UCLA International Institute, December 11, 2017 — One of the narratives about the global economy is that contemporary financial flows are so massive that they defy borders and are impossible to regulate, says UCLA financial geographer Shaina Potts. However, she observes that global finance is “about erecting new borders in addition to breaking down all kinds of other borders.”
One of those new borders involves the transnational extension of the commercial law of certain subnational units. Since the 1970s, for instance, New York law has come to govern the contracts by which commercial financial institutions lend money to sovereign governments. That is, the legal borders of New York State have expanded to include countries worldwide.
Financial district of New York. Photo: Ian Morton/Flickr, 2016. CC BY-NC-SA 2.0.
Potts, who joined UCLA this fall with a dual appointment to the department of geography and the UCLA International Institute (where she teaches in the Global Studies Program), is a specialist on sovereign debt crises. She is currently working on a manuscript on the role of U.S. law in transnational sovereign debt relations, which includes a close look at the Argentine debt crisis of 2001 and the decade-long litigation that followed.
A Northern California native who completed both her undergraduate and graduate education at UC Berkeley, she has lived in San Francisco, Berlin and New York. She is delighted to have landed in a big city and is actively exploring Los Angeles.
Teaching global studies
“One of my major goals in teaching global studies,” says Potts, “is to have students think about major crises not so much as national crises — where you can find the cause and consequences of a crisis within the bounds of a particular nation state — but to understand that what leads to a crisis is transnational in nature.
“Think of the 1980s debt crises,” continues Potts. “It was the confluence of so many things — including the decline of the U.S. dollar in the 1960s, the Vietnam War and U.S. overspending, the oil crises of 1973 and 1979 and the deregulation of finance in the United States — that made petrodollar loans possible.
“All of those things had to happen to make possible the kind of lending that led to the third-world debt crisis of the 1980s,” she adds. “Such crises are the culmination of transnational processes — not only economic processes, but geopolitical processes.
“There can be a tendency to say, ‘Let's talk about the economic and then let's talk about the political,’” she observes. “In terms of what I want to get across to students,” she continues, “it’s thinking in a nuanced way about space and a world composed of inter-relations, about political economy and not about economics and politics as separate things.”
With respect to sovereign debt crises, Potts says such crises must be examined beyond their economic implications to include their social, political and environmental implications, and even the way in which gender relations in a given country may be reconfigured.
New York commercial law and the Argentine debt crisis
Argentina defaulted on $82 billion in sovereign bonds in 2001. Most of the bonds were held by commercial investors, although a certain portion were owned by Italian pensioners through pension funds. Argentina negotiated discounted payments with most of its bondholders in debt restructuring negotiations in 2005 and 2010 and began regularly repaying those bondholders thereafter.
Central Bank of Argentina, Buenos Aires. Photo: Rubén/Flickr, 2010. CC BY-NC-SA 2.0.
However, “vulture hedge funds” that had purchased a small portion of the country’s bonds at a huge discount decided to sue to recover their full face value. The long and expensive litigation that followed began in roughly 2004 and continued through 2016, when Argentina repaid something close to $9 billion to the funds.
“What Argentina did was to fight a creditor lawsuit much harder than any country has been able to do before, for multiple reasons, including its economic size and stature and the fact that it was not immediately dependent on getting new loans,” recounts Potts. “As a result, it was able to resist for longer than third-world debtor countries in the 1990s.” In the end, however, it lost the case.
Because New York was the “governing law” of Argentina’s commercial debt agreements, the hedge funds sued in New York courts under New York law. “It is New York law,” explains Potts, “but because it involves sovereign debtors, it goes to the federal courts in New York rather than the state courts.* Those courts, however, apply New York state law and the U.S. Supreme Court, had it chosen to review the case [it didn’t, leaving a Second Circuit Court ruling to stand], would also have applied New York law.”
During the protracted litigation, the U.S. government under both President George W. Bush and President Barack Obama wrote multiple briefs on Argentina’s side. “The case was seen even by the U.S. government as an upsetting overstepping of boundaries,” notes Potts, “a territorial overreach by a U.S. court that the government was afraid would offend other sovereign governments and could end up impacting U.S. assets all over the world.”
The New York ruling that ended the litigation did not force Argentina to pay the hedge funds (an impossibility in any case). Rather, it barred Argentina access to the international financial system by prohibiting third-party financiers from helping it process payments to the “exchange bondholders” (the bondholders who accepted discounted repayments) unless Argentina first repaid the hedge funds.
Specifically, the ruling forbid banks and financial institutions anywhere in the world from processing payments transferred from the Central Bank of Argentina to the exchange bondholders (located mostly in the U.S. and Europe) until Argentina had repaid the hedge funds in full.
The intersection of finance and geography in this case is critical, says the UCLA professor. “In New York,” she explains, “legal power, judicial power and financial power are closely intertwined.” The reason why a New York court got away with limiting an actor’s access to the international finance system, she explains, “is not so much because it has some kind of international, formalized authority to do so, but because access to New York financial institutions and New York financial space is so important to any major financier that they can’t risk being held in contempt of court and thus risk themselves losing access.”
In the end, a change of government and an economic need for new financing forced Argentina’s hand, and it chose to pay the vulture hedge funds in full.
Major courts in New York's financial districit. From left: New York Supreme Court, U.S. District Court for the Southern
District of New York (Daniel Patrick Moynihan U.S. Courthouse) and the U.S. Court of Appeals for the Second
Circuit and S.D.N.Y. (Thurgood Marshall U.S. Courthouse). Photo: Ron Coleman/Flickr, 2015; altered. CC BY-NC 2.0.
The internal and external borders of global financial flows
Potts says her research on the Argentina debt crisis essentially seeks to ask the question: “What is the history of a legal structure in which domestic U.S. law, that is, sub-national law, not international institutions, got written into lending contracts?
“Before the 1980s,” she explains, “it would have been extremely difficult to recover a sovereign debt through a lawsuit. By the 1990s, creditors had figured out how to rearrange the U.S. laws governing these transactions to bring more of this lending under U.S. jurisdiction.”
A major way in which this was achieved was, starting in the 1960s and 1970s, to make a “governing law clause” standard in commercial creditor contracts. A global financial center, New York was already considered the most “creditor-friendly” jurisdiction in the world by commercial creditors and New York commercial law became the de facto law governing such contracts.
“These clauses, in combination with a slow accretion of case law and case precedent, eventually made the vulture hedge fund strategy possible,” remarks the UCLA professor. At the same time, a growing legal class in many developing countries began trying to harmonize the commercial laws of their countries with those of the major financial centers (especially New York).
“What was interesting to me is that these kind of vulture funds are probably the most widely reviled financiers around — even many other financiers will say critical things about them,” comments Potts. “The U.S. government has critiqued them, many activists and third-world governments especially have critiqued them.” Yet while these funds may often be treated as an aberration, Potts considers them symptomatic of how the financial system currently operates.
“There has been a huge integration of markets all over the world and enormous cross-border exchanges,” she says. “But to make capital flow far and fast actually requires a huge amount of work in terms of constructing all kinds of regulations and legal frameworks.” Part of that work, she adds, involves erecting new legal borders.
“For instance,” she explains, “one of the things that comes up in the Argentina litigation is what I would call the internal legal borders of financial payments. The parties to the litigation pretty much agreed on the institutional map that the payments went through: from the Argentine Central Bank to the Bank of New York Mellon branch in Buenos Aires, and either to European clearinghouses or to New York clearinghouses and then eventually to the exchange bondholders.
Photo: khrawlings/Flickr, 2009. CC BY-NC 2.0.
“What they disagreed about was where in that payment chain did that money go from belonging to Argentina to belonging to the exchange bondholders on the other end,” she specifies. Argentina and the third-party financiers who joined the lawsuit argued that the money belonged to the bondholders immediately after the first transaction in Buenos Aires, meaning that seizing the funds at any point thereafter meant seizing the bondholders’ property.
The vulture funds and the courts argued that it still belonged to Argentina after it had left the country, and could thus be enjoined. By defining the borders of legal ownership in this way, the New York District Court in essence denied the country access to the international financial system.
This way in which global finance both breaks down and erects new borders can also be seen in financial havens, says Potts. “Offshore financial centers are a fantastic example of elite spaces that are really about constructing jurisdictional isolation,” she says. “The only reason the Bahamas works as an offshore center is because you can declare it legally distinct and sovereign… you want to make sure that you are legally distinct and protected from, for instance, the reach of New York courts.”
“As a geographer,” concludes Potts, “that’s what I find fascinating... For me, the questions are: Which borders apply? What are financial system actors doing in order to make the global financial system look from the outside as if it is money flowing everywhere all the time?
“This image of capital flows without boundaries leads to a certain discourse that says it would be great if finance could be regulated, but it’s not possible because financial flows are too fast and too complicated,” she says. “When you start looking at how much work goes into keeping the financial system running, it may be politically difficult to change,” she concludes, “but technically, it’s not that difficult.”
* The lawsuit was filed in the U.S. District Court for the Southern District of New York; that court's rulings in the case were then appealed to the U.S. Court of Appeals for the Second Circuit. The U.S. Supreme Court declined to hear an appeal of the Second Circuit Court ruling.