An escalating sovereign debt crisis is crippling governments across the Global South and making billions for Wall Street. Activists hope to crack down on these debt vultures by pushing the New York State Legislature to ban their most predatory tactics.
Sri Lankans protest on April 12, 2022, after the country defaulted on its $51 billion foreign debt amid a deep economic crisis. (Ishara S. Kodikara / AFP via Getty Images)
As world leaders meet in Morocco this week to discuss the growing global debt crisis, lawmakers in New York will soon consider the most globally important state legislation you’ve never heard of. The three bills in question could aid developing countries by curbing the exploitative powers of predatory vulture funds that profit off international debt distress, since these contracts often fall under New York state law.
Liberating developing nations from crushing cycles of debt — and predatory creditors — has enormous implications for these countries’ ability to enact social services and climate resilience measures. But Wall Street power players are beginning to lobby on the reforms, and organizers expect opposition to ramp up in the new year.
“Debt relief isn’t happening,” said Tess Woolfenden, senior policy and research officer at Debt Justice, a UK-based nonprofit dedicated to ending unjust global debt. “And one of the major barriers we see is private creditors.”
Currently, 62 percent of the debt owed by developing nations is to private creditors, and more than half of those debt contracts are governed by New York state law, giving the state outsized influence over the world’s emerging markets. For decades, predatory private creditors have capitalized on loose state regulations to exploit impoverished nations’ debt crises in order to make huge profits.
Economic devastation from the COVID-19 pandemic, the Russia-Ukraine war, and growing climate peril have plunged many developing nations deeper into financial distress.
Centuries of colonialism — and the resulting resource extraction and stymied economic development — have created unequal distributions of wealth across the globe. Today’s crisis is an extension of this legacy, as mounting debt continues to cement inequality, forces these nations to borrow, and fails to equip the nations most vulnerable to climate change with the resources to address it.
Now, New York lawmakers are considering a number of bills that could arm nations in crisis against this exploitation by limiting private creditors’ ability to hold up debt restructuring negotiations. The three bills, first introduced in the senate and assembly in 2021 and 2022, are expected to be reintroduced in the 2024 legislative session in January.
One of the reasons for the effort is to make debt markets operate more fairly and sustainably, said Michael Kink, executive director of the Strong Economy for All Coalition — a New York–based economic justice network pushing for legislative action on sovereign debt reform.
“We’re trying to reduce the power of these insanely, historically, bombastically greedy hedge fund managers that seem willing to destroy millions of lives to make explosive, never-before-seen-in-the-history-of-profits profits,” said Kink.
The World’s Debt Crisis
Total global debt, both public and private, currently stands at $307 trillion. Of that, global public debt — the kind held by governments — reached an all-time high of $92 trillion in 2022. Meanwhile, debt ratios, the amount of debt compared to a country’s gross domestic product, a common measurement of economic health, have continued to climb.
Defaults on sovereign debt — the debt owed by a nation’s government — are at a record high, with fourteen distinct defaults since 2020 across nine countries. Currently, Sri Lanka, Lebanon, Russia, and Venezuela are in default, with many more nations at risk.
Debt payments from lower income countries will hit a twenty-five-year high by the end of 2023, as fifty-four countries around the world suffer debt crises.
People pay the costs of these debts. Today, about 3.3 billion people live in countries where debt interest payments are greater than expenditure on health or education. At least nineteen developing nations allocate more money to interest payments than education, and forty-five allocate more money to servicing debts than health care spending.
When a debtor nation defaults on its debt, it enters into negotiations with creditors to come up with a sustainable, actionable repayment plan. But if a creditor refuses to negotiate, the restructuring process can drag on, and a nation will fall further into distress.
Nations under debt distress are forced to repay creditors instead of funding essential government services like health care, housing, disaster prevention, or climate adaptation. As they sink further into crisis, it’s harder to pay off initial loans. And as countries default, their debts are re-negotiated at higher rates and with shorter timelines.
In recent decades, hedge funds and private equity groups have seen these crises as opportunities, buying up debt cheaply and effectively holding countries hostage until they can collect “full” repayment plus interest, which is sometimes many times the initial loan amount. This strategy, which subjects citizens of poor countries to austerity measures, major cuts to public services, regressive taxation, and privatization, has earned these firms the name “vulture funds.”
In 1996, billionaire Paul Singer’s Elliott Management corporation was the first vulture fund to sue over sovereign debt, forcing Panama to eventually pay out nearly $60 million to the firm, more than double the original loan. Many vulture capital firms have since mimicked this approach.
Research shows that in the 1980s, less than 10 percent of debt crises involved lawsuits. By 2000, about half involved lawsuits, with the majority led by vulture funds, suing to obtain full repayments that would result in huge profits for investors.
Armed with millions in legal resources, hedge funds make sure these cases can drag on for years even as countries continue to make payments. Using lawsuits filed in the Southern District of New York, these firms have extracted billions from Brazil, Argentina, Peru, and many other nations.
Singer went on to spend fifteen years hounding Argentina for lapsed debt payments after its 2001 financial default, ultimately making over $2 billion in profits while the country was forced to sacrifice important government services. Singer brazenly strong-armed the country by freezing its assets abroad and even coercively detaining a naval ship in a foreign port.
The debts were finally settled in Singer’s favor in 2016, after Argentina paid its loan and years of accrued interest, at a 1,270 percent return. Singer won all eleven of the lawsuits his firm filed in New York courts, a precedent that Jubilee USA Network’s executive director, Eric LeCompte, noted at the time would “encourage this type of predatory behavior around the world.”
In Sri Lanka’s ongoing debt restructuring, the vulture fund Hamilton Reserve Bank is holding up negotiations, suing in a New York court to demand full payment and interest on over $250 million in bonds. Meanwhile, Sri Lanka faces political disarray, civil unrest, and its worst economic crisis since its independence in 1948. Citizens there struggle to buy daily essentials like food and fuel.
In addition to New York, another approximately 45 percent of privately held sovereign debt contracts are governed by English law. That over 90 percent of the world’s private debt is funneled through London and New York City, two global citadels of capital, is a legacy of centuries of colonialism, said Woolfenden at Debt Justice.
That over 90 percent of the world’s private debt is funneled through London and New York City, two global citadels of capital, is a legacy of centuries of colonialism.
“It’s just where the center of finance is,” Woolfenden said. “And it’s really messed up that Global South countries are forced to operate under laws that are outside of their control.”
The global debt crisis has garnered increased attention recently and was a major theme at the United Nations (UN) annual meeting in New York last month. This week, the International Monetary Fund (IMF) and the World Bank are hosting world financial sector leaders in Marrakech to discuss global economic resilience in the face of crisis. LeCompte, a lead organizer behind one of the three New York bills — the New York Taxpayers and International Debt Crises Prevention Act — said the legislation would be discussed at the conference.
“We see history repeating itself,” LeCompte said of current crises. “That’s why there’s a need for a New York law. . . that helps to define this question of equal treatment or parity [and] that our tax dollars in New York and across the United States shouldn’t be bailing out the private sector.”
There have been some attempts to make debt arrangements more equitable for developing nations, which have to work doubly hard to keep up in the global economy. In 2020, the Paris Club, an informal group of creditors overseeing debt negotiations, established the Common Framework, a new set of guidelines for G20 countries to follow when overseeing loans to debt-vulnerable nations.
But experts say the framework still can’t compel private creditors to come to the table. Nor does it apply to all countries struggling with debt: Sri Lanka, for example, does not fall under the framework. As a US territory, neither does Puerto Rico.
The New York Legislation
For decades, Wall Street and seasoned legal precedents have made New York the center for signing and enforcing contracts.
“New York has the courts and infrastructure to deal with problems with contracts and to enforce contracts,” LeCompte of Jubilee USA Network said. “New York state really is the most important place in the entire world in terms of dealing with these issues.”
That’s why advocates are focused on Albany in the upcoming legislative term.
Three bills made it to committee in the 2023 legislative session that all aimed to limit the ability of private creditors like vulture funds to exploit debt restructuring negotiations for their own profits. Pushed forward by academics, legal experts, grassroots groups, nonprofits, and lawmakers, the bills are now getting revamped to be reintroduced in the state Senate and Assembly in January.
The first bill focuses on a concept called “model law,” developed by Duke University law professor Steven Schwarcz and the International Insolvency Institute. The bill would create a framework for distressed countries to restructure their debt with creditors, similar to the current process for corporations undergoing bankruptcy.
“It’s a bankruptcy process for countries,” said Jose Gonzalez, director of data initiatives for New York Communities for Change (NYCC) and an advocate for the bill.
Schwarcz said the bill will seek to address attempts by private creditors like vulture funds to unilaterally delay debt negotiations, seeking unfair advantages. In Argentina, Singer’s Elliott Management and other hedge funds held up a restructuring plan that 93 percent of creditors agreed to, effectively blocking nearly half a million creditors from receiving payment and plunging Argentina further into distress.
Now, in Sri Lanka, a single private creditor, Hamilton Reserve Bank, is similarly holding out negotiations at the expense of bilateral creditors who want to negotiate.
The model law would address this so-called “holdout problem” by legally mandating supermajority voting, rather than unanimous votes, across contracts. The bill would also give new lenders priority, encouraging new creditors to give a lifeline to nations already in crisis.
“To the extent nations are struggling with debt, and to the extent their contracts are governed by New York Law, it will give them a way to reasonably restructure the claims on all those New York law-governing contracts,” Schwarcz said of the model law approach.
The second bill would close a legal loophole, opened in 1996 by Singer of Elliott Management, that allows creditors to buy up debt of a nation already in crisis, with the express intention of suing the country when it can’t meet the original debt terms.
In an earlier precedent-setting incident, Elliott Management sued Peru over $20 million worth of debt, bought at near half price for the purpose of suing. During litigation, lawyers for Peru’s national bank pointed out that Elliott had violated New York’s champerty law, which — based on a legal concept that dates back to the Middle Ages — prohibits the purchase of financial instruments for the purpose of litigation.
Singer won the Peru case on appeal, and secured an exemption from champerty law for debt transactions over $500,000 — opening the floodgates for vulture funds to continue holding debt hostage.
Singer secured an exemption from champerty law for debt transactions over $500,000 — opening the floodgates for vulture funds to continue holding debt hostage.
The champerty bill, introduced by state Sen. Liz Krueger (D) and state Rep. Jessica González Rojas (D), would require private creditors to come to the bargaining table and commit to reasonable restructuring.
The last bill — supported by Jubilee USA Network and a string of trade unions, faith groups, nongovernmental organizations, and UN experts — would make it New York state policy to promote fair and equitable sovereign debt restructuring.
The New York Taxpayer and International Debt Crises Prevention Act would require private creditors to participate in debt relief negotiations at a comparable level to government creditors. Arguing for “equitable burden-sharing among public and private creditors,” the bill asserts that private creditors’ recoveries can’t exceed what the US government would have received if it had been the creditor holding that claim.
“New York is the world’s global financial hub,” said Assemblymember Patricia Fahy, who introduced the bill in the Assembly, in a statement. “Enacting basic changes that will ensure debt relief for developing nations through investments in sustainable growth, infrastructure, and more is common sense.”
The bill’s supporters argue that this change will protect US taxpayer money from funding private creditor bailouts, and would streamline debt restructuring processes.
Not all advocates support all three bills. Though there’s widespread support for closing the champerty loophole, there is some disagreement between the approaches of model law and the taxpayer act. But organizers said groups behind each of the three bills are in discussions ahead of the 2024 legislative session to present a more coordinated push, and are considering how to adjust and package these bills together before reintroduction.
Eyes On Albany
Advocates for reform emphasize that in New York, this legislation is personal.
“There are very large numbers of citizens and immigrants [in New York] that trace their roots to these countries in crisis,” Kink said. “Those [people] are part of the constituencies that New York lawmakers are accountable to.”
When Hurricane Maria hit Puerto Rico in 2017, Gina DeJesus, senior director of organizing at NYCC, was living in New York but had family in the US territory. She remembers being completely cut off from her family, not even knowing if they were alive for over a week.
As island residents dealt with destruction, blackouts, hospital closures, and more, predatory hedge funds swooped in to buy up more of Puerto Rico’s debt. That’s when NYCC organizers like DeJesus, living in New York City and watching their families struggle in Puerto Rico, mobilized to curb the power of Wall Street over sovereign debt, and settled on legal reform.
“New York can easily stop this,” DeJesus said. “We’re gonna keep pushing until we get this bill passed.”
NYCC’s policy director Alicé Nascimento, who grew up in Brazil during the country’s 1990s economic crisis, said many of NYCC’s members are low-income immigrants who have been personally impacted by vulture funds’ exploitation of countries in the Global South.
“That the answer here might be within the state legislature is just uncanny to me,” said Nascimento.
Michael Kink, the executive director at Strong Economy for All and advocate for the champerty and model law bills, explained that when the bills were first introduced in 2021, there was very little awareness of the efforts among financial institutions. Over the past year, however, opposition has started to mobilize on all three bills.
“It’s pretty clear the battle has been engaged,” Kink said. “They’re starting to jump in and spend money and tell lies.”
Morgan Stanley, Wells Fargo, JPMorgan Chase, Goldman Sachs, the New York Bankers Association, and the International Legal Finance Association are among the organizations that have lobbied on one or more of the three bills, according to state disclosures.
When the bills were first introduced in 2021, there was very little awareness of the efforts among financial institutions. Over the past year, however, opposition has started to mobilize on all three bills.
Activists report that lobbyists have attended press conferences and meetings about the bills, and an international law firm that claims to have “had some role in most sovereign debt restructurings since the 1980s” has released client memos on the matter.
In May, a number of organizations came out in opposition to the bill that would hold private creditors to US debt relief standards.
That month, the Partnership for New York City, a lobbying group whose members include Blackrock, Citibank, Morgan Stanley, and JPMorgan, argued the bill would make investments in sovereign debt more risky and boost competing financial centers like London.
According to a letter the partnership sent to a state Senate office, the legislation would disrupt “the delicate consensus reached by global officials, multilateral, and private creditors. . . favouring contractual rather than legislative solutions to sovereign debt challenges.”
Meanwhile, a news release coauthored by six major business lobbying groups claimed the bill could hurt emerging economies, investors, and the state. The groups suggested that such legislation would “tarnish [New York’s] hard-won reputation” as a reliable global financial center.
Finally, the New York State Business Council — which represents 3,000 New York–based companies — raised similar concerns, saying the bill would raise borrowing costs, destabilize international markets, and “make borrowing in New York expensive and unappealing.”
Supporters of the legislation took exception to these claims.
“Those talking points are not accurate nor are they — as far as we know — based in any actual economic analysis,” wrote Ben Grossman-Cohen, Oxfam’s director of campaigns, in an email about Partnership for New York City’s letter. “Their goal was just to scare offices away from the issue and stall the bill.”
Kink called the notion that New York would lose its designation as the finance center of the world “laughable,” and said the state’s legacy of housing financial institutions would endure.
Kink added that the legislation would be broadly advantageous for creditors and financial institutions that are not vulture funds. “Our argument is that both of these bills would make the markets and institutions around government finance and sovereign debt stronger,” he said.
International Debt Forgiveness
Activists in the UK are pushing for similar legislation to bring private creditors to the bargaining table, said Woolfenden at London-based Debt Justice. The UK already passed legislation in 2010 targeting vulture funds, and according to Woolfenden, passage of the New York legislation would greatly improve the chances of further action there.
If similar reforms were enacted in New York and the UK, the vast majority of debt contracts would be impacted. “The UK and New York have this special opportunity but also special responsibility to act and compel private creditors to participate,” said Woolfenden.
This week, world leaders are discussing the debt crisis and the New York legislation at the IMF–World Bank conference. Just a mile away, a countersummit organized by climate activists, trade unions, small landholders, and nonprofits will be focused on debt abolition. In online materials, the organizers question what they call the “financial dictatorship” of the IMF and World Bank.
NYCC’s DeJesus moved back to Puerto Rico, where she was born, three years ago. There, almost a decade after the island’s debt crisis began, the situation is still dire.
“It’s a shame that we don’t have the money to fix schools and hospitals and the roads,” DeJesus said. “The money that we do get from aid or anything, we don’t see it, because [the government is] using that to pay back the debt that they got us into.”
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