By Aldo Caliari
Director, Rethinking Bretton Woods Project – Center of Concern
Co-Chair, Jubilee USA Network Board of Directors
In June of this year, the US Supreme Court extinguished the last hope that a US judge’s ruling handing “vulture funds” a victorious precedent to sue poor countries and make extraordinary profits at the expense of debt relief granted by other creditors, could be reversed.
Less than three months later, debt justice campaigners had reason to celebrate that something good may come out of it, after all. The UN General Assembly, in a historical vote held on September 9th, adopted a resolution to initiate negotiations towards a multilateral legal framework on sovereign debt restructuring.
The ruling had been part of a case “vulture fund” NML initiated against Argentina. This fund had acquired Argentine sovereign debt bonds after the 2002 default and had not accepted the terms of the agreement reached by Argentina with over 92 per cent of the bondholders in 2005 and 2010, and sued in US courts for payment of a 100 per cent of the instruments value plus interest aiming to achieve what, at the current moment, represents a 1600 per cent return on their original investment.
The US judge with jurisdiction on the case decided to depart from the traditionally accepted understanding of the “pari passu” clause –a clause typically inserted in sovereign bonds. He interpreted the standard pari passu clause (normally understood to grant equality of rank and treatment) as forbidding Argentina from making payments on its restructured debt if at the same time it does not pay the bondholders who did not accept the terms of the agreement. Successive appeals led to a U.S. Supreme Court decision that, last June, denied cert on a petition filed by the Republic of Argentina.
The damage from such novel interpretation of the clause is of incalculable scope, as it creates a precedent that will endanger current and future agreements States reach with creditors in debt restructuring negotiations. Having the guaranteed chance to sue for a 100 per cent of their credit, it is difficult to see how any creditor would accept less, thus making the path to debt restructurings even more fraught with difficulties than it already is.
The UN resolution adopted this month, which had been tabled by the developing countries’ negotiating bloc at the UN (the Group of 77) only in August, was passed with 124 votes in favor, 41 abstentions and 11 against. The General Assembly year after year issues resolutions on debt that generally leave the status quo unchanged. What makes this one remarkable by historical standards is that it takes the bold step of initiating negotiations on a multilateral legal instrument and sets a deadline of end of 2014 for the definition of modalities for negotiation of such a text.
Reprinted with the Author’s Permission