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[casi] 'Vulture Funds' Descend On Dying Third World Economies

US pledging vast tracts of public land as collateral on their loans.

What's happening now in Argentina may also happen in the US and elsewhere


      This article appears in the October 10, 2003 issue of Executive
Intelligence Review.

      'Vulture Funds' Descend
      On Dying Third World Economies

      by Dennis Small

      vulture, n. 1: any of various large raptorial birds ... that subsist
chiefly or entirely on carrion 2: a rapacious or predatory person.
      -Webster's Ninth New Collegiate Dictionary

      Argentine Finance Minister Roberto Lavagna used the high-profile forum
of the annual meeting of the International Monetary Fund (IMF) and World
Bank in Dubai, United Arab Emirates, to unveil on Sept. 22 Argentina's
long-awaited proposal to restructure some $94.3 billion in public debt, on
which the government had defaulted in December 2001. Lavagna's proposed
"solution" to the world's longest-running and biggest public debt default,
was to write off 75% of the debt's face value, and service the remaining 25%
somewhere down the line.

      Howls of outraged protest exploded from spokesmen for Argentina's
international creditors, especially the speculators widely referred to as
"vulture funds," which now hold most of the defaulted bonds. "This is not a
serious offer," blustered Christian Stracke, head of emerging market
research at CreditSights. "Scandalous, offensive, morally unacceptable,"
fumed Italian bondholder and lawyer Mauro Sandri, without a trace of irony.

      Then came the threats of legal action. "There is no way Argentina will
avoid going to court with this offer," warned Stracke. London's Financial
Times reported that "frustrated Japanese investors are trying to seize
government land in Argentina's Patagonia, and German investors are trying to
appropriate Argentine-embassy assets to recoup losses." Rumors even began to
swirl that the Argentine Presidential jet would shortly be seized.

      In fact, one vulture holding defaulted Argentine bonds has already
succeeded in winning just such a judgment. On Sept. 12, a New York court
ruled in favor of Kenneth Dart, of Dart Container Corp., granting him a $700
million judgment. Dart will have the right to start seizing Argentine assets
at the end of October.

      Finance Minister Lavagna told a TV interviewer: "In this particular
case, it's a vulture fund for $700 million.... These funds that buy the
bonds do it for no other reason than to sue governments." And Argentine
President Néstor Kirchner told his advisors, according to the daily Clarín,
that most of the defaulted Argentine bonds have in fact been bought up by
the vulture funds, and that they paid an average 20 cents on the dollar for

      In other words, their fulminations notwithstanding, the vultures stand
to make a killing, even with Argentina paying on only 25% of face value-let
alone if they are able to collect dollar-for-dollar.

      LaRouche: This Is Fascism
      Informed of the Argentine developments, U.S. Presidential
pre-candidate Lyndon LaRouche denounced the vulture funds-which typify a
very large part of the global financial system today-as being "fascists,
just like those who put Hitler in power. These bastards," LaRouche
elaborated, "care even less than President Bush for the stability of the
system. Now you're looking at fascism in the face. And if you want to
characterize it, you would say about the vulture funds' reaction, this gives
you the mentality of the same kind of fascists who sacrificed the human
race, including all those who died eventually in Auschwitz. This is why
people died in Auschwitz: because these vulture funds had to have a
government which would do the kind of job they demand."

      As for the New York court finding in favor of Dart, LaRouche noted
that it clearly goes beyond the court's jurisdiction and competence, to
assess the value of debts owed by a sovereign state. This stinks of Teddy
Roosevelt's "Gunboat Diplomacy" to collect the debt, LaRouche concluded.

      The Argentina case is in fact typical of the entire global financial
bubble: None of the debt can actually be paid, and the only real policy
issue is whether to put people's welfare before the debt-as LaRouche
demands-or to try desperately to maintain the illusion that the debt is
somehow still performing, no matter what the human cost. In that latter
camp, the vultures are gaining ground against those who are still trying to
maintain "stability," and revive the corpse of the world financial system,
if need be by swallowing sizeable debt write-downs. The vultures prefer to
descend on the body now, and be first to pick over the bones. For them, it's
every vulture for himself, and the devil take the hindmost.

      Argentina, of course, had a choice: to go the LaRouche route, or to
become an economic cadaver. The country reached that fork in the road back
in December 2001, when interim President Adolfo Rodríguez Saa announced to a
cheering Congress that he would stand up to the country's creditors, and
declared a foreign debt moratorium on the spot. But Rodríguez Saa was unable
to rally sufficient support, domestically and internationally, for this
courageous approach, and Argentina's frightened political class and other
institutions allowed him to be toppled on Jan. 1, 2002. This set Argentina
on the course of submission to vulture economics that it remains wedded to,
to this day.

      Argentina Still Can't Pay
      Rhetoric aside, President Kirchner has, in fact, never seriously
considered breaking with the IMF. On Sept. 10, his government struck an 11th
hour deal with the Fund, under which Argentina agreed to pay $2.9 billion it
owed the IMF. That amount had come due on Sept. 9, and for one day, Kirchner
went into technical default against the IMF, in search of more "lenient"
terms under which Argentina was to be raped by its creditors.

      "We were in default for more than 24 hours," Kirchner reportedly told
his closest advisors during a plane ride to New York on Sept. 22. "I could
have fallen, but had that happened, the whole IMF would have fallen with
me," he blustered.

      Kirchner was referring to the widely known fact that a default against
the IMF or the World Bank, as opposed to a mere private lender, is capable
of bringing down the entire international financial system. Such a default
could prove contagious with other countries, including neighboring Brazil,
which has a public debt about twice the size of Argentina's. As an Argentine
Finance Ministry source told La Nación newspaper, the possibility of an
eventual Brazilian debt default "is on a lot of people's minds." Any such
sovereign default against the IMF would likely lead to a downgrading of its
credit rating, and that could mean the effective bankruptcy of the IMF
itself, and of the entire IMF system.

      On Sept. 10, Kirchner chose to defend that system, and struck a deal
with the IMF, which, he was told, was a prerequisite for negotiating a
write-down of the $94.3 billion in privately held government bonds. The IMF,
in turn, was pressured by the Bush Administration to be "lenient" with
Argentina, since the stability of the entire global system was considered a
higher priority than collecting every penny-at least for now. As an unnamed
Bush Administration source soberly told the daily Clarín: "Nobody wanted
Argentina to again go into default with an international institution."

      The IMF thus agreed to Argentina producing a 2004 Primary Budget
Surplus, or PBS (with which to pay the public debt) of "only" 3% of
GDP-whereas the country's more rapacious creditors had been demanding
Brazil-style levels of 5%. The international financial media then
ridiculously characterized the deal by saying that "the IMF blinked" in the
face of Kirchner's "tough" negotiating stance. A manic George Bush further
stroked the Argentine President's ego at a Sept. 23 reception at the United
Nations, by greeting him from across the room in a loud voice: "Here comes
the man who conquered the IMF!"

      The vulture funds, for their part, were furious at how "lenient" the
IMF had been with Argentina. As a Bloomberg wire reported, the Italian Mauro
Sandri and other vulture bondholders "said they were outraged after
Argentina reached an accord with the IMF two weeks ago, that ensures the
government pays back multinational lenders while forcing losses on

      IMF spokesman Thomas Dawson defended their deal with Argentina by
arguing that it "will lead to a sustainable debt position"-which is a lie.
As one Buenos Aires economist told the Financial Times: "It's doubtful
Argentina can even service its performing debt with that [a 3% PBS], let
alone defaulted loans."

      The reality is that Argentina is not going to be able to service its
public debt, even after the 75% write-down. On top of the $94.3 billion in
defaulted bonds-now to be written down to some $24 billion face
value-Argentina has another $85 billion in supposedly performing public
debt. Of that, about $70 billion is classified as "Senior debt," meaning
that it is paid first, before the renegotiated defaulted debt. This "Senior
debt" includes some $25 billion in new government bonds, that were issued
after the December 2001 default.

      So, even with massive write-offs, Argentina is staring down the barrel
of a gun at well over $100 billion in public debt that it has to pay-an
impossibility, given the ongoing destruction of its physical economy.

      To achieve even a "low" PBS of 3% in 2004, the government is going to
have to impose further massive cuts in government spending on wages for
teachers, doctors, and others, as well as in pension payments. This is on
top of the 11% plunge in national economic activity in 2002, which, coupled
with a 70% forced devaluation of the peso that year, has meant that
Argentina's dollar-denominated GDP plummeted from $264 billion in 2001, to
$120 billion in 2002-a 55% drop! As a result, over half of Argentina's 38
million people now live below the poverty line, and unemployment is over

      There is no amount of achievable looting that can make Argentina's
debt perform. Analysts estimate that, for Argentina to be able to pay, even
after a 75% write-off, it would have to generate a PBS not of 3%, but of
4.5%; and not for one year or two, but for the next 15 years!

      This is fascism and lunacy, as LaRouche stated. If adopted, such
policies will leave Argentina, and the rest of the developing sector
economies that follow it, as a carcass picked over by vultures. And then the
debt will be defaulted on, anyway.

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