Argentina and America – of Vulture Funds and Justice. Part 2

Sub -level Three. Vulture world.

Without carrion eaters the world would be strewn with corpses. Vultures eat the dead. Vulture funds, however, eat the still living.

Argentina defaulted on its debts. It borrowed money, said it would pay it all back, signed contracts binding it to that promise and then reneged. It forced its creditors to agree to get back only a few cents out of each dollar they had lent it. Argentina simply said, ‘that is all we are going to pay. Accept or get nothing at all’. The creditors, the bond holders, agreed. Except of course for the stealthily circling Vultures who bided their time.

Surely, despite the sordid stink of what was done to Argentina, how she came to default, on another level Argentina has also done wrong to those who lent to it and must therefore pay?  Well on one level sure. But before we wag a moralizing finger lets take a step back.  Borrowing and then not paying back, defaulting, is not a crime against God and Nature known only to the  dregs of statist madmen. Companies default. They take on debts, sign contracts to pay it all back and then default on their creditors. When they do it is often due to mis-management, stupidity, greed and even fraud. Whatever moral case we might think Argentina has to answer it is not peculiar to them or to the  bloated and corrupt governments which loom large in the minds of fervent Libertarians.

Lets take a recent example, Chrysler . In 2007 Chrysler had revenue of $49 billion. That makes it larger than many nations. It defaulted. The company had knowingly, not forced to by IMF inquisitors, but of its own free-market will, taken on debts that it could not pay. Did statues bleed, or horses give birth to monsters? Did the very heavens cry out at the crime? No they didn’t. It’s business. Just business.

What Chryser did do was use the sheer size of its possible default to force its creditors to accept cents on the dollar on what they were owed. Sound familiar? And the US government itself weighed in on their side to force the creditors to accept. Why? Because, they said, it would be best for the nation. And then the critical bit, (From “The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and other Legal Fauna” Duke University School of Law)

Once Chrysler negotiated the terms of a sale with the majority of its creditors, it entered bankruptcy with a prepackaged petition, and, shortly thereafter, a new Chrysler entity emerged from the process as a going concern, no longer burdened by billions of dollars of debt.

A ‘going concern’ because it was now no longer crippled by an unpayable weight of debt. That is what Argentina had hoped to do.

Although a minority of creditors challenged the Chrysler sale as a draconian invalidation of their contract rights, those efforts failed under the debtor-friendly rules of Chapter 11.

So, for private companies the free-market has debtor-friendly Chapter 11. But not for nations? What Crysler did the Law upheld even as it pursued Argentina for doing the same thing.

And what are some of those debtor-friendly provisions of Chapter 11?

Once a private company or individual enters bankruptcy, debt service and litigation against the debtor is automatically stayed pending the completion of a mandatory restructuring plan. Bankruptcy rules also allow for a post-insolvency market for “superpriority” (debtor-in-possession) financing, which the debtor can access to jump start its reorganization.

So why is this a good ‘free-market’ idea for companies but not for nations? Why should something of the like not be available to nations?  There is no good reason – excpet one. Suing nations is lucrative AND it is part, I believe of a far broader wresting of power from nations states in favour of ‘The Market’. An ideological desire to elevate private over sovereign power. Or to put it another way to reduce nations to actors within a global market framework instead of markets and companies being required to act within a framework of soveriegn, nation state power.  The question is what levers can ‘free market’ ideologues use to force this change?

Pari Passu

The key to the Elliot Associates case against Argentina, the point of law used by them and ruled in favour of by Judge Griesa, and one of the levers that can be and has been used to attack nations, is what is known in law as Pari Passu – to treat equally.

I do not intend here to deal with the argument over whether nations need to borrow at all. I have some thoughts on this subject but they are for another article. All I wish to note here is that it is an odd thing, perhaps a legacy of the time when princes borrowed gold and silver from merchants, that nations who do not have to borrow, given that they can print instead, should chose to borrow. What is not at all odd is that holders of private wealth and creators of private credit, should be delighted to lend to them. Why is this not odd? Because nations are very large borrowers and, most of the time, very good payers.

The only down-side to an otherwise wonderful trade is that IF a nation should decide to default – how can a private creditor take an entire nation to court? The answer for centuries was they couldn’t. The old, English Common Law of Champerty prevented it.

Champerty is -

an English common-law doctrine that precluded the purchase of debt with the intent and purpose to sue upon it. (P.49)

A clear law which makes the very notion of a vulture fund impossible. At this point it is worth taking a moment to remind ourselves that the laws which codify what we mean by debt: who must pay what to whom and under what conditions are not natural laws. Debt and its laws do not spring from the fabric of reality like Gravity. Debt and its laws are human conventions that is all. We can see it one way or we can see it another.

Champerty said you cannot buy up a nation’s debt, when you know that nation has or soon will default, for the express purpose of then suing the nation. Champerty says the nation and its creditors are the only interested parties and thus they alone must be left to work it out for themselves. And since most of the lenders were the largest banks and other nations who  generally had long term and lucrative relations with the debtor nations, the lenders would generally feel obliged to swallow the losses.  And that reality ‘tended’ to give the lenders some pause for prudent thought when it came to how much they lent and to whom.

So for years Champerty did prevent nations being sued AND helped concentrate the minds of the lenders. But then along came the first Oil Shock/Crisis and the subsequent South American defaults of the 80′s in Mexico, Argentina and beyond, and the eventual game changer - The Brady Plan.

Each of these things, like everything else in this article,  can be seen in two entirely different ways. What you see depends on what you are told to look for, what you expect, what you want to see.

Sorry to introduce all these elements but I think it helps to know why things happened not just that they did happen. So to take them one at a time. The first Oil Shock was a crisis at the pumps but a bonanza at the well-heads. Suddenly the world was flooded, literally flooded, with petro-dollars (Oil was traded in dollars). That money belonged to the oil nations but it flowed to the world’s banks. Suddenly they had more cash than they knew what to do with.

So it was not a coincidence that a long list of nations who wanted to borrow suddenly found the taps opening for them. I’m not saying nations didn’t borrow or banks lend to them before. They did. But go back and look at the growth in lending just to Argentina – from $8 billion in ’76 to $43 billion in ’83. An increase of over 400% in just 7 years .

But then,

 A subsequent rise in interest rates and a global recession resulted in a string of defaults on these loans,starting with Mexico in 1982. (P. 50)

The banks let the  influx of cash go to their gonads and lent too much to ‘sub-prime’ borrowers, content to let them get deeper and deeper in to debt paying the banks more and more interest. The scale of the bad loans was sufficient to cripple if not bring down at least some of those banks. Sounding familiar at all?

Cue the Brady Plan. Officially a plan to save S. American nations (one way of seeing it), but equally, or perhaps more, to save the U.S. banks who would have suffered/collapsed if  widespread defaults had been allowed to go ahead. The Brady Plan repackaged the defaulting debts in to new bonds imposing some ‘hair cuts’ but off-setting even worse possible losses by various means AND, critically, allowing the new bonds to be sold to a far wider set of financial institutions. The idea – again stop me if any of this rings any bells with you – was, by allowing the new bonds to be sold more widely it got the risk off the bank’s books where it had been concentated  and ‘spread’ the risk more widely across the market.

Seen one way, the official way, the plan was to save the countries from default and ruin. Of course the countries were considered to have defaulted and their credit rating suffered. Which does seem to me to take the shine off the official version. But no matter. Moving on. The un-official way of seeing The Brady Plan is that it was a way of  preventing nations from defaulting and entering any sort of ‘Chapter 11′ restructuring and re-thinking of their borrowing and instead kept them firmly attached to their banks and their habit of debt dependency. Debt dependance is what was being saved along with the pushers who profited from the dependancy. The banks profited financially. The U.S. profited politically.

Of course both ways of seeing are there in the picture. Both have to have some basis in fact. I suggest my way is far more relevant than the usual story allows.

The point of this diversion is that this was the event which launched the modern market in the trade in sovereign debt which is such a boon to countries today. It was the birth of the era of sovereign debts as we now know them, the  place where the old order and old power structure of nation states and their citizens confronts the new and rival power of  the global Free-market and of nearly-but-not-quite stateless capital.

This was the arena where Mr Singer of Elliot Associates had his good idea – the idea that if he could somehow get rid of or find loopholes in the old law of Champerty, then he would be able to buy up debt when it was cheap – for a few cents on the dollar when a nation defaulted – but then sue that nation for the full 100 cents on the dollar. Elliot Associates are a law firm their expertese is in twisting the law to suit themselves. ie they are lawyers. Mine might be an unflatering description of what lawyers do for a living but I think it is nevertheless accurate.

Elliot set about challenging Champerty and to cut a long story short they succeeded. The key case for them was against Peru. Remember Champerty says it is illegal to buy a nation’s debt for the purpose of suing. Elliot’s argument, up-held in U.S court was that when they bought the debt (defaulted debt), their “intent” was simply “to be paid in full”, nothing more. There was no ‘intent’, no plan from the outset, to sue. This was depsite Elliot and the court accepting, as the court said in its ruling

“Elliott knew Peru would not, under the circumstances, pay in full.”

And yet the court accepted and agreed that Elliot hadn’t bought the debt with the express ‘intent’ of suing, only of somehow being paid in full. And they resorted to suing only when their original intent was thwarted. And that is how you get round Champerty.

That, to me, is a fine example of the law and lawyers at work. It has been described as ‘the narrow interpretation’ of the law of Champerty. I think that is the sort of narrow, like the eye of a needle,  that a camel would not be able to pass through.

But just to be doubly sure Elliot and Mr Singer also lobbied the New York State Legislature , the government of  New York State, to amend the laws of New York State  to remove the defence of Champerty. Which they did. Suddenly there is no defence of Champerty in N.Y. state, which means there is no such defence in Manhattan or in its courts and the Southern District Court of Manhattan is Wall Street’s court where Elliot Associates are suing Argentina.

However, it is one thing to win it is another to enforce. Elliot had found the means of suing, but for enforcement they needed Pari Passu.

They have used it before and it is what Judge Griesa has used to clobber Argentina. It is simple really. Pari Passu says all creditors owed by Argentina must be treated equally. Argentina cannot chose to pay some and not others. It cannot play favourites. Which is lovely. To which Argentina replied – yes but what makes you think a US court in Manahattan has any jurisdiction over Argentina?

As the Economy Minister, Hernan Lorenzin put it,

“To pay the vultures is not only unfair but illegal in terms of our internal rules,”

To which the Argentine President Cristina Fernandez added that her country would not pay

 “one dollar to the vulture funds”

And now we come to the rub of Judge Griesa’s ruling. He has said the obligation to treat all creditors as equal – pari passu – applies not just to Argentina but also to any agents working for Argentina. By which he means the banks who handle Argentina’s money and make its payments.

When a nation pays its creditors, the creditors don’t call round to Buenos Aires with a suit case. They go to whichever global bank is Argentina’s paying agent. Argentina’s is Bank New York Mellon. BNY Mellon is perhaps the largest paying agent bank in the world. It handles trillions of dollars in payments.

Judge Griesa’s ruling says BNY Mellon must also treat all Argentina’s creditors equally or the bank will run foul of his ruling. In other words though the court cannot get at Argentina directly, it can enforce its ruling upon Argentina’s bank. The court ruling prevents the bank from paying those creditors that have settled with Argentina unless it also pays the vulture fund. And moreover the bank must pay the Vulture funds the whole amount. If they don’t then it is the bank which will find its assets seized and actions taken against it. Thus the bank will have to do nothing.

Is this Pari Passu? Well certainly not as it was originally intended. The judgement in fact jeopardizes anyone getting paid at all. If Argentina tries to pay anyone through BNY Mellon it must pay them all. If it doesn’t want to pay the vulture fund the full amount demanded by Mr Singer then BNY  Mellon cannot pay anyone. If it does, obeying Argentina’s instructions over the ruling of the court, then BNY Mellon will suffer. So BNY Mellon will not release any of Argentina’s money to pay any creditors. In which case the ruling will force Argentina to default again. This will punish the other bond holders. Thus the judgement is not very Pari passu at all. In fact it is a ruling specifically favouring the rights and welfare of Elliot Associates OVER the rights and welfare of all other bond holders. Which is what their lawyers argued in court,

“It is far beyond the bounds of equity to seek to enforce the rights of one litigant by jeopardizing the rights of others,” lawyers representing a group of bondholders who participated in the exchange, led by Gramercy Funds Management LLC.

So although the Elliot case is often written of in terms of Argentina having to pay its debts, it is worth being clear that Judge Griesa’s judgement is not on behalf of the orignial bond holders. It is not seeking to redress any wrong done to them at all. In fact it is a judgement against them as much as it is againt the people of Argentina. This judgement is purely and soley for Elliot Associates, its owners and its wealthy investors. The ruling says Argentina MUST pay Elliot Associates what Elliot wants, which is FULL payment. It is a judgement which says it is an American court in Manhattan which decides who the people of Argentina must pay and how much not their own government.  The judgement punishes everyone except Elliot. It is a judgement for their benefit only. And that, in my opinion, is the essence of what a Vulture fund is about.

Thus this is not about Pari Passu, nor the sanctity of contracts, it is about enriching Elliot Associates. The long term effect will be to make bond holders afraid to settle with a defaulter for fear that a vulture fund will come in later and force themselves to the front of the queue for payment. This judgement seeks to close down the world of compromise, of bankruptcy protection, of helping a bankrupt emerge as a going concern and force us all to live in a new, Vulture World.

I think Pari passu even if it is declared to work as a ‘narrow’ legal argument fails as a broader moral one. And moreover let’s go back for a moment to the idea that debt and its treatment is a social construction not a law of nature. Who does it really benefit to allow nations to be sued?  The people? No. The other creditors? No. Is it even consistent to afford private debtors a form of ‘Chapter 11′ type bankruptcy protection and the chance to emerge as a ‘going’ concern but not to allow anything of the like for nations and their people? No. And does allowing nations to be sued by private entities, push us towards a world of mutual understanding and positive compromises? No. It pushes us towards the  Vulture World at whose threshold we already stand.

We should not allow nations to be sued. Such a simple decision would rid the world of Vulture Funds and close at least this one path to the world of vulture morality. It would also restore the incentive for bankers to alloy their greed for profits with a need for prudence – in this one area at least.

And that is sub-level Three in which I hope to have offered some answers to how suing nations works, why it works, for whose benefit and to whose detriment. I hope I have also suggested how the narrow legal arguments sit inside a broader moral framework.

The next level down takes us further in to the necessary moral underpinning of how nations treat other nations and how they allow private companies to treat them. For it is my contention that legal arguments such as pari passu, treating people equally, while they can exist in isoaltion, and can be applied arbitrarily, only where it suits and not where it is inconvenient, will end up, in that case, being applied by sheer brute power, and will lose much if not all of their moral authority. They will quickly  cease to have the sway of laws which are seen to be morally right, and become just the law that is there simply to enforce the wishes of the powerful. Or to put it another way, the law will become seen as not the guardian of the weak that speaks truth to power but the paid servant of power who says to it, ‘Yes lord, who shall I crush for you today’.

In sub level four we leave NY and its courts but bring in Ecuador and Big Oil to play along with Argentina.


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39 Responses to Argentina and America – of Vulture Funds and Justice. Part 2

  1. Buck Turgidson November 29, 2012 at 1:27 am #

    So I guess this means that Argentina will default again and we will enter into the legal house of mirrors.

  2. The Dork of Cork. November 29, 2012 at 2:47 am #

    Henry B Gonzalez 1988
    “I have seen 5 money manias in 15 years ……………(38.30)”

    Its the oil of course – the oil is burned via private free banks producing credit in the governments unit of account , its adds to GDP growth but the capital is destroyed for no net return.
    http://archive.org/details/AV_352-HENRY_B_GONZALEZ-_THE_IMPENDING_DEPRESSION

    Peter Bell’s portrait of English society in 1979

    http://archive.org/details/AV_032-THE_NOT_SO_JOLLY_SIDE_OF_OLDE_ENGLAND ( starts 13.00 m)

    It was the last time cities in the Uk was referred to as “Industrial”

  3. The Dork of Cork. November 29, 2012 at 3:36 am #

    “Like the Marx brothers with a political ideology”

    Journalist : Why are we supporting this covert illegal activity or that illegal activity ?
    15.20
    President “Because it would be against the law to do it overtly”

    the law is not something to follow but to get around.

    http://archive.org/details/AV_392_393-A_WILD_EVENING_WITH_PAUL_KRASSNER

    Austin Texas always seemed to me like a Great place to go on the piss – at least back in the 80s

    And a must see .
    How the local extraction operates in detail.
    http://archive.org/details/AV_422-S_and_L_UPDATE-PART_I

  4. YankeeFrank November 29, 2012 at 7:07 am #

    Another great piece! One thing though — you really need someone to proofread these for you. I will do it for you if you like. I have quite a bit of experience as a writer, non-fiction, fiction and legal writing, and have done bucket-loads of proofreading in my day.

    I love your work and always look forward to your clarifications of reality.

    • Dave (aka Frog2) November 29, 2012 at 12:06 pm #

      Frank — you’re not the first to offer proof-reading, but David is very relaxed about the dyslexia , and corrects later . The quality of the content far outweighs any defects in ‘packaging’ ?

      • Golem XIV November 29, 2012 at 12:11 pm #

        Thanks Frog2. Always nice to know you are around.

    • Golem XIV November 29, 2012 at 12:14 pm #

      Hello YankeeFrank,

      Thank you for your kind offer. And I do know you are right. It would be better if I had fewer mistakes. You might not believe this but this is after I have gone through it myself a couple of time and even used spell check.

      In the end I am usually so aware of how little I am writing and posting that If feel I just have to get something, anything out before people get bored and leave for pastures more regular.

      • YankeeFrank December 1, 2012 at 9:33 am #

        Believe me David, your point gets across very well and I have no trouble reading, and nor does it bother me that there may be typos in, any of your pieces. I am a regular at NakedCapitalism and Yves also has proofreading issues. My only concern with typos is that I wouldn’t want anyone who is not already “in your camp” as it were to disregard your points due to typos. I am of the opinion that those who would ignore content due to minor typos is generally a pedantic sort of nob and perhaps not worth the bother. But in any event, you are welcome and the offer still stands if you ever require such services.

        Oh, and I do certainly believe you that typos remain even after several readings. That is the nature of editing and rewriting as I’m sure you know. Anyway, great post and I look forward to your further work.

  5. Hawkeye November 29, 2012 at 10:46 am #

    Surely the very foundation of Capitalism is the concept of profit.

    Profit is the reward pay-off for Capitalists who risk their investment.

    Investment in the traditional sense of Capitalism always involved an Equity stake.

    An Equity stake is therefore a symmetrical alignment of risk & reward.

    Whereas the full enforcement of debt based investments is not a symmetrical economic arrangement.

    It leads to all Reward and no Risk, which pure logic demonstrates is the very antithesis of Capitalism!

  6. orville November 29, 2012 at 11:10 am #

    This is the essential thing that is wrong with usury today. No risk is taken on by the lender. In the mediaeval Venetian system this modern type of lending was banned. Money lenders could lend money only on the understanding that they were a partner in a specific venture and if this venture failed they did not get paid and would never be able to ask for that money back. Ever.

    It’s baffling that Aristotle nailed the nature of money over 2300 years ago but we are still struggling as a species to understand it today.

    “Money was intended to be used in exchange but not to increase at interest” (Politics)

    Money does not reproduce or intrinsically create anything. It is not a capital good or a commodity.

    • Hawkeye November 29, 2012 at 11:27 am #

      I’m no expert on banking methods, but it is quite clear that Western banking has all but abandoned any “partnership” relation with the rest of society.

      Whereas the very doctrine of Islamic banking is much closer to what we consider as Equity based venture capitalism:

      http://en.wikipedia.org/wiki/Islamic_banking#Principles

      Even Alanis Morisette would find this ironic.

      • orville November 29, 2012 at 11:38 am #

        What I find frustrating is how incredibly difficult any fundamental legislative change in banking ethos and structure would be to enact. The size and might of the various organisations that exist to perpetuate it are huge. You’d have a blitz ex-banking suits all over newspapers and 24 hour news scoffing that these people (us) “don’t really understand” banking and that we’re living in “leftwing fantasy land”.

        The reality, as recent history has shown, is that there is only one group of people who are demonstrably clueless, and they’re the very ones we’re looking to to solve the problem!

        • Roanman November 29, 2012 at 12:55 pm #

          Or a “right wing fantasy land”.

          While they may split up for purposes of purchasing political power, the banks political agenda is to perpetrate the power and profits of the banks.

          Take a quick look at Eric Holder’s resume’ and it will become quite clear how it is that he can find no crime associated with the mortgage fiasco.

          Take a look at Chuck Shumer’s major contributors and it becomes quite clear why we can’t break up the banks.

          While they bet and lost on Romney in 2012, they bet and won with Obama in 2008 and the banks still own their majority in both houses of Congress.

    • neretva'43 November 29, 2012 at 3:21 pm #

      “In the mediaeval Venetian system this modern type of lending was banned.”

      Maybe so, but more than likely Venetians were stretching the law as well. There were marauders and looters, mercenaries who were hired by them were paid with somebody else money and property. One needs to read the history of the fourth crusade (and crusade in general).

      • Golem XIV November 29, 2012 at 3:23 pm #

        That’s a bit of history I rather like. It was a very dirty time.

  7. Roanman November 29, 2012 at 12:47 pm #

    The other benefit of the Brady Bond was it’s denomination in US Dollars, which was thought to provide some insurance against default by inflation, the preferred method of the United States of America.

    • Golem XIV November 29, 2012 at 1:22 pm #

      Good point.

      And it would also expose Argentina to horrid and dangerous currency fluctations of the kind that are kiling Hungary for example.

      What a mess.

  8. John Souter November 29, 2012 at 1:04 pm #

    The power to expand and contract credit is great to those who wield it, its effects devastating. As Mayer Amschel Rothschild, grand patriarch of the most powerful dynasty on earth, once said, ‘Permit me to issue and control the money of a nation, and I care not who makes its laws’.

  9. desmond November 29, 2012 at 2:16 pm #

    and thank you for pointing out ‘Pari Passu’ and ‘Champerty.’

    the judges seem to be in cahoots with the lawyers who are employed by the vultures.

    we call it corruption?

  10. steviefinn November 29, 2012 at 2:36 pm #

    Am I right in thinking that if the vultures succeed in the case of Argentina that all the massively debt ridden countries would then be at risk ? Or as you say it will just effect future bondholder behaviour & be a one off. Perhaps the bondholders & banks will get the decision reversed as it isn’t in their best interests.

    I assume there are other vultures out there besides Elliot’s who might be in a position to use the same judgement to their own advantage.

    • Golem XIV November 29, 2012 at 3:04 pm #

      Hello Stevie,

      they already are. There have been rumours about Elliot and Greece.

      If Elliot do force either another default or get Argentina to pay up then it will set the scene for more of the same with other countries.

      I don’t think Elliot’s voctory in judge Griesa’s court sets anything in stone. I think other courts will staill takea different view. Particularly if the decision heralds a move from NY banks to banks elsewhere.

      The are other Vultures but not many. The DART family are heavily involved in Vulture fund activities.

  11. James Dixon November 29, 2012 at 3:26 pm #

    Well, thanks for that. It certainly answered my jurisdictional question (Although, if ever there was an example of not asking a question you might not like the answer to…..)!!

    First off, let’s get the wishy-washy lefty stuff out of the way (and full disclosure here, I live in Brazil, so I’m not exactly neutral or disinterested when it comes to the pillaging of Latin America..):

    It strikes me as grossly unfair (and somewhat Ironic) that, given the relatively recent history of South America, and given the West’s attacks on democracy and freedom in the region, we’re now seeing a kind of financial post-colonial re-colonisation, via, and I use this term very effing loosely, ‘the rule of law’! A Monroe Doctrine 2.0 with added lawyery-type stuff, if you like!?

    Let’s not forget here, that it’s possible to draw a very clear line between whatever debt/financial issues these countries have now, and the compliant Military/technocrats who were ‘installed’ precisely because they’d be all favourable to liberalisation and whatnot!

    So, even though the citizens of many Latin American countries suffered untold atrocities, even though they fought (long and hard) to re-establish democracy and civil rights, they’re still effectively suffering for the decisions and deals made by the Dictatorships who most certainly didn’t ‘speak for them’, and who, sure as shit, had little in the way of democratic legitimacy!!

    Now, obviously the International Financial System isn’t well known for operating within a framework of justice, or fairness, but surely there’s a legal argument that if that line can be drawn, if there’s a clear relationship from then to now (the ‘but for…’ test in law), there’s a pretty good argument for any resulting (accumulated) debt to be considered null and void. 

    Not only were actions taken in the interest of financial gain for particular individuals at the expense of the country, but they were taken by illegitimate representatives of The Argentine people. 

    (If tomorrow, I just decide that I’m the CEO of Citibank, and go around promising to pay everybody billions of dollars for scratching my arse, if and when I was found out, and removed, would Citibank be expected to honour my “debts”?! If people claimed they believed I was genuinely acting on behalf of Citibank, wouldn’t they be told to ‘do one’, on account of it being pretty f*cking obvious that I wasn’t…!?)

    Granted, that’s a pretty daft example, and as is probably (painfully) obvious, I’m not a lawyer, but it seems to me that, if we’re to use “The Law” to enforce ‘contracts’, and do stupid things like treating countries as companies when it suits, we should offer those countries the same protections afforded companies and individuals under “The Law”. 

    Namely that contracts entered into under duress, and especially by random, violent psychopaths without the authority or legitimacy to do so, should be rendered as legally binding as my arse-scratching-payment-promises, AND that all contracts, duties and debts directly resulting from them, should likewise be treated as castles made of cheese and unicorn dust!?

    Or, as is often the case, am I being a bit slow and missing something…..??

    • Golem XIV November 29, 2012 at 3:44 pm #

      Hello James Dixon,

      No I would say you are not missing anything at all. In fact you have put your finger on the critcal point.

      The hypothetical you gice pefectly dercibes what is called in international law Odious Debt’. I have written about it before.

      Debt taken on almost exactly as you descirbe it – where it was taken on for teh benefot of a dictator or that person’s inner cirlce, where it was patently not in the interests of the people, and often awarded ridiculous terms to the lender. All these and other things qualify a debt as being odious and international law recognises such debts can be cancelled.

      What Vulture fund try to do is over-write this idea with their own idea that all debts should be, must be paid at full face value.

      That is part of why I find Vulture funds and those who profit by them to be so absolutely morally repugnant.

      • James Dixon November 29, 2012 at 5:02 pm #

        So, (and apologies for being dense and/or asking a bazillion questions you’ve probably already covered), this is basically a ‘test case’, and will, to some extent, be dependent on appeals/similar rulings in Superior Courts, then!?

        Obviously, that’s not to detract from the (horrific) potential of the ruling as is, or it’s ‘injustice’, and I quite agree with you on the morally repugnant aspects of the vulture funds (who in their right mind wouldn’t?), and the very fact that this happened is, as others have suggested, a massive red-flashing light for not only the rest of Latin America, but pretty much everyone!!

        (In a way, “vulture funds” is almost too kind a term. Hyena fund might be a more appropriate one, given that Hyenas scavenge, but can also attack and kill the weaker, or already injured, members of a group or herd, often pursuing or circling them relentlessly, working together, until the prey collapses from exhaustion, at which point the hyena savagely rip open it’s belly and feed on the dying (but often not quite dead) animal!?)

        Anyways, gruesome nomenclature aside, excellent analysis, and thanks for doing the research. 
        I shall watch how this pans out with interest(/seething rage, depending on how it does so, obviously……)

        • Golem XIV November 29, 2012 at 5:42 pm #

          No this is more than a test case. The test cases were already faught some time ago. This case, if anything re-instates Pari Passu. Previous to this case Elliot had lost a couple of pari passu based cases one in Belgium and another in London, if memory serves. After those cases it looked as if the Pari Passu arguemtn might be dead. Judge Griesa who has been seen as presiding over a ‘tamne’ Wall Street court, appears to have PP back on the table.

          Applying it to agents is, I think, a novel extension but not without precedent. I think BNY Mellon will appeal on the grounds that it is not exactly an agent for Argentina. No idea how that would pan out.

          I suspect Griesa would stamp all over that.

          What a higher court would do I don’t know. But the Argentina case has already been passed up once and that court ruled and passed it back to Griesa.

          So I think Argentina is best to stick two fingers up to the Lower Manhattan court and take their business to another judicial centre.

          • John G November 29, 2012 at 6:54 pm #

            Am I right in thinking that Ecuador used the Odious Debt principal when Rafael Correa came to power?

    • CArratiaM November 29, 2012 at 5:48 pm #

      “So, even though the citizens of many Latin American countries suffered untold atrocities, even though they fought (long and hard) to re-establish democracy and civil rights, they’re still effectively suffering for the decisions and deals made by the Dictatorships who most certainly didn’t ‘speak for them’, and who, sure as shit, had little in the way of democratic legitimacy!!”

      Well said James Dixon. In particular, this is also true in the case of Chile where the effectively unchangeable constitution left by Pinochet has, since the return to democracy, blocked many changes that have been demanded by the large majority of the population. I’m writing a reply on this to Roanman’s comment

      http://www.golemxiv.co.uk/2012/11/argentina-and-america-of-vulture-funds-and-justice/#comment-23442

      yesterday regarding Chile’s situation. It’s taken me quite long to write and I don’t have much time now, I hope I’ll be able to make it tonight.

      Cheers

  12. John Souter November 29, 2012 at 7:05 pm #

    There are still two levels of court to be tested before it reaches the Court of International Settlement (Still American -but federal)

    I think the Manhatten decision will prove a Pyrrhic victory for Eliot. Were it to be applied the USofA would have to petition for a Section 11 against the counter claims of half the South American nations about the same amount of developing nations around the world.

    Invert the argument – if America apples this as a legal maxim, it must use the same maxim in its actions and dealings with other nations. It would open the flood-gate on compensatory claims on all of Washington’s acts and ommision’s, from the black ops of the CIA and the Administration through to the hegemony cabals of its global corporates and could cover a time scale from Vietnam through Iraq and beyond.

    I think Elliot may have pulled this off if it had used Senegal as the sacrificial goat, but Argentina having found its democratic spirit has developed a backbone and as a result it could well be Elliot’s who find themselves squirming on the altar of expediency.

  13. James Dixon November 29, 2012 at 8:29 pm #

    Well, from my (admittedly limited) knowledge of the US judicial system, I think you can always appeal ‘upwards’, up to and including the Supreme Court if necessary (although what happens to the ‘execution’ of that ruling during this time, I’m not entirely sure…), and when there’s particularly controversial or potentially ‘law-changing’ issues (like PP) involved, this tends to happen as standard.

    So, ‘test case’ might not be exactly the right phrase, but I think the decision’s only ‘enshrined’ in law and precedent until all appeals are exhausted/or higher decisions returned.

    A district court/judge in Manhattan is pretty low in the legal hierarchy, I think, so it’s possible that the reinstatement of PP might just turn out to be a temporary blip brought about by a numbnuts judge with vested interests. But, then again, if it’s already been passed back once, maybe not so much…..Again, it’ll be interesting to see how it pans out!  

    (It’s always a bit of a gamble when you’re left relying on the US legal system to do the right thing, especially when there’s a shitload of money, and/or business interests involved, so I pro’ly won’t be holding my breath. 

    But, having said that, and perhaps a reason for cautious optimism, is the fact that I think there’ll be also be a fair few companies who won’t want stuff like this to stand, precisely because it opens up a whole can of worms for their own dealings with particular countries…….

    Maybe they’ll all just spend the next 10 years or so ripping big chunks out of each other, which, at the very least, would be quite good fun to watch!.)

  14. Golem XIV November 29, 2012 at 9:22 pm #

    Hello John G

    Yes, you are absolutely correct it was Ecuador and Correa who used declared many of their debts Odious Debt and refused to pay. They used the concept succesfully.

    • John G November 30, 2012 at 6:57 am #

      I think they were secretly buying up their own bonds in the secondary market at about 30 cents on the dollar at the same time.

      Good times.

  15. Kevin Snyman December 11, 2012 at 11:46 am #

    Thought I’d simply say thanks. Much appreciate the post and subsequent comments.

  16. Joe R December 30, 2012 at 10:50 pm #

    I couldn´t find this story in the anglophone media but there was widespread looting of supermarkets ( 250 ) across 40 Argentine cities just before Christmas with 2 people left dead. Some people seem to blame inflation which is under-reported by the government but stands at over 20% p.a. and they say also that the rioting was inspired by the basic needs of the populace.

    http://www.elmundo.es/america/2012/12/23/estados_unidos/1356272159.html

    saqueo = sacking or looting.

    The Spanish media are reported this with a big anti Argentine government bias showing images from one looting with large flatscreen TVs and other luxury electrical goods being robbed. Sour grapes over YPF I think!

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