Vulture funds or the art of making money out of money

The business of financial institutions is obviously to make money. But at one time in the not-so-distant past university professors and do-gooders spent hours and hours explaining how loans and other financial tools would help "underdeveloped" countries join the select group of "First World" nations enjoying economic prosperity, democracy and the benefits of the consumer society.

Yet you don’t have to have a Phd to understand that money lenders are out for economic as well as political gain.

Last Monday the U.S. Supreme Court ruled that Argentina must repay some $1.3 billion to a group of creditors bent on making money out of money—a decision which might well represent a severe blow to emerging economies dependent on international debt markets and establish once again the political clout of international finance.

To put the story in perspective it is convenient to remember what happened in the 1970’s when banks had accumulated enormous amounts of capital. Instead of putting that money into production, they handed out loans to poor countries, no doubt knowing that paying back those loans would be difficult or nearly impossible and therefore a handy tool for imposing economic rules favorable to multi-national business.

In Latin America during that decade conservative ant-communist dictatorships snatched power from one country to the next and almost in unison attempted to impose “free market” economic policies characterized by scandalous debt taking. In Latin America indebtedness from 1975 to 1982 increased four times according to Wilkipedia, from $75 billion to $315 billion, while interest payments jumped ahead by even greater ratios.

In Argentina the biggest debt takers were the members of the military dictatorship: the debt increased by 465% from1976 to 1983. Many critics say furthermore that many of the so-called loans never appeared in the form of social or economic infra-structure projects.

The democratically elected governments which followed the defeat of the dictatorship inherited an enormous economic headache, which led to an enormous economic collapse in 2001 and the non-payment of $81 billion in public debt. The government offered bondholders a haircut solution which 92.4 % of the creditors accepted and the debt payments were made punctually. Since 2003, according to Argentine government figures, debt service payments were made for over $190 billion dollars, although the country had no access to international financial markets.

The 7% bondholders who refused to go along with the deal, known as the vulture funds, bought up default bonds at incredibly low prices in order to resell them at extraordinary profit.

An example of this profitability is the case of Paul Singer’s NML fund: in 2008 it paid only 48.7 million US dollars for bonds in default. Monday’s ruling by Judge Thomas Griesa orders that it be paid 832 million, for a gain of 1608% over six years.

The ruling of the New York District Court orders payment of 1.5 billion dollars by June 30, although it is calculated that the value of the total bonds in default that did not enter the restructuring processes would take the figure to 15 billion, over 50% of the country’s foreign currency reserves.

That would appear to push the country into another default because if it does not pay the 1.5 billion it will have to pay 15 billion in the immediate future.

Curiously enough, if Argentina does not pay the vulture funds, the ruling forbids Argentina from making the payments to the 92.4% of the bondholders who did accept the restructuring. So, in the words of an advertisement of the Argentine presidency: “paying the vulture funds is a path leading to default, and if they are not paid, Judge Griesa’s order entails jeopardizing the right of the bondholders to collect their debt restructured in 2005 and 2010.”

What would appear to be clear is that giving out loans gives the financial institutions leverage to demand the kind of economic policies which are favorable to the interests of the prevailing financial and industrial interests. Thus, any attempt at alternative forms of development become either pipe dreams or attempts to subvert the financial world’s vision of reality.