The United Nations General Assembly could deal a significant blow to those hedge funds who use what Argentina and its supporters called “vulture” tactics.
UN creating a global bankruptcy mechanism?
In a vote at 3pm (EST) the UN could pass a resolution creating a global bankruptcy mechanism. Such a process could empower poor countries against predatory funds and limit future defaults.
“There’s global consensus to stop predatory behavior,” noted Eric LeCompte, Jubilee USA’s Executive Director who signed a letter to UN Ambassador Samantha Power urging support for the measure. “This resolution is an opportunity to turn consensus into action. A process could begin that allows us to challenge inequality and have real stability.” LeCompte serves on UN expert groups developing a sovereign debt resolution process and has met with world leaders, including Pope Francis, on the issue.
UN passing a resolution due to Argentina’s legal dispute with hedge funds
The resolution comes in the wake of Argentina’s legal dispute with predatory hedge funds and hold-out investors. During the course of that dispute, the International Monetary Fund, US Government, United Nations and World Bank all expressed concern that a legal victory for predatory funds would make debt restructurings more difficult, Jubliee USA noted. The UN action also follows a proposal from the International Capital Market Association to alter debt rules to curb predatory behavior.
The primary issue is to either start a formal international treaty process or official inter-governmental negotiations to establish a binding sovereign bankruptcy process during the UN session. A key legal issue is the ability of holdouts to purchase government debt on the secondary market after an agreement has been reached, and then dispute the terms of that agreement.
LeCompte expects the measure to pass with a simple majority along the lines of the developing world vs the developed world. However, unless the measure passes with a super majority or by consensus, it won’t have as much weight, he said.
The million dollar question
How will the US vote? “That’s the million dollar question,” LeCompte said in an interview. “As you know the US convened the ICMA process and has sided with Argentina, but they have a sense that both the discussion and the outcome should take place at the IMF.”
LeCompte confided that he thinks the probability is the US is thinking about a no vote, but he is hoping that they would at least abstain if they can’t vote yes.
A Guardian article published last week noted the UK government could vote against the proposal. In the past the United States government has expressed support for Argentina, but that support was viewed as tepid.
In part the UN resolution reads:
Recognizing the need to create a legal framework that facilitates the orderly restructuring of sovereign debts, allows the re-establishment of viability and growth without creating incentives that inadvertently increase the risk of non-compliance and acts as a deterrent to disruptive litigation that creditors could engage in during negotiations to restructure sovereign debts.