NY lawmakers seek to cap investors' profits from foreign debt

Source: Times Union

ALBANY — Lawmakers seeking to tackle a complex legal process that dictates the deals investors can make with cash-strapped countries have expressed their intent to usher through legislation on the issue in the final days of New York’s legislative session. 

The legislation, which deals with a highly technical area of international finance, is intended to hamstring efforts by “bad faith” investors to recoup profits from lower-income countries, which critics say can often severely weaken those countries' economies, particularly those in South America. 

Lawmakers who have worked on broader efforts to reshape the global financial landscape have argued that the move is particularly important in New York for two reasons: the state wields enormous influence because of its high concentration of financial heavy-hitters, and the recent influx of migrants are often from economically destabilized countries. 

More than half of international sovereign bonds are traded in New York City’s financial institutions and are governed by the state’s contract law. 

State Sen. Liz Krueger and Assemblywoman Jessica Gonzalez-Rojas, both New York City Democrats, are sponsoring an amended version of a bill that would bolster a complex legal action known as “champerty” that prohibits purchasing securities (such as a cash-strapped country’s sovereign debt, which is often valued cheaply) for the sole purpose of taking those deals to court and recouping much higher profits. 

They argue that the bill would not apply to cooperative investors who occasionally choose to sue, and would instead focus on reversing a safe harbor provision that New York passed in 2004 that allowed investment firms to purchase certain financial claims, such as a country’s sovereign debt, with the intention of suing to maximize the money they receive. 

Krueger, chair of the Senate Finance Committee, characterized the bill as essentially a judicial fix to allow New York courts to scrutinize the behavior of litigants in a sovereign debt case to determine their intent. She added while previous iterations of the bill had drawn scrutiny and concerns from industry groups like the Business Council and the Partnership for New York City, stakeholders including federal officials and investors have expressed more satisfaction with the recent legislation. 

“I really appreciate the fact that we’re doing a bill with the business community to try to address something that is fundamentally unfair, and harming the exact countries that we frankly don’t want to be forcing into even bigger international crises,” Krueger said. “Because, guess what — when your economy collapses, or even your political system collapses because of pressure by outside investors … that’s why we have so many migrants coming from these countries.”

The funds handled by investment firms 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 critics have said that many finance experts have been concerned by the legislative efforts to undercut the market for sovereign debt, arguing that the move could unintentionally hobble poorer countries who often rely on private creditors to give them a fuller “menu” of borrowing options, yielding more money than they might otherwise get from international banking entities like the World Bank.

Sonja Gibbs, a marketing director at the Institute of International Finance, said lawmakers' efforts have so far not raised significant alarm bells from the widespread investment community; similar legislation pushed last year was viewed as “low probability” and didn’t advance very far. But she said she views any efforts to curtail the private market’s role in sovereign debt restructuring as potentially dangerous and ripple effects could include threats to pension systems for U.S. residents.

 Gibbs added that heavyweights in the international finance world have long been engaged in conversations on how to navigate sovereign debt restructuring, with some success, but that it often takes much time and careful thought. 

“The expertise is not there. … You have to live and breathe this stuff to be able to understand the ramifications, the implications of what you’re doing,” Gibbs said. “And that’s been the challenge all along. We have well-intentioned people in Albany, who are trying to come up with magic solutions for really intractable problems.”

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. 

Lawmakers are seeking formal comments on the bill this week and next.