A decision by the US Supreme Court to allow a hedge fund to seize Argentina’s assets in the US over a sovereign debt has sparked protests from lobby groups fighting for global financial reforms around the world.
The development also indicates that Kenya could have acted in the best interest of the country by paying Sh1.4 billion to one of the Anglo Leasing firms, First Mercantile of Switzerland before floating its US $ 2 billion Euro Bond that has so far realised US $ 8 billion.
Attorney-General, Prof Githu Muigai Sunday said the US Supreme Court vindicates the legal opinion he gave the government to pay one of the Anglo Leasing firms before floating its US $ 2 billion Euro Bond.
“This case vindicates the legal opinion that the State law Office issued to Treasury before the issuance of the Euro Bond as regards the judgements in Geneva and London against the Government of Kenya,” Prof Muigai told the Nation.
Last Monday, the US Supreme Court denied hearing Argentina’s appeal against a hedge fund also known as 'vulture fund’ called NML Capital that is demanding more than $2billion from the South American country.
The term “vulture fund” refers to a hedge fund that seeks to profit by buying up distressed debt on secondary markets for pennies on the dollar then trying to recover up to ten times the purchase price, often by suing in U.S. or European courts. Vulture funds are usually secretive and are often based in offshore tax havens like the Cayman Islands. In some cases, there is no information on who actually owns them.
NML Capital had bought the debt at a heavily discounted rate after Argentina defaulted in 2001. It then refused to accept a restructuring deal which over 90 percent of the other creditors had accepted and sued Argentina for full payment.
Although most other creditors accepted a restructuring which saw them take a 70 percent cut in the value of the bonds they held, the amount held by NML is still substantial, at over $2bn.
However, the ruling has elicited protests from organizations fighting for global financial reforms led by European Network on Debt and Development (Eurodad), Jubilee USA Network and Tax Justice Network.
Mr Bodo Ellmers, the Advocacy and Policy Manager at the European Network on Debt and Development (Eurodad) said the implications of the US Supreme Court ruling are potentially severe for African countries that have increasingly issued bonds on financial markets when there was 'cheap’ money around.
“If there is a crisis and they have to restructure these sovereign debts they will face what Argentina now faces, holdout creditors that sell their claims to vulture funds, which will eventually sue the African nations,” he said.
Ruling strengthens vultures
Mr Ellmers said the New York court ruling is a precedent that strengthens the vultures who refrain from participating in voluntary debt restructurings and sue for full payment.
He said given the prevailing circumstances,” African countries are advised to issue bonds under domestic law rather than foreign law or US law.”
He said Eurodad and its partners advocate for a global insolvency regime that is mandated to deal comprehensively with sovereign debtors when needed.
“As there is currently no insolvency regime for sovereign debtors, voluntary debt restructuring used to be the standard procedure for solving sovereign debt crisis. This will no longer be possible,” he said.
Mr Ellmers said the implications of the US Supreme Court ruling for Africa are severe because an increasing number of African countries started to issue bonds on financial markets (while in past decades most of their debt consisted of concessional loans due to bi- and multilateral development banks).
“This happened at a time when much “cheap” money was available on global financial markets. African countries will have to refinance these bonds when they mature. In case of a liquidity squeeze or insolvency, they will have to restructure,” he said.
And Mr Eric LeCompte, Executive Director of the religious anti-poverty organization Jubilee USA, said the US Supreme Court validates predatory behavior targeted towards countries in financial distress by Vulture Funds.
Mr LeCompte said the ruling will now broaden vulture funds efforts to collect assets that belong to the poor.
“One loser today is New York State. Given today’s ruling, countries wishing to borrow money are going to find other places to sign their contracts. That’s why legitimate Wall Street investors have joined the IMF, World Bank, United Nations and the United States Government in opposing this behavior,” Mr LeCompte said.
And Mr George Turner, a researcher with, Tax Justice Network (TJN) said although the governments of the United States, France and Germany as well was the World Bank and IMF backed Argentina’s case the ruling of has implications for every developing country which has or will face a financial crisis.
'The long and the short of this is that it will now be extremely difficult for countries to restructure their debt in a crisis, as the bond holders will know that they can pursue the government of that country through the courts and force them to pay the whole amount,” Mr Turner said.