After the First Default of the Greek State, Large Corporations Were Suddenly Safer Than Their Countries’ Governments

We are so accustomed to see government representatives and activities around us—in taxes, regulations, assistance, enforcement, and so on—that the state seems to be omnipresent and immortal. The state is naturally deemed to be a solid institution, the most solid of all. Everybody is supposed to trust it. This is why the sovereign debt is, or was, supposed  to be totally safe. Those who continue to buy government securities still seem to think so. As The Economist writes with a whiff of British humor: “If governments aren’t safe, after all, what is?” Many people were surprised when, in 2009, the sovereign debt crisis appeared in Europe. Suddenly, the state itself looked fragile. After the first, disguised default of the Greek state, large corporations in many countries were suddenly considered safer than their countries’ governments: in February 2012, the cost of insuring bonds (through financial instruments called “credit default swaps” or CDSs) was lower for ENI (an Italian multinational corporation in oil and gas), for Telefónica (a Spanish telecom multinational), for Danone (a French food product multinational), for Bayer (a German pharmaceutical multinational), for IBM (an American computer service multinational), than for their respective home governments.

Thus, there is a sovereign risk, a risk that states will not reimburse their debts, as happened often historically, although we seem to have forgotten it. The world of trusted state securities is over. “Sovereign risk is out of the bottle,” wrote The Economist in early 2010. “There is no easy way of putting it back in.”

—Pierre Lemieux, The Public Debt Problem: A Comprehensive Guide (New York: Palgrave Macmillan, 2013), 6-7.

“Vulture Funds” Have Tried to Seize Money Held by the Argentine Central Bank at the NY Fed and at the BIS

If the Argentine government decides not to pay the money it owes you, you will not be able to persuade its domestic courts to dissolve it, and to reimburse you with bankruptcy proceeds. You cannot hope to be reimbursed with government buildings, public roads, army equipment, police stations, and so forth. You may sue the Argentine government before the courts of your own country or a third country, but you will not be able to have the judgment enforced against a foreign sovereign. As an American judge reminded plaintiffs in the Argentine case, “You have rights but may not have remedies.” Hence the hurdle faced by holdouts on Argentine sovereign debt.

The vulture funds and a few other holders of defaulted Argentine debt have been fighting hard. Their strategy was to buy the bonds cheap and redeem them at a higher price. They have obtained hundreds of judgments against the Argentine government. Two vulture funds are sitting on $3-billion worth of favorable rulings. Since the Argentine government will not reimburse them, they have tried to seize money held by the Argentine central bank at the Federal Reserve Bank of New York, at the Bank of International Settlements (BIS), which is the central bankers’ bank, and in private banks outside Argentina. The lawyers of one hedge fund apparently served a subpoena to the BIS’s general manager just as he was about to speak at a public event. “His Excellency” was probably not happy! But all these efforts have failed. The creditors have had only symbolic successes, such as seizing $90 million from a New York trustee who was holding shares of a privatized Argentine bank, or seizing a few million dollars that the Argentine science ministry had deposited in an American bank account in order to buy telescopes. However, this activism probably means that the Argentine government cannot return to international financial markets until it reaches an agreement with its disgruntled creditors, as proceeds from the sale of Argentine bonds issued in an international financial center would likely be seized.

—Pierre Lemieux, The Public Debt Problem: A Comprehensive Guide (New York: Palgrave Macmillan, 2013), 2-3.

When a Government Does Default, Getting your Money Back Is Not Easy—“Vulture Funds” Can Try To

When a government does default, getting your money back is not easy. Ten years after the government of Argentina defaulted on $81 billion of bonds issued in dollars and sold to international investors, some creditors have still not agreed to the loss that was imposed on them. The government of Argentina had made a take-it-or-leave-it offer: accept 35 cents on the dollar, or you will get nothing. Some 93 percent of the bondholders ended up accepting the offer: better a 35 percent settlement than nothing. The remaining 7 percent rejected the offer, and have been trying since then to force the government to pay the full principal of the bonds plus accrued interest. Some of the original holders have chosen to sell their bonds, so that the current holders are not always among the original 7 percent. Many bonds were sold on the secondary market to so-called vulture funds, which have spent millions trying to get a full reimbursement from the Argentine government. Vulture funds are hedge funds (more risky investment funds) that buy distressed assets that have fallen to a fraction of their value, wait for the issuer to go bankrupt, seize its other assets, and try to make a profit by reselling them. The problem is that nobody can force sovereign states to go bankrupt and to be sold in pieces.

—Pierre Lemieux, The Public Debt Problem: A Comprehensive Guide (New York: Palgrave Macmillan, 2013), 2.