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Americas | International | Global Justice and Anti-Capitalism

Banks and Investors Challenge Predatory Funds Solutions Fall Short of Comprehensive Prote
by James Griffin
Friday Aug 29th, 2014 10:46 AM
The International Capital Market Association (ICMA), a group of banks and investors, released a new debt framework this morning aimed at reducing the ability of predatory funds and holdout investors to undermine debt restructuring. The plan was created after meetings convened by the US Treasury Department in the wake of Greece's debt restructuring and comes in the aftermath of the landmark debt case between Argentina and NML Capital.
The International Capital Market Association (ICMA), a group of banks and investors, released a new debt framework this morning aimed at reducing the ability of predatory funds and holdout investors to undermine debt restructuring. The plan was created after meetings convened by the US Treasury Department in the wake of Greece's debt restructuring and comes in the aftermath of the landmark debt case between Argentina and NML Capital.

"The actions of ICMA are impressive," said Eric LeCompte, Executive Director of the religious anti-poverty group, Jubilee USA. "It really shows there is a global consensus to stop this predatory behavior."

The ICMA's plan would use contract clauses to bind all bondholders to any debt restructuring agreement. Under the plan, the "pari passu" or parity clauses would require would-be holdouts to accept restructured bonds approved by the majority of creditors. The ICMA plan states that all bondholders must accept a deal approved by 75% or more of a country's creditors, a clause that would have prevented Argentina's holdouts from litigating for full repayment. The International Monetary Fund is set to propose similar guidelines in late September.

"While this is another step in the right direction, it doesn't solve the immediate problems. Without statutory approaches the behavior won't be slowed down for 12 to 15 years," noted LeCompte.

The Argentina/NML precedent could have a global impact. Last month, two hedge funds successfully sued the Democratic Republic of the Congo (DRC) for $68 million, including roughly $50 million in interest on loans dating back to the early 1980's. According to United Nations figures, the DRC is the world's second-poorest country. Meanwhile, the Caribbean island nation of Grenada is currently facing a “pari-passu” lawsuit in US courts.
"Poor people and legitimate investors will continue to be harmed by this behavior in the foreseeable future," said LeCompte.

Jubilee USA Network is an alliance of more than 75 US organizations, 400 faith communities and 50 Jubilee global partners. Jubilee's mission is to build an economy that serves, protects and promotes participation of the most vulnerable. Jubilee USA has won critical global financial reforms and more than $130 billion in debt relief to benefit the world's poorest people. http://www.jubileeusa.org
In the wake of the Argentina/NML case, there have been calls for instituting such a system to address the issue of hold-out creditors. The International Capital Market Association (ICMA), a group of banks and investors, will call Friday for reforms aimed at preventing repeats of the Argentina/NML Capital debt dispute.

The International Capital Market Association (ICMA), a group of banks and investors, will call Friday for reforms aimed at preventing repeats of the Argentina/NML Capital debt dispute. The ICMA's plan would reduce the ability of hold-out creditors to litigate and undermine debt restructuring, in part by using contract clauses to bind all bond-holders to debt restructuring that 75% of all holders agree on. Additionally, the plan will argue that the "pari passu" or parity clause in existing bond contracts should always mean that hold-out funds should always receive the same restructured bonds that the majority of investors agree on.

"This is a step in the right direction and we really applaud the US government's leadership on this," noted Eric LeCompte, Executive Director of the religious debt relief organization Jubilee USA. "I am concerned that this won't do enough to prevent litigation against poor countries in the next decade. We still need a statutory approach."

The Argentina/NML case could soon impact other countries facing creditor litigation. Last month, a US judge in New York ordered the Democratic Republic of the Congo (DRC) to pay $68 million to two hedge funds that acquired the country's debt on the secondary market and then sued. The award included nearly $50 million in interest on loans dating back to the early 1980's. According to the United Nations, the DRC is the world's second-poorest country. Meanwhile, the Import-Export Bank of Taiwan is suing the Caribbean nation of Grenada, making an identical legal argument to the one used against Argentina. The case is currently on hold as Grenada attempts to resolve its debt situation.

"The Argentina case has a global impact, and we need a global solution," said LeCompte. "We need an international bankruptcy process to make default less likely and force hold-outs to sit at the table."

An international bankruptcy process would in theory bind all creditors and debtors to the decisions of a neutral third party. In the wake of the Argentina/NML case, there have been calls for instituting such a system to address the issue of hold-out creditors. As the Financial Times notes, creditor litigation against defaulting nations has doubled in the last decade, while debt levels continue to rise.

Jubilee USA Network is an alliance of more than 75 US organizations, 400 faith communities and 50 Jubilee global partners. Jubilee's mission is to build an economy that serves, protects and promotes participation of the most vulnerable. Jubilee USA has won critical global financial reforms and more than $130 billion in debt relief to benefit the world's poorest people. http://www.jubileeusa.org