Provides for a tax on debt evading foreign states

Section 2 - Effective Date.

Justification

New York taxpayers have invested billions of dollars in debt issued by foreign sovereigns. To facilitate the issuance of their debt to New York citizens and other individuals through New York's capital markets, many foreign sovereigns designate New York as the place of payment and the venue where the foreign sovereign waives sovereign immunity and consents to jurisdiction to be sued in the case of a default. As a result, actions to enforce defaulted debt are frequently brought in state and federal courts located in New York. Although many foreign sovereigns pay their debts responsibly, some foreign sovereigns that are capable of making payments to their creditors instead choose to repudiate their debts and to refuse to pay judgments rendered against them. Because of the difficulties associated with enforcing judgments against foreign sovereigns, New York taxpayers suffer significant losses, and have little legal recourse, when foreign sovereigns choose not to pay their debts. The losses incurred by taxpayers significantly affect New York tax revenue, not only because New York cannot tax interest and other gains that are not paid, but also because investors' losses can be offset against other taxable gains.

The most egregious example of a foreign sovereign that is capable of paying its debt, but that chooses not to, is the Republic of Argentina. In 2001, Argentina defaulted on $81.2 billion of debt, which is the largest sovereign debt default in history. Argentina refused to negotiate with its bondholders until 2005, and then offered the bondholders an exchange worth about 25 cents on the dollar on a take-it-or-leave-it basis. Approximately 76 percent of bondholders accepted the exchange offer, and Argentina repudiated the remaining portion of its debt. Argentina has repudiated these debts while claiming, in a recent filing with the Securities and Exchange Commission, to have a debt-to-gross domestic product ratio of 49.1% -- less than the ratios of Canada, the united Kingdom, France, Germany, and a variety of other European countries - and a budget surplus in each year from 2004 to 2008.

Dozens of lawsuits have been filed in the united States District Court for the Southern District of New York as a result of the Argentina debt default. The two largest creditors alone have claims and judgments of over $3 billion. Judge Thomas P. Griesa, the most senior judge in the southern District, has repeatedly observed that Argentina has never offered to pay the judgments rendered against it and instead focused all of its efforts on protecting its assets from creditors. In May 2009, Judge Griesa held that Argentina was in civil contempt of court for failing to comply with court orders and drew an adverse inference that Argentina had removed assets from New York in violation of court orders.

The economic impact of this debt repudiation has been substantial. The direct net costs to New York holders of defaulted Argentina debt currently total $902 million, including $452 million in capital losses, $382 million in foregone interest payments, and $180 million in foregone investment returns, less nearly $112 million in tax benefits created by the losses or foregone income. From December 2001 to December 2008, the indirect costs of the Argentina debt default, through lost tax revenue, total approximately $329 million.

This bill creates a tax to offset a portion of the adverse effect that DEFS have on New York tax revenue. It does so by imposing a tax on two types of transactions that foreign sovereigns commonly engage in when they utilize New York's capital markets; foreign exchange transactions and overnight repurchase agreements. The rate of tax would be fifty percent of any interest or other gain from an overnight repurchase agreement, and one percent of the entire amount of a foreign exchange transaction. Foreign exchange transactions are simply transactions in which one" currency is exchanged for another at the prevailing market exchange rate. Foreign exchange traders earn profits through shifts in exchange rates. Overnight repurchase agreements are essentially collateralized overnight loans: a lender buys securities from a borrower, and the borrower agrees to repurchase the securities for a higher price the next day. The price difference serves as interest, and the securities serve as collateral.

The volume of these transactions in New York is considerable. For example, Banco Central de la Republica Argentina ("BCRA"), which is the central bank of Argentina and would be subject to this tax, reports that, globally, it engages in average daily net purchases of foreign currency worth tens of millions of dollars. A substantial portion of these transactions occur in New York, which is known because Argentina's creditors have frozen a portion of BCRA's assets in New York. Judge Griesa limited the freeze to $100 million found in one account on one particular day so that BCRA could continue to engage in transactions in New York. At a hearing before Judge Griesa on January 13, 2010, BCRA's counsel confirmed, among other things, that BCRA consistently uses New York's capital markets for foreign exchange transactions, especially after European markets close for the day. BCRA reports on its website that the net daily value of its foreign exchange transactions ranges from tens of millions of dollars to hundreds of millions of dollars. At the applicable rates, this tax would raise approximately $75 million per year. If Argentina pays the judgments rendered against it in order to avoid the tax, the tax would

still indirectly raise revenue through interest and capital gains taxes on Argentina's belated payments to investors.

The bill also ensures that the tax does not adversely affect developing countries. It expressly excludes heavily indebted poor countries ("RIPC") that are eligible for relief from the International Monetary Fund and World Bank under the Enhanced RIPC Initiative. It also excludes countries that are eligible for financing from the World Bank's International Development Association, which aids the world's poorest countries, or for debt relief under the Multilateral Debt Relief Initiative of the International Monetary Fund

Legislative history

New bill.

Fiscal implications for state and local governments

Raises additional revenue of at least $75 million per year.

Effective date

Immediately on the date on which it shall have become a law.