Venezuelan Central Bank Director Eudomar Tovar on Hedge Funds and Latin American Sovereignty

The US Supreme Court’s ruling in favor of a small group of Argentine bondholders, putting a vice-like grip on that nation, pushing it to the brink of overdue debts, is a direct response to the independent and sovereign attitude that Christina Fernandez’s government has taken towards the global powers which dominate international finance.

That’s how Eudomar Tovar sees it, as the director of Venezuela’s Central Bank, especially when considering similar decisions taken by jurisdictional bodies against other Latin American countries that defend their self-determination, such as Ecuador, Bolivia and Venezuela. 

Tovar explained that hedge funds [or, as they’re called in Spanish; vulture funds] are speculative, risky capital enterprises whose function is to buy bonds at rock-bottom rates to be sold later at the highest possible price. These financial predators tend to wait for the moment that the bond seller- either a country or a company in financial trouble- tries to renegotiate the payment conditions, in which case they reject the offer and opt to press charges. 

In the case of Argentina, the dispute emerged in 2001 when the country suspended payments and laid out to its creditors a plan to restructure their debt. The majority of Argentine bondholders, 93%, accepted in exchange for new bonds, but the outlying 7%, consisting of speculative funds, rejected the renegotiation and sued the Argentine Republic for the amount owed, plus interest. The US judge ruled in favor of the hedge funds and instructed Argentina to cancel their debt immediately, which meant freezing payments to all the other creditors. The decision placed Argentina in danger of nonpayment, even though the nation demonstrated its intention of complying with these obligations, and even deposited the necessary amount to overcome the mandate in a New York bank. 

-What consequences will this have for Argentina?

If Argentina cannot pay its debt, if it cannot complete international transactions because it’s subject to a lawsuit which allows hedge funds to seize [Argentine] goods, that will have an important impact. If the bondholders do not get paid, they cannot pay their respective creditors, and that will affect the financial flux in general, keeping in mind that Argentina is the third [most significant] economy in Latin America. 

-What effect could this have on other countries?

Of course, it is bad news for the rest of the world by being a precedent of which any country may find themselves the victim of in the future. 

-Is there a possibility that Argentina will manage to negotiate with the hedge funds to avoid a default?

The Argentine economy minister said the hedge funds have no interest in negotiation. This indicates an entanglement of political and economic ties between powerful international capital, including financial institutions. If they do not negotiate it’s because they believe they can be paid 100%.

The BCV director recalled other hedge fund suits launched against sovereign nations, such as the case of Zambia in 1979, when the country had to pay 40 million dollars in bonds, while their original value totaled only $3 million. Peru also fell victim to the financial rapacity in 1996, when it paid $58 million for a debt incurred at five times less.

-Could Venezuela be affected by a similar situation?

In terms of debt, Venezuela is in favorable conditions. The country has honored its obligations in a positive sense, in terms of punctuality, and will continue to do so according to all plans; however the thrashing of its brother country in Mercosur and Unsaur, with whom we share political affinity, will undoubtedly be felt in some manner. If such an important economy as that of Argentina is affected, there will certainly be consequences.

-What concrete action can be taken by Latin American countries to support Argentina in this crisis?

I am convinced that what saves our countries from these international blows is the strengthening of processes of integration. The integrationist vision of …Chavez, continued by President Maduro and other leaders in the region, provoked the conception of a new regional financial architecture which lead, for example, to the creation of the Bank of the South.
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Another project that Eudomar Tovar believes will be useful to foster economic integration is the creation of a regional reserve fund which will administer part of the countries’ reserves, in order to avoid external financial impact and serving additionally as a buffer for lawsuits and problems with debt balance.
He also proposed a position from which [South American] officials can interpret local risks, thereby fulfilling the task currently done by international companies which respond to corporate interest.

Sucre in expansion

Eudomar Tovar, as president of the Regional Sucre Council, was present at the installation of the Administration Council for the Bank of the South, conducted last Wednesday [06/25/14], in the headquarters of Venezuela’s Central Bank. The activation of the Administration Council is an important step for the multilateral financial institution to begin its labors and become a strong alternative for the financing of development projects in the Latin American region.

Shareholders of the bank include Argentina, Brazil, Bolivia, Ecuador, Paraguay, Uruguay, and Venezuela, while Chile and Peru participate as observers.

“It is a new type of bank, an alternative that will help to strengthen the economies of the countries, because we will utilize our savings so that resources can cycle through our economies and contribute to development and international integration. An institution such as this will provide alternate solutions for the kind of situation that Argentina confronts today.”

-When will the bank formally launch?

On Wednesday we were preparing the agenda we plan to present to the Bank of the South Ministers’ Council. Additionally we approved the regulations outlined by the Administration Council with which we plan to use, from a legal perspective. I believe the bank could begin operations in the near future, such as the financing of social, industrial, structural, and environmental projects in the region.

-How will the sucre be implemented as an instrument for interregional payments?

The sucre was born in five countries; Ecuador, Cuba, Bolivia, Venezuela, and Nicaragua. The integration of Uruguay is currently underway. No one believed in the sucre, they said it was madness, but it has produced results. When we began operations in 2010, we were exchanging 12 million dollars in this way. Now, at the end of June, we reached 235 million dollars.

-How can you make it grow more?

The sucre needs new blood from the production of goods in order for there to be increased exchange. We are looking for increased production from all countries within the context of our economies’ necessities. The sucre works, it is strong and we wish to expand it with corresponding production. 

The Unitary System of Regional Compensation (SUCRE, for its initials in Spanish), is a mechanism which will permit member states to use local currency to pay for trade between them. In Venezuela it has served for the commercial transaction of food products, textiles, household electronics, automobiles, and others.

Translated by Z.C Dutka for Venezuelanalysis.com