by ALDO CARIARI
Protesters demonstrating against NML Capital in February 2013 PHOTO/James Robertson/Jubilee Debt Campaign
Allowing a U.S. court ruling to determine the process for international debt repayments sets a dangerous precedent, and exposes gray areas in international legal jurisdiction.
In NML v Argentina, the world continues to witness a rare and surreal spectacle: the unpredictable consequences unleashed by a U.S. judge going rogue on the law. Last June, the U.S. Supreme Court validated a lower court ruling that granted investment group NML Capital the right to obtain payment of 100% of its claims against the Argentine government, setting a legal precedent whose impact is just beginning to become clear.
NML’s actions against Argentina demonstrate why the firm is frequently described as a “vulture fund.” After initially acquiring Argentine sovereign debt bonds following the country’s 2002 default, the investment group refused to accept the terms of the agreement that Argentina reached with over 92% of bondholders, in 2005 and 2010. Then, NML sued in U.S. courts for payment of 100% of its bonds’ value, plus interest, aiming to get what amounts to a 1600% return on its original investment.
NML’s lawsuit was part of a carefully thought-out script during Argentina’s long debt restructuring process, a strategy that vulture funds have exploited in the past. First, buy the debt of a country in trouble, on the cheap. Second, systematically reject any offer of a deal worth less than the whole claim. Third, wait until the country’s circumstances improve, aided by a mix of debt relief granted by other creditors and the normal healthy impacts that such debt cancelation, if timely and sufficient, will have on the debtor country’s economy. Then, sue for the whole amount of the claim plus interest.
It is easy to see that if all creditors followed this playbook—waiting for the debtor to get better without sacrificing any part of their credit—the strategy would not work.
Unfortunately, at the international level and for nations issuing sovereign debt, there is no recourse to anything like bankruptcy, so they are exposed to rulings – even divergent ones – made by judges with jurisdiction over particular bonds.