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The need for a fair international debt work-out mechanism grows stronger as vultures gather over Argentina

Added 14 Jan 2010

By Murat Kotan,

This week a U.S.A. district court judge, ruling in favour of creditors holding old Argentinean debt papers, has frozen Argentinean central bank assets in New York.[1] The judge’s ruling is the most recent example of a problem that has been caused by uncompromising creditors and Vulture Funds, amongst others, and that has plagued low and middle-income countries for some time. It is compounded even more by the absence of an internationally legitimate court charged with solving disputes based upon a set of responsible financing rules. Instead, the situation sees the indiscriminate protection of creditors and speculators acting as creditors. The story of Argentina that is currently unfolding, although specific in detail, is just one example of the current general trend.[2]

The vultures descend

Back in 2002 Argentina experienced severe debt problems and was forced to default on its loans. In 2004, after a period of negotiations, it ultimately negotiated a deal with bondholders that paid approximately one third of the debt value. Debt holders were also offered the possibility of converting their bonds into new loans. Most creditors accepted, with others deciding to hold out for a better deal.

At present, an unknown amount of current claimants of old Argentinean debt are demanding money from the Argentinean government, despite the fact that they have no history of lending to the government, either before or after 2002. In fact, they are claiming on the basis that they have bought the debt papers from others. The state of affairs is particularly acute in the case of the extremely contentious and legally aggressive vulture funds. Vulture funds purchase public or publicly guaranteed debt from creditors at great discounts when the debtor country involved is facing serious difficulties. The intention is to make the country pay as much as possible, and to sue the country for the full amount of the original debt plus interest.

Since 2002 the Argentinean economy and the social welfare of Argentinean people have been made progressively worse by so called hold-out creditors and speculative vulture funds who have bought defaulted Argentinean debt. The ruling of the American judge is just one of similar on-going attempts to cash in on debt-  Argentinean or otherwise.[3] 

Weren’t the WB and the IMF set-up to provide support to countries in crisis? 

Currently the World Bank and IMF function as weapons for creditors. In fact, some of the vulture-like creditors circling above Argentina are from the World Bank. Presently, a case is running against Argentina at the World Bank’s Washington based court- the "International Centre for Settlement of Investment Disputes" (ICSID). The court case is being led by a legal consortium headed by Italian corporate law firm Grimaldi & Associates. It started in July 2008 and as of January 2010 is still pending.[4]

The World Bank ‘s dispute settlement court is a controversial institution as it has been accused of an unhealthy bias towards corporations. Bolivia pulled out from the ICSID in 2007 explicitly because of this reason [5], and more recently in July 2009 Ecuador also pulled out of the ICSID.

Previous bad experiences with the IMF are reason enough for Argentina not to deal with it. The IMF functions too much as a debt collection agency to be of much help for indebted countries in any way. This internal problem within the IMF came to light recently during Iceland’s troubles with the Dutch and the English governments. These governments are demanding that Iceland pays them the money that they used to bail out their own Dutch and British citizens and institutions that lost money through the Icelandic online bank Ice Save. The IMF’s uncomfortable balancing role as lender of last resort in case of crisis, and debt collection agency for creditor countries is vividly illustrated by the Dutch representative to the IMF: 

Iceland has an IMF loan, part of which has not been disbursed. If it wants to receive further payments, then Iceland must comply with its international obligations.”[6]

Need for independent arbitration

Currently, private and speculative interests are being enforced through U.S. and other rich country courts. This system is unfair and insufficient, and the courts and decision making institutions such as the World Bank and the IMF are no substitute for internationally legitimate courts either. The Argentinean situation, shared by many other countries, underlines the need for a fair and humane international debt solution mechanism that is sufficiently effective and efficient whilst remaining impartial. Currently none exists.

Key links:  
Eurodad’s proposal: ten civil society principles for a fair and transparent debt work-out procedure. 

[1]  Reuters. 12 Jan 2010. U.S. judge freezes Argentine cenbank accounts. Author: Jorge Otaola At: http://www.reuters.com/article/idUSN1220366220100112?type=usDollarRpt

[2]  With Iceland now also experiencing debt problems­, and the Dutch and English governments acting aggressively as creditors, the problem has gained prominence in Europe and come home to rich countries.

[3]  The same judge actually ruled earlier during another case, in favor of creditors and  against Argentina . See for example: Bloomberg. 30 Oct 2008. Argentine Pension Fund Investments in U.S. Are Frozen. Author: David Glovin. At:http://www.bloomberg.com/apps/newspid=20601087&sid=aEonvkKQKfOY&refer=home

[4]  Giovanni Alemanni and others v. Argentine Republic. ICSID Case No. ARB/07/8. At:  http://icsid.worldbank.org/ICSID/FrontServlet

[5]  Bolivia’s President Evo Morales stated boldly: "Some multinational companies take over our natural resources, privatize basic services, fail to pay taxes and then, when they have no arguments in their defense, they go to the so-called ICSID. And then, in that World Bank tribunal, no country wins against the multinationals. So why do we need an ICSID where only the multinational companies can win?"  [Evo Morales, quoted in Phillips, Tony. 2008. Argentina versus the World Bank: Fair Play or Fixed Fight? Center for International Policy (CIP), Americas Program Special Report. http://americas.irc-online.org/am/5189]

[6]  N.O.S. 5 Jan 2010. IMF gaat druk op IJsland opvoeren. At: http://nos.nl/artikel/127072-imf-gaat-druk-op-ijsland-opvoeren.html