Chapter 10 Theory in Practice case studies

Global Political Economy


Argentina, international institutions and vulture capital

Venture capital is money that moves to promising start-up enterprises in exchange for equity (Pearce and Barnes 2006). “Vulture capital” is very different. Although the nickname is contested (Guzman 2020), it refers to money that moves to capitalize on the carcasses of dying economies. It works because of the conditions created both by the state in question and by international economic institutions. Apart from the UN, there are the “Bretton Woods institutions” including the International Monetary Fund, whose responsibility is to stabilize currencies. The case of Argentina is a good illustration of the interactions involved.
There was much debate in the years that followed Argentina’s default on its sovereign debt obligations in 2001. This debate was itself surprising, since debt defaults are generally anticipated breathlessly, and universally, as a disaster.
The context was a plummeting economic and political situation, which some attributed to a series of reforms adhering to the script of the Washington Consensus (WC). This is a set of ten “policy instruments* (Williamson 2000; original emphasis) constituting an orthodoxy of reform, often imposed on IMF stabilising loan recipients.
However, instead of leading to economic florescence, in Argentina the burden of debt restricted growth, so that “unemployment … rose to 21.5%, and the poverty rate [to] 45.7%.” (Guzman 2020).
So the government declared it was no longer able to service its debt. Sovereign debt is commonly held in bonds, which investors buy in the expectation of repayment with interest. When the government declares a debt default, there ensues a round of debt ‘restructuring’, in which bondholders agree to accept a lesser amount, in return for getting anything at all. As you might expect, a declaration of default leads to a dramatic shrinkage of the value of sovereign debt bonds.
But these bonds are still tradeable. Enter the ‘vulture funds’. Large managed funds can buy up bonds when they are cheap, and then sue for full payment later on. This is what happened with Argentine bonds between 2001 and 2010. The bulk of its creditors accepted reduced returns, resulting in lower debt repayments. This freed up money for more government spending and solid economic growth until the great crash of 2008.
Over the same time, several hedge funds bought defaulted Argentine bonds cheaply, then sued for full payment, plus interest. Having bought bonds at 24% of their face value, they now demanded 100% payment from the state. And not only did they sue, they won.
This precedent has meant, argues Guzman, that anyone buying bonds cheaply could just be patient, wait for someone else to sue, and sell when the price rose.
Some say that ‘vulture’ is too strong, that these investors benefit both bondholders and the state by raising the value of bonds, breathing life into the market, rather than feeding on economic carrion. Not only that, but the IMF, the UN, and others approved “a set of principles” for “creating a multinational formal framework for sovereign debt restructuring” (Guzman 2020).
Far from dining on the ruins, then, the ‘vulture funds’ set in train a program of recovery and reform. You will still find plenty of disagreement among economists, but that is nothing new.


* The ten are: fiscal discipline (budget surpluses); pro-poor public expenditure priorities; tax reform; financial liberalisation; competitive exchange rate (often floating currency); trade liberalisation (free trade); opening up for investment; privatisation; deregulation; and, property rights for informal or micro-enterprises.
Guzman, M. (2020). “An Analysis of Argentina’s 2001 Default Resolution.” Comparative economic studies 62(4): 701-738.
Pearce, R. and S. Barnes (2006). Raising venture capital. Chichester, West Sussex, England, John Wiley.
Williamson, J. (2000). What Washington Means by Policy Reform, Routledge: 18-23.

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