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 2 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. 3 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 between vulture funds and banks in their pursuit of sovereign debt repayments. 4 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 5 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).