Argentina's dispute with Elliott Management was taken to a higher authority recently, as Pope Francis term “savage capitalism” was used to describe the actions of hedge fund players in the pursuit of sovereign nation debt payments.
Argentina's Pope Francis critical of the global financial system
In a May 21 meeting with Pope Francis, Eric LeCompte, executive director at Jubliee USA, presented an amicus brief in support of Argentina in the battle with what Lecompte called “vulture hedge funds.” Pope Francis, an Argentine native and a former Cardinal from the region, was critical of the global financial system first used the term “savage capitalism” on May 18th to describe the most extreme practices by a small amount of actors who engage in predatory behavior. After a meeting with the Pontiff, LeCompte used the term "Savage Capitalism" to describe the actions of the "vulture hedge funds."
"When Pope Francis has used the term savage capitalism he refers to a group of extreme actors who profit from exploitation of the poor," LeCompte said. "I can’t think of a more appropriate example than the actions of the vulture hedge funds and Argentina."
LeCompte reveals the details of the meeting
In an interview with ValueWalk, LeCompte revealed details of his meeting with Pope Francis and Vatican Secretary of State Cardinal Parolin, who applauded Jubilee for bringing together Muslims, Jews and Christians to work on debt, taxes and financial reform in order to end poverty. LeCompte said that not only would a court ruling against Argentina hurt the developing nation and force their hand with limited options, but he said it would hurt New York as the world capital of debt underwriting.
“There is very little international standard for bankruptcy of sovereign nations and debt repayment,” LeCompte said. “There are precedents that have been set in London, Paris and Frankfurt ruling against predatory hedge funds.” This could lead developing nations signing debt contracts to use nations that have clear mechanisms for default, avoiding New York, he said.
In detailed discussion with Cardinial Parolin, LeCompte said the two reviewed the ramifications of Argentina’s fight with hedge funds would set world wide precedent and could force the nation to put the needs of their citizens first. At issue are hedge funds that purchase distressed debt from bondholders in developing nations, often paying pennies on the dollar, then the “funds sue in full under U.S. law and they actually take the money that’s allocated to build infrastructure and help vulnerable populations to pay for hedge fund profits.”
Contracts between Argentina's government and lender
In order to borrow money, contracts between governments and lenders are signed under New York law, LeCompte said, providing background of the issue. When a country is in financial distress, unable to pay back bond holders, those holders of debt will sometimes sell their claims on the debt to hedge funds for pennies on the dollar. “These vulture funds who swoop in, buy the debt, then they wait until the country has settled with most of its creditors and then target those assets that are supposed to be used for poor people and, using the New York court system, they sue to change the settlement agreement.”
These actions have consequences, LeCompte noted, with two precedents in history to consider, both positive and negative. After World War I the allies saddled Germany with such significant debt in the Treaty of Versailles it sent Germany into an economic tailspin, leading to the election of Adolph Hitler. LeCompte notes it is the London Accord which should be considered as the appropriate template. The agreement after World War II assisted Germany in developing their economy and did not impose crippling austerity on the population, LeCompte said, leading to the development of Germany as an economic powerhouse.
Argentina defaulted on its government bonds
As previously reported in ValueWalk, Argentina defaulted on its government bonds in 2001 amid difficult economic circumstance. Elliott purchased Argentina debt from bondholders, many of whom settled with Argentina for thirty cents on the dollar. Elliott Management’s NML Capital hedge fund unit has been attempting to collect from Argentina through a number of methods, including court as well as repossessing various assets of the foreign nation. In 2012 Elliott was behind capturing and holding an Argentine naval vessel off the coast of Ghana and would have maintained control had a court not intervened.
More recently the case was taken to the US Supreme Court, with Argentina seeking to overturn a lower court decision requiring Argentina to repay NML and other “holdout” bond holders. After hearing both sides on April 21, the US Supreme Court is considering the case.
This past June 3, ValueWalk reported on a confidential memo between the government of Argentina and their New York based lawyers that laid out various options if the court rules against them. One of these options being considered was said to be default on the debt and restructure outside US legal jurisdiction.
Days after the memo leaked, the New York Post reported that a judge had said they would not consider the memo.