Debt ruling: economists ask US Congress to legislate
05/08/2014
- Opinión
More than a hundred economists from different countries have sent a letter to the members of the US Congress, requesting that they legislate to mitigate the ruling by Judge Thomas Griesa of the District Court of New York, which obliges Argentina to immediately pay out 100% of the debt to those creditors who refused to renegotiate their bonds; and while this payment is not made, it prohibits the country from making regular payments to the 92.4% of creditors that did renegotiate. In the letter, economists warn that the ruling could harm, not only Argentina, but the United States and its own financial institutions, as well as the international financial system.
To comply with the ruling, Argentina would have to pay out around 1.5 billion dollars, equivalent to 100% of the nominal value plus unpaid interest, to the so-called "vulture funds", which means these creditors would make windfall gains of over 1000% on their initial investment, since they bought the bonds on the secondary market for 20% or less of their face value. But the greater risk is that it could trigger a flood of lawsuits from bondholders of the restructured debt, due to a clause in the contract that allows them to make a claim if the country improves its offer to other creditors before 2015. Therefore, the government of Cristina Fernandez is seeking to postpone the payment to the vulture funds until next year, even if this will mean an increase in the final payment.
Meanwhile, the Argentine Government has reported that, this Wednesday August 6, they will urge the Bank of New York Mellon (BoNY) and Citibank to distribute the funds corresponding to the creditors of the restructured debt, which the government deposited on time for this purpose, but that are blocked by order of the New York judge. The Argentine cabinet chief, Jorge Capitanich, said that there is a contract that must be implemented and that Argentina has strictly complied with all the contract clauses.
Capitanich also reported that the government is considering appealing to the International Court in The Hague to release payments to holders of the restructured bonds. Meanwhile, the international credit rating agencies have declared the country in cessation of payments, which the Argentine government denies, arguing that it has fulfilled its financial obligations and that the freezing of funds to creditors of the restructured debt is the responsibility of US Justice.
The full text of the letter from the economists follows.
- o -
July 31, 2014
Dear Member of Congress,
We note with concern the recent developments in the court case of Argentina vs. NML Capital, etc. The District Court’s decision – and especially its injunction that is currently blocking Argentina from making payments to 93 percent of its foreign bondholders -- could cause unnecessary economic damage to the international financial system, as well as to U.S. economic interests, Argentina, and fifteen years of U.S. bi-partisan debt relief policy. We urge you to act now and seek legislative solutions to mitigate the harmful impact of the court’s ruling.
For various reasons, governments sometimes find themselves in situations where they cannot continue to service their sovereign debt. This was Argentina’s situation at the end of 2001. After years of negotiations, Argentina reached a restructuring agreement with 93 percent of the defaulted bondholders, and has made all agreed-upon payments to them.
The court’s decision that Argentina cannot continue to pay the holders of the restructured bonds unless it first pays the plaintiffs mean that any “holdout” creditor can torpedo an existing agreement with those bondholders who chose to negotiate. While individuals and corporations are granted the protection of bankruptcy law, no such mechanism exists for sovereign governments. As such, the court’s ruling would severely hamper the ability of creditors and debtors to conclude an orderly restructuring should a sovereign debt crisis occur. This could have a significant negative impact on the functioning of international financial markets, as the International Monetary Fund has repeatedly warned.
Those who invested in Argentine bonds were compensated with high interest rates, to mitigate the risk of default. There are inherent risks when investing in sovereign bonds, but the court’s ruling creates a moral hazard, by allowing investors to obtain full repayment, no matter how risky the initial investment.
The plaintiffs in the case purchased Argentine bonds on the secondary market after default, often for less than 20 cents on the dollar. While these actors could have accepted the restructuring and still made a very large profit, they instead have fought a decade-long legal battle, seeking exorbitant profits in excess of 1,000 percent and creating financial uncertainty along the way.
The recent developments will also directly impact the United States and its status as a financial center of the world economy. While much of the developing world’s debt is issued under the jurisdiction of New York law and utilizing New York-based financial institutions, the court’s ruling will make it more likely for sovereign governments to seek alternate locations to issue debt. Britain and Belgium, for example, have already passed legislation aimed at preventing this type of behavior from “holdout” creditors.
In addition, the court has put restrictions on New York banks, preventing them from distributing regularly scheduled interest payments to holders of the restructured bonds. Already, banks have faced lawsuits from investors, creating greater uncertainty for U.S.-based financial institutions.
Argentina has expressed a willingness to negotiate, and has recently reached agreements with the Paris Club as well as claims by international investors.
We hope that you will look for legislative solutions to prevent this court decision, or similar rulings, from causing unnecessary harm.
We note with concern the recent developments in the court case of Argentina vs. NML Capital, etc. The District Court’s decision – and especially its injunction that is currently blocking Argentina from making payments to 93 percent of its foreign bondholders -- could cause unnecessary economic damage to the international financial system, as well as to U.S. economic interests, Argentina, and fifteen years of U.S. bi-partisan debt relief policy. We urge you to act now and seek legislative solutions to mitigate the harmful impact of the court’s ruling.
For various reasons, governments sometimes find themselves in situations where they cannot continue to service their sovereign debt. This was Argentina’s situation at the end of 2001. After years of negotiations, Argentina reached a restructuring agreement with 93 percent of the defaulted bondholders, and has made all agreed-upon payments to them.
The court’s decision that Argentina cannot continue to pay the holders of the restructured bonds unless it first pays the plaintiffs mean that any “holdout” creditor can torpedo an existing agreement with those bondholders who chose to negotiate. While individuals and corporations are granted the protection of bankruptcy law, no such mechanism exists for sovereign governments. As such, the court’s ruling would severely hamper the ability of creditors and debtors to conclude an orderly restructuring should a sovereign debt crisis occur. This could have a significant negative impact on the functioning of international financial markets, as the International Monetary Fund has repeatedly warned.
Those who invested in Argentine bonds were compensated with high interest rates, to mitigate the risk of default. There are inherent risks when investing in sovereign bonds, but the court’s ruling creates a moral hazard, by allowing investors to obtain full repayment, no matter how risky the initial investment.
The plaintiffs in the case purchased Argentine bonds on the secondary market after default, often for less than 20 cents on the dollar. While these actors could have accepted the restructuring and still made a very large profit, they instead have fought a decade-long legal battle, seeking exorbitant profits in excess of 1,000 percent and creating financial uncertainty along the way.
The recent developments will also directly impact the United States and its status as a financial center of the world economy. While much of the developing world’s debt is issued under the jurisdiction of New York law and utilizing New York-based financial institutions, the court’s ruling will make it more likely for sovereign governments to seek alternate locations to issue debt. Britain and Belgium, for example, have already passed legislation aimed at preventing this type of behavior from “holdout” creditors.
In addition, the court has put restrictions on New York banks, preventing them from distributing regularly scheduled interest payments to holders of the restructured bonds. Already, banks have faced lawsuits from investors, creating greater uncertainty for U.S.-based financial institutions.
Argentina has expressed a willingness to negotiate, and has recently reached agreements with the Paris Club as well as claims by international investors.
We hope that you will look for legislative solutions to prevent this court decision, or similar rulings, from causing unnecessary harm.
Sincerely,
Robert Solow, Nobel laureate in Economics, 1987, MIT Professor of Economics, emeritus
Dani Rodrik, Albert O. Hirschman Professor in the school of Social Sciences at the Institute for Advanced Study in Princeton, New Jersey
Branko Milanovic, Luxembourg Income Study Center, the Graduate Center CUNY, former Lead Economist in the World Bank's research department
Andrew Allimadi, United Nations, Department of Economics and Social Affairs
Gar Alperovitz, University of Maryland
Eileen Applebaum, Center for Economic and Policy Research
Mariano Arana, Universidad Nacional de General Sarmiento
Leonardo Asta, Università degli Studi di Padova
Venkatesh Athreya, Bharathidasan University
Dean Baker, Center for Economic and Policy Research
William Barclay, Chicago Political Economy Group
Jairo Alonso Bautista, Universidad Santo Tomas
Gunseli Berik, University of Utah
Alexandra Bernasek, Colorado State University
Cyrus Bina, University of Minnesota (Morris Campus)
Josh Bivens, Economic Policy Institute
Peter Bohmer, The Evergreen State College
Korkut Boratav, Turkish Social Science Association
Elissa Braunstein, Colorado State University
Jorge BUZAGLO, University of Goteburg
Jim Campen, Americans for Fairness in Lending
Carlos A. Carrasco, University of the Basque Country
Sergio Cesaratto, University of Siena
Kyung-Sup Chang, Seoul National University
Kimberly Christensen, SUNY/Purchase College
Michael Cohen, New School for Social Research
Brendan Cushing - Daniels, Gettysburg College
Omar Dahi, Hampshire College
Carlo D'Ippoliti, University of Rome
Peter Dorman, Evergreen State College
Amitava Dutt, University of Notre Dame
Dirk Ehnts, University of Oldenburg
Gerald Epstein, University of Massachusetts, Amherst
Susan Ettner, University of California, Los Angeles
Jeffrey Faux, Economic Policy Institute
Massoud Fazeli, Hofstra University
Andrew Fischer, International Institute of Social Studies
Jeffrey Frankel, Harvard Kennedy School
Roberto Frenkel, CEDES Argentina
Kevin Gallagher, Boston University
Chris Georges, Hamilton College
Reza Ghorashi, Richard Stockton College
Jayati Ghosh, JNU New Delhi and Ideas
David Gold, New School University
Neva Goodwin, Tufts University
María Florencia Granato, Corporación Andina de Fomento
Martin Hart-Landsberg, Lewis and Clark
Conrad Herold, Hofstra University
P. Sai-wing Ho, University of Denver
Andreas Hoth
Gustavo Indart, University of Toronto
Joseph Joyce, Wellesley College
J K Kapler, University of Massachusetts Boston
Martin Khor, South Centre
Gabriele Koehler
Andrew Kohen, James Madison University
Nikoi Kote-Nikoi
Pramila Krishnan, University of Cambridge
David Legge, La Trobe University
Henry Levin, Columbia University
Mah hui Lim, South Centre
Rodrigo Lopez-Pablos
Robert Lynch, Washington College
Arthur MacEwan, University of Massachusetts Boston
Jeff Madrick, The Century Foundation
Cheryl Maranto, Marquette University
Ann Markusen, University of Minnesota
Julie Mattahei, Wellesley College
Kathleen McAfee, San Fransisco State University
Elaine McCrate, University of Vermont
Hannah McKinney, Kalamazoo College
Thomas Michl, Colgate University
William Milberg, New School for Social Research
Larry Mishel, Economic Policy Institute
Mritiunjoy Mohanty, Indian Institute of Management
Nicolás Moncaut
Tracy Mott, University of Denver
Michael Murray, Bates College
Luiz M Niemeyer, Pontifical Catholic University of São Paulo
Machiko Nissanke, SOAS University of London
Manfred Nitsch, Free University of Berlin
Jose Antonio Ocampo, Columbia University
Carlos Oya, University of London
Marco Palacios, El Colegio de México
Antonella Palumbo, Roma Tre University
Dimitri B. Papadimitriou, Levy Economics Institute of Bard College
Mark Paul, University of Massachusetts Amherst
Lorenzo Pellegrini, International Institute of Social Studies
Lucia Pittaluga Fonseca, Universidad de la República (Uruguay)
Renee Prendergast, Queen's University- Belfast
Mark Price, Keystone Research Center
Alicia Puyana, Facultad Latinoamercana de Ciencias Sociales
Charles Revier, Colorado State University
Joseph Ricciardi, Babson College
Malcolm Robinson, Thomas More College
Leopoldo Rodriguez, Portland State University
John Roemer, Yale University
David Rosnick, Center for Economic and Policy Research
Antonio Savoia, University of Manchester
John Schmitt, Center for Economic and Policy Research
Stepphanie Seguino, University of Vermont
Anwar Shaikh, New School for Social Research
Kannan Srinivasan
James Stanfield
Eduardo Strachman
William K. Tabb, Queens College
Ezequiel Tacsir, United Nations University
Philipp Temme, Free University of Berlin
Frank Thompson, University of Michigan
Chris Tilly, University of California, Los Angeles
Mario Tonveronachi, University of Siena
Lawal Tosin
Chiwuike Uba, African Heritage Institution
Bunu Goso Umara
Leanne Ussher, Queens College, CUNY
Rolph van der Hoeven, International Institute of Social Studies
Irene van Staveren, International Institute of Social Studies
Matías Vernengo, Bucknell University
David Weiman, Barnard College
Mark Weisbrot, Center for Economic and Policy Research
Thomas Weisskopf, University of Michigan
John Willoughby, American University
Yavuz Yasar, University of Denver
A. Erinc Yeldan, Yasar University
Erhan Yildirim, Cukurova University
Ben Zipperer, University of Massachusetts, Amherst
https://www.alainet.org/es/node/102219
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