Debt-dealing vulture funds can spark economic crises: Argentine expert

Developing countries with substantial debt to the so-called vulture funds are vulnerable to economic crises, an Argentine expert warned Friday.

In an interview with Xinhua on the sidelines of World Bank Group-IMF Annual Meetings being held here, Aldo Caliari, Argentine director of the Rethinking Bretton Woods Project, explained the dangers inherent in the debt scheme.

"The principal problem with these funds is that they buy debt at a low price to speculate with later, when (financial) times are better," said Caliari.

Greece, he said, is a prime example. Only 20 percent of the European Union (EU) member's debt is owed to multilateral lending organizations, while the remainder was purchased by private equity funds, also known as hedge funds or vulture funds.

"In Greece's case, around 80 percent of its debt was deposited in vulture funds, and when it defaulted the (problem) exploded dramatically," said Caliari.

Argentina, he noted, found itself in a very similar situation, with an even higher percentage of its overdue national debt in the hands of private creditors.

"Just like Greece, (Argentina's case) threatens to spark a crisis," said Caliari, who campaigns to overhaul the international financial system through the Bretton Woods reform project.

Normally, when multilateral organizations are involved in debt restructuring, creditors agree to negotiate with the debtor country to stave off default and promote payment, even if partial. The vulture funds, however, refuse to negotiate and take their case to courts, seeking to get 100-percent returns on the nominal value of the debt purchased, even if they bought that debt at deep discounts.

"These investors won't accept renegotiation, because they want higher returns," said Caliari, adding "countries that fall into the clutches of the vulture funds are vulnerable to their voracity, since their debts can generate high profits."

He suggested that debtor countries demand clear terms for repayment when they deal with vulture funds.

Still, the tide seems to have turned in favor of the funds, he said, noting the U.S. Supreme Court decided in favor of Argentina's debt holders.

"The U.S. legal system ordered the debtors to pay the vulture funds in full," regardless of its implications on employment, inflation and poverty, he said.

"The vulture funds can provoke a debt crisis that can have repercussions on the most vulnerable social sectors of debtor countries, and it sparks a never-ending vicious cycle" of amassing more debt, Caliari said. Endit