ALBANY — New York would have the power to force private hedge funds to comply with debt relief deals that the U.S. government brokers with cash-strapped foreign countries through a new bill under consideration by the Legislature this week.
The bill — which sponsors and critics alike have said has the unprecedented power to significantly reshape the international financial landscape — has spurred warnings of far-reaching economic consequences from the financial industry, even as it has gained support from numerous religious groups and progressive unions.
Political debate around the bill has been relatively silent ahead of a potential advancement in Albany this week, according to bill sponsors.
But the measure is roiling the financial industry, where heavyweights from the Business Council to the Partnership for New York City have expressed deep concern that the law could tank New York’s reputation as the world’s top financial center, curtail access to private capital funds — and threaten U.S. investors’ pensions.
At its heart, the legislation seeks to force so-called “vulture funds” to agree to dissolve the debts incurred by foreign countries using the same terms as the U.S. government when the latter brokers debt relief deals. Essentially, the bill caps the amount that private creditors can recover from a debt-distressed country to the same amount that the U.S. government is willing to recoup.
Vulture funds are investment firms that use unorthodox investment practices that involve, in part, buying up the debt from countries or companies that say they can no longer afford to abide by the original terms of their loans. These firms “swoop in” to buy that debt and will often hold countries to contractual obligations to pay that money back.
If the firms wait long enough, they often see successful returns on that investment, sometimes aided by state arbitration: New York courts have historically ruled in hedge funds’ favor when it comes to recouping the full value of the debt they have purchased from distressed foreign governments.
But the practice has been roundly criticized as unscrupulous by some economists and politicians, who say it forces poorer nations into a conundrum: paying back privately held debt at the expense of funding their own social welfare, in some instances depriving institutions like public schools and hospitals.
Assemblywoman Patricia Fahy, an Albany Democrat sponsoring the measure, said that New York’s status as an economic powerhouse means that the state plays a unique jurisdictional role. More than half of international sovereign bonds are traded in New York City’s financial institutions — and therefore are beholden to New York contractual law.
“It’s a very straightforward solution of leveling the playing field,” Fahy said, pointing to a “mass mobilization” from trade unions like the AFL-CIO as well as the international relief organization Oxfam.
But investors and others in the financial industry mobilized to try and block the bill in a flurry of activity last week. Opponents say lawmakers are overstepping, casting aside the financial implications to pensioners and note there has been no direction from the federal government on enacting such restrictions.
The bill advanced out of the Assembly’s Judiciary Committee last week and has been referred to the chamber’s Ways and Means Committee. A companion bill could be taken up by the Senate soon, where it is sponsored by state Sen. Brad Hoylman-Sigal, a Manhattan Democrat.
The Credit Roundtable, a group that represents institutional investors, wrote an impassioned letter to lawmakers last week urging more discussion on the measure before it goes any further.
Sonja Gibbs, the head of sustainable finance at the Institute of International Finance, said the industry’s main concerns are how the legislation may unintentionally hobble access to private capital for countries who need a source of lending beyond what other governments are willing to give them.
“If you lend money based on a contract, and then all of a sudden somebody comes along and rewrites all the rules or changes them in a way that’s very hard to predict how much you can recover in the event of restructuring, then what’s going to happen is the investor is going to be scared,” Gibbs said. “And they’re going to say, ‘I don’t want to lend any more money to whoever is out there. … It’s incredibly dangerous.”
Several top hedge funds are headquartered in New York City, including Aurelius Capital Management and NLM Capital — both infamous for their roles in previous debt restructuring like that of Argentina in the early 2000s.
New York lawmakers argue the taxpayers who contribute to debt relief deals brokered by the federal government do so with the expectation that those deals will be used to advance poorer countries’ economic wellbeing and that private creditors take advantage of this by refusing to compromise on what they are owed.
Proponents also say that the pandemic deepened the debt distress faced by already cash-strapped nations. The International Monetary Fund, a global financial institution that aids countries during international crises, has urged private creditors who own sovereign debt to take action similar to what Fahy’s bill outlines.
Yet though financial experts acknowledge a good intent behind the legislation, “there’s really consensus in the financial world that this is going to create more problems than it is going to help struggling countries,” said Paul Zuber, vice president of the Business Council.
The principle of worldwide debt relief is not a new one. In 2000, a faith-based movement known as Jubilee 2000 urged international debt forgiveness in a campaign heavily backed by the Catholic Church and its then-leader Pope John Paul II, as well as prominent musicians and artists of the time.