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Sovereign Debt Restructuring: Not Falling Prey to Vultures

The IMF program has failed, and the debt is unsustainable. What happens next? The Macri government leaves behind another failed IMF agreement, an economy in shambles, soaring poverty, and a large dollar-denominated debt burden. The move to extend maturities on some domestic debt is not a solution to the problem. It postpones the restructuring of the entire debt to the next government. How that restructuring will proceed is unclear because there is no orderly international process for addressing unsustainable sovereign debt.

When companies or individuals face an unsustainable debt burden, there are clear mechanisms for bankruptcy procedures. Typically, a neutral judge assesses the debtor’s ability to pay and decides what each creditor will receive. No such procedure exists for sovereign countries. Countries are left to engage with a variety of creditors with different interests and under different jurisdictions, a process that can drag on for years and hamper economic recovery.

Argentina undertook negotiations with creditors after the 2001 default, and by 2005 reached a deal with a majority of them. This process seemed successful at first and was undertaken in a way that gave Argentina room to recover. However, a group of US vulture funds refused to settle and dragged Argentina through years of litigation in US courts. Vulture funds purchase distressed debt at steep discounts and use litigation to force payouts. US courts are a friendly jurisdiction for these predatory creditors. The 2014 ruling in favor of the vulture funds artificially forced Argentina into another default, blocking it from making payments to other creditors until the vultures were paid. This effectively locked the country out of international bond markets and allowed a few speculators to hold an entire country hostage.

Interest was revived in creating a debt workout mechanism. At the United Nations, a 2015 resolution on principles for sovereign debt restructuring passed with overwhelming support. Six countries with outsize power in global finance voted against the proposal: Canada, Germany, Israel, Japan, the UK, and the US. The UN Conference on Trade and Development released a detailed roadmap on how to implement a mechanism. However, it has yet to become a reality.

Argentina was a key supporter of the initial progress at the United Nations. This ended when Macri came to power. His administration paid the vultures, some of which made returns as high as 1270 percent. Macri proceeded to issue a large amount of dollar-denominated debt. As his pro-market policies failed to bring the promised prosperity, Macri turned to the IMF for a record $57 billion loan package.

Previous discussions included an initiative by the International Monetary Fund in 2002 to create a sovereign debt restructuring mechanism that was stopped after opposition from the US. The Fund again supported reform when the issue resurfaced during the final stages of vulture fund litigation against Argentina. This promotion of a fair multilateral process is welcome, although the United Nations is the proper venue for a mechanism. The Fund is not a neutral actor in restructuring. It is usually a creditor, with priority status, when restructuring is required, or provides a loan that keeps a country afloat during negotiations and later enables the payment of private creditors.

The IMF is one of Argentina’s main external creditors and will play a central role in debt restructuring. At the outset of the loan, the Fund made unrealistic growth assumptions to justify a questionable conclusion about the country’s future ability to service its debt. Any similar assumptions should be viewed with skepticism.

During the IMF program, a large portion of the loan effectively financed capital flight while the Argentine people suffered under austerity measures. Now, the Fund could push further spending cuts to make money available for debt payments. In the words of UN Independent Expert Juan Pablo Bohoslavsky, the policies promoted by the IMF are “austerity for the poor, not for creditors”. In a new report, the Independent Expert describes how high debt burdens and the interventions of international financial institutions can lead to human rights violations, cuts in public services, job loss, and higher inequality.

The international community should finally agree to a fair sovereign debt workout mechanism that prevents the interests of creditors and a broken system from hindering human and national development.

Lara Merling and Leo Baunach, International Trade Union Confederation / Global Unions (Confederacion Sindical International / Sindicatos Globales). Lara Merling is also a senior research fellow at the Center for Economic and Policy Research.

This article first appeared in Pagina.

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