Parasites and vultures : why vulture funds are more aggressive in demanding sovereign debt repayments than the banking sector

Parasites and Vultures

Why vulture funds are more aggressive in demanding

sovereign debt repayments than the banking sector

28 January 2019

Alexander van Eijk 11176911 Bachelorscriptie Politicologie Politics of Development University of Amsterdam Supervisor: Dr. Sebastian Krapohl Second Reader: Dr. Philip Schleifer 7,893 Words

INTRODUCTION 3 PART I: THEORY 5 SECTION I: FINANCIALISATION 5

FINANCE AND THE STATE 6

SECTION II: PARASITES AND VULTURES 7

BANKS 7

VULTURE FUNDS 8

SECTION III: METHODOLOGY 9

PART II: THE CASE & ANALYSIS 12

SECTION I: A BRIEF ECONOMIC HISTORY OF ARGENTINA 12

OPENING UP (1973-1983) 12

INHERITING AN ENDLESS DEBT (1983-1989) 13

SURGERY WITHOUT ANAESTHESIA (1989-2001) 13

ENTER THE VULTURES (2001-2016) 15

SECTION II: ANALYSIS 16

PRELIMINARY REMARKS ON FINANCIALISATION 16

DIFFERENTIATION BETWEEN BANKS AND VULTURE FUNDS 17

CONCLUSION 20 WORKS CITED 22

Introduction

After Argentina defaulted on its sovereign debt in 2001, the Southern District Court of New York became the stage for perhaps the most dramatic and confusing financial feud to date. Paul Singer, a billionaire hedge fund capitalist, took the Republic of Argentina to trial for full repayment of a debt he had not issued. Instead, Singer’s NML Capital had bought Argentina’s bonds second-hand for $177 million (Guzman & Stiglitz 2016). By 2016, the hedge fund secured a payment of $2.28 billion, thus netting a 1,180% return (ibid.). Investors like Paul Singer call themselves “activist investors,” because they fight aggressively to hold debtors accountable (Fortado 2018). A less favourable and more commonly used term for these firms, however, is “vulture fund” (Cox 2018). The image of the scavenging bird is attached to these funds in everyday language because of their perceived aggressive preying on the weak, in this case heavily indebted poor countries.

Evidently, something has happened in the financial market that allows these relatively small investors to demand astonishing returns from sovereign states. To understand this we will draw upon Marxist theories of financialisation. Canonical works, like those of Braudel (1984) and Arrighi (2010), have argued that economies become increasingly involved in financial rather than productive endeavours as the result of an overaccumulation crisis. In other words, private capital starts trading in financial services or credit as productive growth inevitably stagnates. More recently, the works of Vogl (2017) and Streeck (2018) have shown how the state becomes increasingly subordinated to financial interests because of this process, as the banking sector balloons past its necessary proportions.

Marxist theory has thus built a framework to understand how finance has developed into a commanding power over the state, which allows us to understand how it became possible for private capital to demand extreme rents from supposed sovereigns. What this academic tradition cannot explain, however, is why only a small group of these new vulture funds seem to be using these opportunities for profiting from the state to its fullest degree. Given that financialisation has opened the door for these predatory practices with massive returns, we would perhaps have expected that all of private capital would pursue these strategies. In Paul Singer’s litigation against the Argentine state, however, it was only a relatively small group of private firms holding 7% of the state’s bonds that sued for full repayment while the vast majority accepted negotiations (Guzman & Stiglitz 2016). Therefore, this research will endeavour to understand why these new funds form such a break from the traditional repayment approaches.

Research Question

Why do vulture funds employ more aggressive strategies to demand sovereign debt repayments than the banking sector? Understanding this question is increasingly becoming an urgent priority. Private capital strong-arming sovereign states into massive repayments is more than just a peculiar appearance, it is absolutely life threatening for the global poor of our already grievously unequal world. When a developing nation is forced to hand over hundreds of millions to a billionaire in New York, those are all dollars that never get spent on building schools, expanding access to clean water or funding health clinics. Furthermore, these vulture funds cripple debt relief efforts that developing nations so desperately need. This particular form of rent seeking on the back of developing economies has become a significantly widespread problem. The African Development Bank notes that over 20 developing nations are currently facing lawsuits from vulture funds to demand payment (n.d.). Indeed, this particular financial game has become a billion dollar industry (Leipziger 2007).

Considering the research question, the scope of this paper will be limited to ensure the analysis is always related to our research purpose. First, this paper will only analyse the positions and behaviour of private creditors. Lenders like the International Monetary Fund (IMF) or the Paris Club of creditor states will therefore be excluded from consideration, except in how they relate directly to private creditors. This is because the purpose of this research is to understand a differentiation between private capitals, not between public and private capital. Besides, there is already a long and rich history of academic investigation regarding IMF lending behaviour (see Klein 2008, Harvey 2007, Graeber 2014). Second, the scope of this research will be limited in time from roughly the 1970s to the present day. This is to ensure that any conclusions made will be relevant for the current wave of financialisation and are not complicated by previous stages in the development of global capitalism. More will be said on this staged development of financialisation in the theoretical discussion.

Part I of this paper will consist of the theoretical discussions necessary for a proper understanding of the situation. In this part, Section I will be concerned with financialisation in general and how this process has captured the state for financial interests. Section II will conduct a more focused theoretical discussion of our two types of private creditor, the banking sector and the new vulture funds. Section III develops the methodological approach needed for this research. Part II will consist of a case description of Argentina’s economic history of sovereign debt and its relation to foreign creditors. This will be followed by an analysis of that case, guided by our theoretical discussions, that will hopefully shed light on the differentiation

Part I

Theory

Section I: Financialisation

Simply put, financialisation is the growing presence of financial capital alongside or in control of industrial capital (Lapavitsas 2013: 793). In effect, capitalists who lend their wealth so that others can produce increasingly control the economy. This implies an asymmetry between the spheres of circulation and production, whereby circulation grows greater than production (ibid.).

An analysis of world history will reveal that financialisation is not necessarily a new phenomenon. Fernand Braudel recounts in Civilization and Capitalism how the Dutch Republic of the 1600’s was essentially kept in global hegemony by being the “credit suppliers for the whole of Europe” (1984: 241). In order to set off on any sort of trade journey, merchants of the time were practically forced to lend from Dutch credit. Even though their productive capacities were minimal relative to the global market, the Dutch controlled all global trade. As such, Amsterdam became a financialised hub for the global economy. Braudel (1984) reports similar processes for the histories of Genoa, Venice and Portugal. As such, Braudel theorised that the longue durée of capitalist history is marked by waves of financialisation whereby hegemonic powers become the financial centres of their era (idem: 621). Giovanni Arrighi has built upon this insight by adding a more cyclical nature to it. Arrighi proposed that when productive hegemony moves from one power to the next, the waning hegemon can retain their hold on financial dominance as a final resort to remain in global power (2010). Essentially, this means that financialisation is the result of an overaccumulation crisis. When the productive or trade base of an economy reaches its peak and cannot continue accumulating, merchants and capitalists enter the financial industry to resolve the crisis and resume accumulation.

The current wave of financialisation also started with an overaccumulation crisis and very much follows the theoretical trajectory outlined above. By the 1970’s the U.S. was lagging behind in productivity on nearly all products that it dominated immediately after the Second World War (Olson 1988: 43). The post-war boom of mass production and global trade in

America’s favour had slowed down to a halt. The Fordist accumulation regime, based on mechanized mass production, could no longer generate the growth required and new arenas of accumulation were needed to keep the economy going forward (Lapavitsas 2013: 793-794). As we might now expect, a booming financial sector quickly developed in the U.S. and by the 1990’s financial services would constitute a larger share of national GDP than manufacturing (Davis & Kim 2015).

A particular feature of this wave of financialisation has been securitization. Financial instruments are increasingly pooled together and repackaged as a new financial asset to be traded and to accrue further interest (Jobst 2008). In essence, this meant turning ordinary financial assets like debt or equity into tradable assets. When a debt is turned into a bond, the original lender can sell the bond to another investor who from then on is entitled to the repayments and interest resulting from that debt. With the benefit of hindsight, we know that this method can actually be incredibly dangerous. Pooling risky mortgages together and trading these new securities, for example, lead to the sub-prime mortgage crisis when enough of the debtors defaulted on their mortgages and sparked the Great Recession of 2008 (Fiorillo 2018).

Finance and the State

Understanding how state power relates to financialised capitalism requires us to dig deeper into the relationship between state and finance. In The Ascendancy of Finance, Joseph Vogl argues that the spheres of finance and state power are actually interdependent (2017). Rejecting the liberal notion of a separation between market and state, Vogl proposes that the relation can best be understood as a “zone of indeterminacy” (Streeck 2018: 144). While finance and the state do not always have the same interests, both rely on mutual support for continued existence. The state needs credit from finance to fund any of its projects and money is nothing without the state’s seal of approval. This latter point derives from the fact that money, and therefore all financial activities, cannot function without general trust in its effectiveness or stability (ibid.). By lending its stamp to money and safeguarding financial institutions, the state builds that crucial trust in money.

The embodiment of this sphere is the central bank. This crucial institution of economic policy stands somewhere between the state and finance as it delicately walks the tightrope of the public-private power vector. As such, the central bank is a fourth power of government, after the traditional legislative, executive and judiciary branches (idem: 146). Its varied functions, from sovereign debt to controlling private banks, lead to the central bank serving as both a private interest in state decision-making and a public interest in the decision-making of finance. Therefore, this fourth power actually consolidates finance into the state, granting it a permanent seat in the government.

Section II: Parasites and Vultures

Financialisation has thus led to a situation wherein the state is subordinated to the interests of financial capital. The purpose of this research is, of course, to understand why banks and vulture funds make different use of this situation. First, therefore, we will need to conceptualise the position and behaviour of the banking sector in this financialised capitalism. Following that, we will need to theorise what differentiates the vulture funds from the banks and could thus potentially explain their more aggressive use of the opportunities granted by financialisation.

Banks

In his analysis of the banking system, Marx observed that banks actually play a necessary role in production but quickly balloon into their very own economic sector increasingly unrelated to production (Harvey 2013: 231). Banks use their own accumulated capital and the deposits of its customers to invest in productive enterprises. As such, the financial sector facilitates the flow of capital and the continual expansion of production (ibid.). Banking capital becomes, however, “fictitious capital” when it is not invested in real production but in circulation (idem: 240). This is to say that a bank no longer invests in the creation of further surplus-value but still continues receiving interest on their investment. This happens when revenue streams themselves become capitalised. Put simply, instead of loaning money to a factory, the bank turns that financial relationship itself into capital that can be sold off again. Another investor or bank then pays the issuing bank for its financial claim to the originally extended credit and interest payments. Geoffrey Ingham (2017) has argued that when capitalisation of revenue streams becomes prevalent the banking system outgrows its necessary proportions as a facilitator of production. Instead, finance takes on its own logic and assumes an excessive, parasitic role. This was made possible by what Ingham calls “derivatives of derivatives” (idem: 135). These are financial assets sold on a secondary market where they can be endlessly repackaged and resold, thus constantly accumulating more fictitious capital without ever increasing production. Ingham notes, for example, how the US securities industry grew four times faster than corporate profits between 1970 and 2000 (idem: 136). The unimaginably expansive market for this fictitious capital is a particular characteristic of the current wave of financialisation, as mentioned earlier. Based on this understanding of the banking sector we can produce some theoretical expectations for banking behaviour. Evidently, the financialised and securitised banking sector is founded on increasingly complex relationships to actual productive revenue streams. Because of this, banks need to constantly and consistently be extending credit to maintain the stability of the entire system. So, when it comes to demanding repayment of sovereign debts we should expect banks to employ lending and repayment strategies that secure long-term investment

opportunities with the debtor state. Just like the parasite, the banking sector requires its debtor to continue living for it continue functioning.

Vulture Funds

Perhaps the most interesting actor on the transformed stage of global capitalism is the vulture fund. Essentially, they generate profits by purchasing distressed debts from creditors and aggressively pursuing its repayment. Distressed debt is an obligation that is likely to be defaulted on by the debtor soon or has already been defaulted on (Baldridge 2018). As such, it trades for much lower than its original value, as the original creditor simply wants to get rid of the risk. Once the distressed debt has been bought, the new creditor generally aims at quickly demanding repayment of the original debt, always a multitude larger than what the vulture fund paid to take it over. This new type of rent-seeking activity started in domestic markets, particularly in the mortgage market (Potts 2017: 455). These funds buy up mortgages that seem close to default and chase after repayment for short-term profits. Businesses fall prey to the vulture funds too as their debts become distressed and are sold off to these funds.

Devastating as these processes can be for the targeted households or employees of distressed businesses, the vulture funds have recently moved on to a higher target. In the same ways as they chase after consumer or corporate debt, vulture funds also target sovereign debt on a secondary market. For the financialisation of sovereign debt, the defining moment was the Brady Plan in the late 1980’s (idem: 460). This plan, proposed by U.S. Treasury Secretary Brady, allowed worried lenders that held distressed sovereign debt to turn these debts into bonds backed by the U.S. Treasury so that they could be sold off again relatively risk-free. Essentially, the Brady Plan sold the fates of distressed nations off to whoever would be willing to carry out the burden of debt collection. As a result, an entirely new avenue opened up for vulture funds to accumulate their wealth on the sovereign debt market.

Shaina Potts describes two methods for vulture funds to demand payment on sovereign debt (2017). First, there is the restructuring strategy. This entails purchasing distressed sovereign bonds and waiting until the state defaults on its obligations, at which point the debtor state will go into negotiations with its creditors to restructure the debt. The debt is usually discounted slightly and paid back under the guidance or support of international financial institutions like the IMF. The discounted repayments are still, nonetheless, very profitable for vulture funds. Potts reports that these practices have average returns of 114%, far higher than any traditional investment (idem: 464). Furthermore, it is especially troubling to consider how low the risk is for such a massive return as it is extremely rare for a restructuring deal to not be reached (ibid.). Besides, the vulture funds can always trade their bonds for a profit to other funds on the secondary market.

The second strategy for vulture funds, litigation, is far more aggressive. If the vulture fund is not satisfied with waiting for restructuring deals or accepting discounted repayments, most sovereign bond agreements contain “Governing Law” clauses that decide which jurisdiction rules over the contract. Unsurprisingly, the jurisdiction of choice is usually the capital-sympathetic court in New York. (idem: 465). The litigation strategy, then, is to sue for full repayment of the debt once the debtor state has defaulted. This strategy, when successful, leads to returns between 300 and 2,000% (ibid.).

For the vulture funds we can also compose some theoretical expectations regarding their strategies to demand sovereign debt repayment. As private capitals, their main motivation is of course to generate profits. However, unlike the more traditional banks, vulture funds have no long histories of investment in the same market so they are not as dependent on the stability of the relevant financial system. Vulture funds simply enter and exit various markets whenever they expect a profitable operation. As such, they do not have the same long-term interests that banks do and therefore will employ far more aggressive strategies, like the litigation strategy outlined by Potts (2017).

Section III: Methodology

The theoretical discussion above has produced a potential explanation for the varying behaviours of sovereign debt creditors. In order to test whether the vulture funds truly present a new, entirely different type of private creditor we will, of course, need to compare them to the more traditional bank creditors. The expectation is that vulture funds will be more aggressive than the banks in their demands and strategies for repayments because these funds do not have the same long-term interests that banks do. Hypothesis

Banks have long-term interests and therefore are less aggressive in their pursuit of sovereign debt repayments than vulture funds, which have only short-term interests.

In order to test the strength of this explanation, a case study will be conducted surrounding Argentina’s history with sovereign debt and its creditors. This case provides an appropriate base to test our particular claims for three reasons. First, the relevant types of private creditors both have significant presences in the Argentine sovereign debt market as will be discussed. Second, Argentina’s latest default was the largest ever recorded at its time and as such attracted attention from many analysts and scholars. There is, therefore, sufficient information, analysis and proposed explanations to be found regarding the country’s history with sovereign debt. Finally, as Naomi Klein (2008: 156) argues, Argentina is a particularly insightful case for what

happens when a state becomes heavily indebted and reliant on foreign credit. This is because, while the particulars of the Argentine case are extremes, the same processes took place across Latin America at the time and to a lesser extent across all indebted states.

Furthermore a case study is the appropriate method to test this hypothesis because of the purpose of this research. We are trying here to understand a new phenomenon that is not yet fully incorporated into existing theory. While there is certainly bountiful theory regarding financial capital at large, much of which has been consulted in the theoretical discussion above, the specific category of the vulture fund has yet to find its proper place within this general theory. As such, what is needed is a methodology with high internal validity and that is therefore able to properly map out observable implications and draw causal conclusions. The case study allows us to gain a proper understanding of the causal process present and enhance the theory at hand.

Finally, testing our hypothesis requires that we formulate the variables in such a way that they are empirically observable and thus testable. For our hypothesis the independent variable is the type of private creditor, or whether they are a bank or a vulture fund. The latter can be recognised by the fact the fund trades exclusively, or at least primarily, in distressed assets. A bank, on the other hand, offers general financial services and trades in more than one type of financial asset.

The mediating variable between the independent and dependent variable is the temporal nature of the creditor’s interest. In other words, the different types of creditor have objectives over different timeframes, which determine the aggression of their strategies. As mentioned, our hypothesis posits that vulture funds are interested in short-term returns while banks have longer-term interests to consider, because of which the former is a far more aggressive creditor. To measure the timeframes within which the creditors’ interests lie we can rely on two indicators. First, we can look at the particular maturities of the different bonds held. This seems like a poor indicator, however, as vulture funds buy their bonds on the secondary market once the original debts have already been issued. As such, the maturities on vulture fund bonds will by definition be shorter because the clock has already started ticking on these bonds, so to speak. A better approach would be to look at how long the particular type of creditor has spent in the Argentine sovereign debt market. If a creditor has spent a significant amount of time dealing in the Argentine market it can safely be assumed they have long-term interests in doing so and perhaps even plans for future investments, extending their timeframe even further. Admittedly, this is not a perfect indicator of the temporal nature of a creditor’s objectives. For one, the market for banks to deal in sovereign debt has been available far longer than it has for vulture funds. However, the Brady Plan that introduced vulture funds to this market dates back to 1989, which leaves these funds with 30 years to have built up their activity.

As such, the secondary market for sovereign debt has been open long enough for these funds to have developed long-term behaviour if that was their objective. Another potential problem with this indicator might be that a long history in the Argentine market does not necessarily imply any long-term objectives. It might be the case that a creditor has simply had a long list of consecutive short-term investments that did not develop into a full, long-term objective. This problem cannot be as easily refuted but it should not weaken the indicator beyond reasonable use in this case.

The last variable, the dependent variable, is the aggression with which creditors pursue repayment. This can be measured by looking at the strategies that the various creditors employ regarding their outstanding credit. The most aggressive strategy is to demand repayment through litigation. Less aggressive approaches include negotiation and restructuring deals. The least aggressive approach is to write-off portions of the sovereign debt or complete pardons.

Part II

The Case and Analysis

Section I: A Brief Economic History of Argentina

Opening Up (1973-1983) Argentina has a long and rich history but for our purposes the story starts in the final years of the Peronist governments. The last presidential terms of Juan Peron and his wife who succeeded him spanned from 1973 to 1976 and were marked by hostility towards foreign capital (García Heras 2018:). Non-compliance with the IMF’s conditions and interventionist policies had isolated Argentina from the global monetary system. At this time Argentina only had access to basic IMF programs designed to compensate the global drop in oil prices of 1973 and all foreign bank loans were purposefully short-term to avoid real commitments (ibid.). The military coup that ousted Peron and installed Jorge Videla would normalise relations between Argentina and foreign capital. The military government appointed Martínez de Hoz as their minister of economy, who was regarded as a “Chicago Boy” because of his affiliation to the neoliberal doctrine of Milton Friedman at the University of Chicago (García Heras 2018: 220). This meant de Hoz was a proponent of harsh austerity and liberalisation to bring Argentina back into the international monetary fold.

De Hoz’s implementation of neoliberal doctrine soon attracted foreign credit and allowed the Videla government to deepen Argentina’s indebtedness. Foreign credit was particularly used to fund military rearmament to fight a border dispute with Chile and of course the infamous Falklands War (idem: 228). Other frequent investments were infrastructure projects and unfortunately massive corruption (Toussaint 2018). To attract foreign credit, the dictatorship sent state banks all over the world to draw loans (ibid.).. An exemplary case is the Banco de la Provincia de Buenos Aires (BAPRO), a state-owned provincial bank, which opened branches in Miami, Los Angeles and New York and raised $1.7 billion (García Heras 2018: 229). In sum, the military government and their Chicago Boy had opened Argentina up to the international monetary market and all sorts of public institutions went on massive shopping sprees using foreign credit.

Inheriting an Endless Debt (1983-1989)

Once democratisation began in 1983, the new Argentine Republic inherited this deep indebtedness of all its public institutions. In Argentina’s first year of democratic control its central bank already had to pay $1.6 billion to foreign creditors in repayments of loans taken out by the military and provincial banks like BAPRO (García Heras 2018: 214). In sum, the military dictatorship and its various public institutions had amassed an external debt of over $40 billion (Boughton 2001: 462). The fresh democracy had thus taken power over a state that owed an unmanageable amount of debt to banks abroad.

In order to avoid the inevitable default on these debts, the new democratic Alfonsin government sent their first economic minister to the IMF. Bernardo Grinspun negotiated loans from the IMF to bridge their massive external debt issues but the austerity measures demanded by the Fund were simply too unpopular in the swell of democratic enthusiasm (Romero 2002: 257). By the end of the year Argentina could not meet the fiscal targets set by the IMF, which withdrew its loan instalments and foreign banks soon followed (Boughton 2001: 387). The banks had now formed an informal Advisory Committee, initially to negotiate the Mexican sovereign debt but they soon expanded to deal with looming defaults across Latin America (idem: 298). This Committee was effectively run by William Rhodes of Citibank and consisted of the various banks that held sovereign debt in the afflicted countries.

By 1985, Grinspun resigned as economic minister after failing to negotiate bridging loans while the situation worsened. He was replaced by Sourrouille who faced an external debt of $48 billion, amounting to 75 percent of Argentina’s GDP (idem: 468). To resolve this drastic situation Sourrouille implemented the Austral Plan, which introduced a freeze on prices, wages and money printing to tackle inflation. The Plan also implemented harsh spending cuts in order to reach the fiscal targets set by the IMF and attract new loans from foreign credit (Manzetti & Dell’Aquila 1988). The policies were not enough, however, to please foreign capital as the Fund and the Advisory Committee stalled negotiations (Boughton 2001: 464). This would remain until 1987, when the banks agreed to restructure $30 billion of the outstanding debt and provided new loans (idem: 469). The following year Argentina missed the scheduled payments and the credit program ended entirely. The Advisory Committee remained in negotiations, however, and even suggested new rounds of concerted lending to the IMF (idem: 470).

Surgery without Anaesthesia (1989-2001)

It would not be until 1989 that Argentina really could start to regain the trust of foreign capital with the election of Carlos Menem. The second President of Argentina implemented hardcore neoliberal reforms to the Argentine economy with what he termed “surgery without anaesthesia” (McCullough 1989). The main components of Menem’s surgery were two laws

passed by his government. First, the Law of Economic Emergency drastically reduced public spending (Romero 2002: 288). Second, the Law of State Reform comprised of a wholesale privatisation of public companies (ibid.). The banks that held Argentina’s sovereign debt largely accepted shares in the telecommunications company, the national airline and the oil company as partial payments of those debts (idem: 289). The trust of foreign capital was regained and credit was once again available to Argentina.

The years that followed were marked by praise for Menem’s policies and the perception of Argentina as the poster child of the Washington Consensus (Klein 2008: 165). Production picked up again and the impoverished population decreased by 10% by the end of the decade (UNDP 2009: 6-7). But the improvements were not built on real progress in the Argentine economy as real wages were still 25 percent lower than even during the military dictatorship and the initial decline in poverty was not maintained past 1992 (Loyd-Sherlock 1997: 49). Furthermore, fully opening up to the global market had made Argentina vulnerable to external shocks. The first of these was the global drop in agricultural prices (Economist 1999). Reliant on tax incomes from soybean and corn exports, this price shock drastically reduced the government’s ability to service its increasing debts. On top of that, the US dollar, to which the Argentine currency was now pegged, appreciated in value while neighbouring Brazil’s real devaluated (ibid.). As such, Argentina lost its third largest export market (ibid.). Once again, the Argentine economy was underperforming and the trajectory to another default on sovereign debt was set.

The third President of Argentina, Fernando de la Rúa, was elected in 1999 and very soon went to the IMF to ask for financial aid to avoid another default. To appeal to the IMF, de la Rúa implemented the Zero Deficit Law, which forced the government to reach a balanced budget using harsh austerity measures (Economist 2001). The IMF approved of these fiscal promises and announced a new loan (ibid.). This was enough to avoid sudden default but the conditionalities were tough and the macroeconomic situations that faced Argentina had yet to improve. The loans proved unsustainable as the economic situation in Argentina essentially collapsed once again.

December 2001 proved to be a chaotic month. The IMF cancelled a loan instalment of $1.24 billion because Argentina did not reach its Zero Deficit fiscal targets. Two days later, de la Rúa announced a partial default on sovereign debt. The situation in Argentina had worsened on all fronts. By 2001, 53% of the population lived below the poverty line and violent clashes between protestors and the state were increasingly common (UNDP 2009: 6, Goni 2001). Furthermore, the government had frozen bank deposits as citizens started a run on their savings, deepening the anger of protestors. By 19 December, the government declared a state of siege and the next day de la Rúa resigned. The situation had become so unmanageable that the

presidency exchanged hands four times in only two weeks. Most notably, Ramon Puerta was made acting president for the second time that fortnight but resigned before the day was even done (Urgente24 2017). Enter the Vultures (2001-2016) The whole ordeal would remain rough until 2005 when the first debt restructuring deals were reached. Argentina offered its creditors new bonds at discounted rates and longer terms. Most of the creditors accepted these restructured debts and in 2010 another round was held which restructured even more of Argentina’s debt. Though these new bonds were discounted and longer-term, they were still very profitable for the creditors (Toussaint 2018). A total of $190 billion was paid to various creditors and the restructured bonds had very favourable interest rates which were even indexed to Argentina’s GDP so that if the economy were to do well again, the creditors would receive yet more (ibid.). In 2005, President of Argentina Nestor Kirchner also negotiated the full repayment of IMF loans (Balch 2005). So, the vast majority of Argentina’s sovereign debt was either restructured or repaid. However, a small minority of the bondholders refused restructuring and became known as the “holdouts” (Bases, Lough & Marsh 2016).

The most prominent of the holdouts was NML Capital, a New York vulture fund run by Paul Singer. The fund had paid $177 million for Argentine bonds at a massively discounted rate and sued for full repayment plus interest at a total of $2.28 billion (Guzman & Stiglitz 2016). Thomas Griesa, the presiding federal judge, ruled in Singer’s favour and Argentina was ordered to repay the debts now owned by NML Capital and other holdouts in 2012 (Oakford 2014). Cristina Fernandez de Kirchner, President of Argentina, refused to abide by the ruling and claimed it would invalidate the already agreed-upon restructuring deals (Goñi 2016). If the holdouts received full repayment, the other creditors would most likely demand the same. Argentina simply could not commit to full repayment without jeopardizing the entire economy once more. Eventually, the U.S. Supreme Court refused Argentina’s appeal and permitted NML Capital to start seizing assets (Oakford 2014). And so a global hunt for Argentine state assets began that would eventually see innovative attempts like the temporary arrest of a naval vessel and Argentine pension funds (Fernholz 2014). Argentina continued its refusal to pay what it considered extortion and appealed all the asset seizures until the capital-friendly Mauricio Macri was elected president in 2015 and agreed to commit to repayments (Economist 2016).

Section II: Analysis

Preliminary Remarks on Financialisation

While it is not the direct research focus of this paper, it would be worthwhile to briefly analyse financialisation in Argentina. This is important because our theoretical expectations for the vulture funds and banks are strongly connected to the theory of financialisation. As such, an understanding of Argentine financialisation means we do not have to proceed on too many assumptions.

Initially, Argentina was far from financialised. Peronism’s hostility towards foreign financial capital and the IMF kept the state from being captured by financial interests. This was marked by a lack of significant state lending, evidenced by the fact that only two basic loans from the IMF were taken. These were simple oil facilities that the IMF extended to most nations affected by the drop in oil prices of 1973.

Financialisation only really started after the coup. As described, the military government sent its state banks all over the global financial market to attract foreign credit. This happened at a particularly crucial time in the worldwide monetary market because, as noted in the theoretical discussion on financialisation, the Fordist accumulation regime in the US had stagnated by this time in 1970’s. Argentina thus had no problem finding American capital that had just financialised and desperately needed new avenues to pour credit into. Foreign finances quickly entered the Argentine state in massive amounts and allowed public institutions like the BAPRO to become heavily indebted beyond its means.

The embrace of foreign credit fundamentally shifted the power dynamics within Argentina’s public decision-making. Here, Vogl’s zone of indeterminacy becomes incredibly useful for our analysis. The junta had followed a deliberate course of extreme indebtedness, bringing finance capital into the state such that, even as democracy was restored, the central bank’s first move was to bailout the dictatorship’s debts. The military and their Chicago Boy had opened the gates for financialisation and once the deep connection between finance and state was created it quickly consolidated.

Because of the new Republic’s subordination to foreign credit, nearly all of Argentina’s economic policy going forward seems to have revolved around appeasing financial capital. From the Austral Plan, to Menem’s surgery without anaesthesia, to the Zero Deficit Law, Argentina’s policymakers spent their entire careers chasing after measures to regain the trust of their lenders and attract new foreign credit. The only president who seemed to fight back was Cristina Fernandez de Kirchner with her refusal to pay the amounts demanded by Paul Singer’s victory in New York courts. This break from the monotony of financialised public policy proved to be only brief, however, as Macri and the repayments soon succeeded her. The outcome of all this is an

Argentine state strongly influenced by financial interests and starkly indebted to financial capital.

The Argentine case does not fully conform to the theoretical expectations of financialisation however. In Vogl’s framework the really principal actor of the zone of indeterminacy is the central bank, forming a fourth power after the traditional trias politica of legislative, executive and judicial branches. While Argentina’s central bank certainly played a large role in financialising the state, it seems that the traditional executive branch played the most important role. All the extensive plans implemented to appease foreign financial capital came from the various economic ministers or presidents. Even during the early years of financialisation, it was economic minister Martínez de Hoz who led the charge in attracting foreign capital and he was instructed to do so by the military government. So, while the outcome is essentially as Vogl proposed, the process that led to it differs slightly from his framework.

Differentiation between Banks and Vulture Funds

Regarding our central hypothesis though, the Argentine case seems to confirm our initial expectations. Again, the theory proposed here holds that these new vulture funds employ more aggressive tactics than banks because they have only short-term objectives to secure quick returns on singular investments, while banks have long-term investment and reputation concerns that keep them from overly aggressive strategies. This hypothesis contains two observable implications to be drawn from the described case.

First, we need to determine the temporal nature of the different creditors’ interests. A cursory glance at the case described above already reveals that banks were active far earlier and longer in the Argentine sovereign debt market. The banks had, for example, already struggled with Peron’s hostility to foreign capital and were deeply involved in the transformation under the military government, all the way through to the present day. It is worthwhile, nonetheless, to highlight a few exemplary cases. Citibank, for example, spearheaded the Advisory Committee of creditor banks dealing with Argentina and has been active in Argentina since 1914 (Citigroup n.d.). As such, it would be safe to conclude that this particular bank has a long history of operating with and within Argentina, revealing long-term objectives.

Citibank is of course not the only bank involved in this episode. Other exemplary cases are the banks Lloyds and Deutsche Bank, which have been operating in the Argentine market for 140 and 132 years, respectively (Mercopress 2004, Deutsche Bank n.d.). Even relatively new banks generally enter the market by acquiring older banks that do have history in Argentina. The South African Standard Bank, for example, entered the Argentine market by acquiring the local branches of ING and BankBoston, the latter of which had been there since 1917 (ICBC n.d.). In sum, it can be concluded that the foreign banks involved with Argentina’s sovereign debt

market have long histories in the market or have at least acquired divisions with long histories. This long-term involvement reveals that the banks do indeed have long-term objectives besides merely securing a profit on singular investments.

The vulture funds, on the other hand, have far shorter histories of involvement in the Argentine secondary market, which reveals their short-term objectives. Paul Singer started Elliot Management in 1977 and, as far as this research could find, its sub-division NML Capital had only dealt in Argentine bonds for one round of investment. This particular firm is actually quite exemplary of how these funds operate. Besides Argentina, Singer’s fund and sub-divisions have also operated to similar effect on the Congolese and Peruvian sovereign debt market (Kolhatkar 2017). In all these cases it appears that Elliot Management was only involved for one round of investment, leaving again once debt repayments had been won.

The other vulture funds involved in Argentina show the same trend. Aurelius Capital Management remained in the market only for that round of investment (Treanor 2013), as did Bracebridge Capital Management and Davidson Kempner Capital Management (Bases, Lough & Marsh 2016). It seems therefore, evident that vulture funds do indeed have only short-term interests in sovereign debt markets and pursue only quick repayments on singular investments.

Second, we need also to determine the aggression of the various strategies employed by the vulture funds and the banks. As expected, the banks appeared most willing to cooperate with Argentina. This is most evident when we look at the fact that the creditor banks organised themselves into an Advisory Committee specifically to negotiate with Argentina, showing a clear willingness to cooperate and reach a concerted solution. This explains the aforementioned proposal in 1987 by the banks to extend credit even after the IMF cancelled its plans and the deal in 1989, when many creditor banks also accepted trading their bonds in for shares in privatised state companies. The conclusion to be drawn here is not that the banks are charitable negotiators though, all the deals they closed with Argentina were still profitable for them. The 2005 and 2010 restructuring deals, for example, netted average returns of 90% (UNCTAD 2014). It does appear, however, that creditor banks are generally willing to cooperate and compromise on debt negotiations.

The banks did show some aggressive behaviour though. The creation of an Advisory Committee could perhaps actually be seen as an aggressive manoeuvre and a method of forming a united front against the debtor state. This interpretation definitely carries some plausibility but is diminished by the Committee’s frequent acceptance of restructuring deals and even its own proposals for further relief lending. Besides that, though, it is hard to conclude anything about the specifics of the negotiation tactics of the Advisory Committee as it remained an informal, ad hoc body. It is entirely possible that the negotiations were particularly hostile, thus diminishing our conclusion. The outcomes of the deals, however, are all we can judge on.

The vulture funds, on the other hand, showed a strategy that can clearly be recognised as aggressive. All the creditors who refused the 2005 and 2010 restructuring deals belonged to this new type of private creditor. These holdout funds chose litigation instead, the most aggressive strategy available. Admittedly, not all the hedge funds involved opted for this most aggressive strategy. Many of them also took part in the 2005 and 2010 deals, thus pursuing the restructuring strategy as described by Potts. Nonetheless, considering it was only vulture funds involved in litigation against the debtor state, it can be stated that these funds are generally more aggressive than banks.

Conclusion

As argued throughout this paper, the global capitalist economy has undergone a wave of financialisation since the 1970s. The Fordist overaccumulation crisis led to the expansion of a financial market for innovative and complex financial instruments beyond anything known so far. This securitisation allowed the sector to balloon past its necessary proportions for supporting production and gain an increasing representation in the state through the central bank and sovereign debt. The zone of indeterminacy, as Vogl proposed, that is created between state and finance thus serves to subordinate the state to financial interests as the state is forced to cater to the new power of financial capital.

In effect, this means that private financial capital is free not only to lend excessively to states but also to demand, with relative ease, harsh repayments beyond what the state can reasonably afford. As we have seen, however, it appears that only a small subsection of private capital is making full use of these new opportunities while traditional banking capital pursues far less aggressive measures to secure repayments. Therefore, the theory at hand needed enhancing in order to understand the differentiation between these types of private capital and why they pursue such varying tactics.

The hypothesis proposed in this paper was that banks have long-term interests in the sovereign debt market while these new vulture funds have only the short-term objective of securing quick returns on singular investments. An analysis of the case of Argentine sovereign debt and its various creditors has confirmed this hypothesis. The results show that vulture funds did indeed have only short-term interests while the banks appeared to be involved for the long run. These different objectives corresponded to different strategies, whereby the banks were far less aggressive than the vulture funds. Admittedly though, this was qualitative research focused on internal validity of the theory. It remains to be tested whether the conclusions apply as strongly outside of Argentina. Hopefully this research has thus contributed to our academic understanding of private capital in financialised capitalism and inspired more externally valid tests, perhaps through quantitative research or larger, comparative case studies.

Some peripheral conclusions can be drawn too that, while not within the scope of this research, could prove interesting avenues for further research. First, the creditor banks always followed the lending behaviour of the IMF. Even if banks were in favour of extending further credit, it would never go further than negotiations without the Fund’s approval. This perhaps

means that when the IMF abandons a state, all that remains in the market are the vulture funds. This is in line with a conclusion by Potts (2017) that these vulture funds are a disciplinary measure of the global monetary order when the IMF pulls out of a country. Are these funds thus an unwitting and unintended enforcer of the IMF’s global power? Second, our analysis revealed a differentiated trajectory towards financialisation from that proposed by Vogl (2017). In Argentina, the central bank was not the crucial driver of the process but the executive branch, particularly during the military dictatorship. This is more in line with Klein’s (2008) work on “shock therapy” and how the executive branch makes use of crises to push through neoliberal and pro-finance policies. In defence of Vogl, his theory is based mostly on the developed world. Is this conclusion therefore particular to the Argentine or Latin American situation, which Klein studied most, or is the executive branch the real driver of financialisation globally?

Throughout this paper, attention has been paid towards retaining an academic and objective approach to our research topic but a few normative points do need to be made. The conclusion that banks are less aggressive than vulture funds certainly should not be interpreted as praise for the banking sector. As the theory on financialisation has showed, these actors have systematically captured the state for capital-friendly policies and thus undermined democracy. While they might do so at a lower intensity than the vulture funds, the banks are nonetheless guilty of inflicting drastic damage on the conditions of the global poor and their representation in relevant governments. Not only that, but as the financial sector increasingly follows its own logic and balloons further it seems that the 2008 Global Financial Crisis will certainly not be the last. We will surely witness another episode of banks crashing by their own Faustian logic and being bailed out by public funds, reverting desperately needed funding away from the poor and needy once more. Having said all this though, it is never good to end a discussion in pessimism. The answer to all this is never to stop dreaming about and working towards a fairer world. A world without obscene inequality, or at the very least a world where one billionaire in New York cannot subordinate a democracy representing over 40 million people. The only road that can lead to necessary change is a rethinking of our entire economic system. As such, it seems appropriate to end this paper with a quote from Thomas Sankara, the revolutionary leader of Burkina Faso who spent his entire career fighting against the oppressive hand of debt: “You cannot carry out fundamental change without a certain amount of madness. In this case, it comes from nonconformity, the courage to turn your back on the old formulas, the courage to invent the future.” (Sankara 2007: 232)

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