from the World Bank, the IMF or whomever.
    I would challenge this assumption; that it is necessary to rapidly acquire advanced technology and that such borrowing is justified. I think a more sustainable path to “development” is a slower path that starts with the basics, jobs, food, and education. Then will come domestic development of more advanced technology as the population can provide it for themselves and use it themselves. An employed population will attract the sellers of more advanced technology. This will create an upward spiral of development supported by domestic demand, fostering the further employment and education of the domestic population, and creating more demand.
    This path will take longer, perhaps many generations, but I think will lead to the development of more appropriate technology that fits with domestic needs.
    We have seen the problems that often result when Ruritania borrows to instantly bring in advanced technology. The real resources of the country are then siphoned off to the foreign creditors and the country becomes more impoverished than it was. Only the local politicians and elite benefit.
    A local currency, if issued appropriately by the government following MMT principles, will have a certain value on the exchange markets and the country can always buy foreign goods at the market value. Locals will want to hold the currency to pay taxes. This always assumes that the government is appropriately managing its currency. But if, as is often the case, it is not, and the locals do not want to hold the currency because it is a failed state, then borrowing in a foreign currency is not going to improve things.
    Argentina is a wealthy country, with an often failed government, and has no need to incur debt obligations to foreigners.

  8. Big red,
    No, I don’t think I’m getting anything wrong and I do understand well MMT’s explanation about the order of expenditure and borrowing for the government. The matter of fact is that investors both local and foreign have been shunning debt in nominal pesos and requiring debt in either foreign currency or adjusted by inflation, this largely because of the mismanagement of the economy, and this is not immaterial as you seem to believe.

  9. It is a bad thing, and unfortunate, but any government in South or Central America has to consider more than purely economic issues when dealing with the U.S.A.

  10. Bill –

    The Argentine government should stop placing advertisements in American newspapers crying poor and making out this is a moral power play.

    How are they paying for those advertisements when they can’t access the American banking system?

  11. It’s somewhat curious that the solution you suggest was the first the Argentine government considered after the ruling, only to realize that it would mean more trouble and declare themselves ready to negotiate with the vultures a couple of days later. (You can always trust the Argentine government to improvise a response to a long awaited decision.)
    Yes, the Argentine peso has stabilized lately after the former finance minister and central banker (the best one in the world according to Randy!) were fired, but foreign reserves are still dwindling, inflation still the 2nd highest in the world, and the official statistics still a joke.

  12. “The matter of fact is that investors both local and foreign have been shunning debt in nominal pesos and requiring debt in either foreign currency or adjusted by inflation, this largely because of the mismanagement of the economy, and this is not immaterial as you seem to believe.”

    Then you replace those investors with the government, and you do that by increasing investment spending and increasing flat taxes to drive the currency harder.

    They’re loss since they will not be able to command real resources in the country.

    Argentina produces a lot of beef. The Chinese really like lots of beef. Not really too difficult to see where the Argentine trade envoys need to be going. But unfortunately they always seem to want to suck up to the USA. I’m not sure why when there are other large nations with better prospects.

  13. “Then it may have to borrow dollars to obtain the funds for the purchase of those imports.”

    No it doesn’t at all. It would say to competing export powers: “we will allow you to have the monopoly on our power plants and earn lots of Ruritan”. Since they are exporters and desperate for new markets, the one that can persuade their central bank to do the necessary liquidity swaps will get the business – which invigorates their own economies.

    You never, ever take on foreign debt as a sovereign because there is no bankruptcy way out. It’s just like taking drugs. Just say no.

    Of course a foreign power is going to try and get you into debt. The clever leader understands this and avoids it like the plague.

    What you do is open up your markets to those export led countries who are prepared to use their central bank for development. Normally these days that is China, since the US has lost the plot.

  14. Hi Neil,
    Thanks for your comments (and your blog, btw).

    Regarding your comment, It’s the government that is borrowing in fx and via inflation linked bonds. In any case, what do you do if you have a country where people that can avoid it’s currency via capital flight and where inflation is endemic and hidden? Anecdotally, Argentina had to import beef in several of the years in the last decade, due to various factors but much due to government policies. OK for say Chile and Brazil which have graduated from high external fx debt dependence to managing their finances in their local currencies. What do you do with a country where this is not possible at a given time?

    The practical application of mmt in these types of developing countries is something I struggle with. Any additional pointers would be appreciated.

  15. I think Big Red gets it right. Javier is also right upon the fact that here in Argentina such a policy would be shocking for most people, but this does not mean it could not work in the end. The point we seem to be forgeting is the core of MItchell’s argument: we don’t need to borrow. Just that. So simple. Borrowing does not help, it’s a lie we make to ourselves by which we get something and send the bill to our kids, who will have a lot of problems upon some other issues (particularly resource depletion).
    And as Big Red remarked, the only problem I can see with Mitchell’s solution is the possibility of handicaps in international trade.

  16. Ok, Javier, let’s take your statement at face value (also, I went ahead and corrected the language):

    The matter of fact is that speculators both local and foreign have been shunning debt in nominal pesos and requiring debt in either foreign currency or adjusted by inflation[.]

    What this means in other words is that it is difficult to get peso-denominated loans. While this obviously sucks for any private company that needs a loan to invest in productive capacity (and any Argentine who wants a loan to buy a car or house), the national government is untouched by it since it doesn’t need loans.
    Furthermore, if the political will were there, the Banco de la Nacion Argentina could decide to pick up the slack and lend for productive investment (after assessing the risks appropriately, of course), and certain consumption purchases.
    So getting peso loans would be a piece of cake. The “only” problem that the Argentine government (and by extension the Argentine population) has is acquisition of foreign currency. Given that Argentina even has oil deposits (and renationalized its oil company), as well as enough arable land to feed its population, this would be manageable, if economic literacy and political will were there.

  17. Neil: ‘No it doesn’t at all. It would say to competing export powers: “we will allow you to have the monopoly on our power plants and earn lots of Ruritan”. Since they are exporters and desperate for new markets, the one that can persuade their central bank to do the necessary liquidity swaps will get the business – which invigorates their own economies.’

    Russia is providing an interesting example right now. They are offering complete financing on the construction of nuclear power plants through a state-owned entity, Rosatom. There are various versions of this, but one is the ‘build, own, operate’ model, that they are using in Turkey. They will build the plant, own it, and operate it, for a set period (15 years I think) and collect the earnings (in the Turkish currency), after which they turn the plant over to the Turks. This has some risks obviously for Russia, but if it all goes as plan is a win-win for everyone.

    People often wonder how Russia can ‘afford it’. Of course it is a matter of resources, not money, since Russia controls the entire supply chain (the locals can participate, if they want to do so and are capable) and has no shortage of rubles.

    Is this a good investment for Russia? That could be questioned, but for now they seem to think so. They are offering this to Bangladesh, Vietnam, Jordan, Armenia, Hungary, and probably some other places in one form or another.

  18. As I’ve been saying for a long time, argentineans know MMT and that they can print their own currency as much as they want. They’ve been doing it forever. That’s why they had bouts of hyperinflation and even know, in a deflationary world, they have the 2nd highest inflation in the world.
    Foreign investors don’t want to earn Ruritans, even less Argentineans pesos. They want hard currency to take back home. But that’s not so easy since the Argentina government has introduced plenty of controls on the exchange of foreign currency which have only achieved to make the flight to the dollar even worse to the point that they are running out of foreign reserves. Progress in the World Cup can be problematic to them ( Another reason to envy Australia or England!

  19. I really enjoyed this article. The point is honest, smart, interesting.
    Thanks a lots.

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