Wednesday, 2 July 2014


Defaulted bonded debt, the US and the UN
Argentina has been a target of the international financial institutions, US government and G-7, multinational corporations, and the mainstream pro-business media in the last fifteen years. The reason is not because it opted to become Communist, but rather to embrace a nationalist solution to the domestic credit crisis, instead of submitting to an austerity regime that the US, International Monetary (IMF), Paris Club, European Central Bank and Wall Street and multinational corporations wanted. The issue is not the size of Argentina’s economy, because it is tiny in terms of the global GDP. 

The core of the issue is that Argentina did not submit to austerity as the markets demanded. Even if it paid the creditors every single dollar it owed, but it still opted for a multilateral foreign economic policy with a heavy dose of economic nationalism, the reaction from the US and the markets would have been just as condemnatory. Public debt is a pretext, because there are a lot more countries that owe a lot more than Argentina, but because they follow the dictates of the markets and neoliberal policies, there is no criticism.   
For many reasons, ranging from ideological to very practical and geopolitical, the US as well as the G-7 creditor nations cannot demonstrate any leniency toward a Latin American republic defaulting on its debt and deciding to break the traditional mechanisms of economic integration that link the national economy to the transnational banks and corporations under the terms the latter dictate. Clearly, the issue here from the Cuban Revolution onwards has been to prevent economic nationalism and multilateral foreign economic policy. 

Public debt is one of the most effective means to keep a country well integrated into the international political economy. This has been the case for Argentina that the US and the G-7 want to punish as severely as possible, sinking its economy into another economic crisis so that the world can learn a lesson of what not to do. The debt crisis of Argentina has been dragging on for more than a decade and a half (late 1990s to the present), and there seems to be no resolution to it, given that the courts in the US have become involved ruling in favor of creditors in a case that is as much financial as it is political.

The worst thing for the US and the G-7 creditors is if Argentina actually prevails with its nationalist path and terms that have allowed it to break off the tentacles of the IMF, New York and EU-based creditors. Argentina’s punishment means greater rewards for creditors in the future, and this is not just my opinion, but the conclusion of the United Nations Conference on Trade and Development agency.
·         First, by removing financial incentives for creditors to participate in orderly debt workouts, the rulings will make future debt restructuring even more difficult, in particular for outstanding bonds without a Collective Action Clause, the actual amount of which is unknown but is likely to be large.
·         Second, obligating third-party financial institutions to provide information about assets of sovereign borrowers will have a significant impact on the international financial system as it forces financial service institutions to provide confidential information on the sovereign borrower's global financial transactions to facilitate the enforcement of debt contracts for the creditors.
·         Third, the ruling will erode sovereign immunity.

Besides the UN, even the IMF was astounded at the US Supreme Court decision, claiming that it poses problems in international financial relations. It appears that the IMF is concerned that a single Hedge Fund is allowed to prevail over a sovereign nation-state that has demonstrated willingness to negotiate with its creditors. After all, Argentina came to terms with the Paris Club, a long-standing international lender to governments, as well as the Spanish-based oil company REPSOL, thus proving that it is seeking negotiated solutions and not outright expropriations.

Hedge Funds, Public Debt  and Public Interest                                                                                        
There is an assumption in the mass media, on the part of businesspeople and mainstream politicians that anything good for business is good for society (1920s mentality in the US), and anything that is in the public domain is inherently evil, invariably associated with Communism. Therefore, the solution to all problems in society is to privatize everything from public transportation and utilities to public health and education. The assumption here is that private sector efficiency necessarily translates to social justice.

Obsolete after the Great Depression, this mindset prevailed in the Western World from the early 1980s and it really took off in the 1990s when the euphoria of the end of Communism was believed to be the vindication of neoliberalism. Does the fact that Communist regimes – bureaucratic Communism with an elite party class – failed in the Eastern bloc necessarily entail that unchecked capitalism under neoliberal policies and a corporate welfare state is a great thing for society as a whole? The answer is that this is the assumption of mainstream politicians from right to left-center, media, academia and hired-gun analysts interested in securing a salary. Argentina’s public debt problem took place against such a background.

In June 2014, the government in Buenos Aires requested that a US court hold its ruling in favor of creditors (mainly a single hedge fund), so that the country would avoid yet another default that would not be in anyone’s interest, least of all the people of Argentina on the receiving end of the crisis. The US court had decided that it was illegal for Buenos Aires to be paying bondholders who had not agreed to the debt restricting plan under such plan struck in 2005 and 2010.

Fearing a precedent that could spell disaster for debtor nations, the UN trade agency UNCTAD stated that the US court ruling is in violation of the US Sovereign Immunities Act, and it contributes to the erosion of Argentina’s sovereign immunity. The concern of the UN-UNCTAD is that the US court ruling strengthens the creditors and weakens the debtors who may not be solely responsible for the debt default. The IMF did not go as far as the UNCTAD, but it was troubled that the courts role intervenes in cases where international financial institutions historically negotiate with governments.

The concerns of UNCTAD as expressed above illustrate very clearly the sharp division between debtors and creditors, between rich and poor, between a predominantly northern hemisphere that is rich and southern hemisphere that is poor. At the heart of this issue is not only the world division of labor and fair practices on international loans, trade and investment, but whether 19th century-style imperialist practices will continue to hold true in the 21st century in democratic societies. 

Under restructuring, capital was reduced, interest capitalized, and time payments extended. Although 93% of the bondholders have accepted the government’s debt restructuring arrangement that entailed shaving off a third of the bonds’ original value, the US has been using the defaulted debt issue to engage in what President Cristina Fernadnez has called “vultures”, creating financial instability and driving the middle class into poverty by using the debt issue. Because the US Supreme Court refused to hear the case, the cost of borrowing and the value of the currency are tied to the court decision. Furthermore, investment decisions, the pace of the country’s economy and living standards are impacted immediately.

Argentina's government ran up against the powerful NML Capital, a subsidiary of Elliot Capital Management, run by billionaire Paul Singer who has experience in law suits against Third World governments (Republic of the Congo and Peru) for defaulted bonds. One could argue that no one forced these countries to borrow, let alone to spend loans unwisely until they fail to service the loans. True enough, though the lender knows the risks when making the loans.

Unlike the majority of creditors who accepted the bond swap Buenos Aires offered, Singer refused, knowing that the politicians, media and markets are on his side. Managing a $17 billion Hedge Fund, Singer is a Republican Party activist and according to news stories a very generous contributor to journalists who shape public opinion to suit his views. A true patriot interested in the US national interest in every respect, Mr. Singer is using the Cayman Islands as the base of his Hedge Fund operations. These are the same Cayman Islands well known for individuals interested in escaping paying taxes in their own countries and laundering money. 

Less than two years ago, the Cayman Islands, under Singer’s influence held an Argentine ship for two months in Ghana. The ship was finally released only after the UN International Tribunal for Law of Sea ordered the ship released. How did the mainstream news organizations report this story? Simple, Argentina is a debtor nation not paying its creditors seized the ship; a lesson for debtors everywhere. The media made no mention about Singer the Hedge Fund manager, about the infamous Cayman Islands. There was no mention about the manipulation of the legal system in the islands and Ghana by Hedge Funds firm. In short, the media only reported what obviously served Singer’s interests. 

How did the debt crisis originate and evolved?
From the Napoleonic era when the republics south of the Rio Grande began to secure their independence, until the early 21st century, cyclical debt crises have been a part of Latin America’s political economy and an instrument of external hegemony of the national economies. Foreign debt has meant external trade dependence and uneven terms of trade inevitably forcing Argentina and its sister republics into cyclical debts.
In the mid 20th century – from the 1940s until the 1960s – import substitution combined with a reliance on funding imports with receipts from raw materials exports ran its course as a growth and development strategy. 

Heavy borrowing financed by raw materials exports to modernize the economy while at the same time emphasizing the manufacturing sector was costly partly because financing came from external sources but also because the economy was not “inward-looking” with the goal of sustainability. Moreover, the vast value difference between raw materials exports and expensive imports and luxury items geared for the elite domestic market failed to make Argentina and its sister republics more self-sufficient. Raul Prebisch, the Keynesian advocate of Argentina’s and Latin America’s “inward development”, would be disappointed not because theory never matched reality, but because so much went wrong along the way owing to domestic and international political and economic obstacles. 

As far as many were concerned, Argentina’s vast natural resources, agriculture and animal husbandry provided the illusion of never ending prosperity, considering that other republics are not nearly as rich in such natural assets. After the era of military US-backed dictatorships in the 1970s, and the Falklands/Malvinas war ending in 1982, Argentina, like many Latin American economies, experienced hyperinflation because there was an interest to catch up with many economic and social development programs neglected by the pro-US dictatorship. The result of “easy money” was inflation, until the IMF advised Buenos Aires to “hold a dollar for every national currency unit” issued by the Central Bank. Inflation had started rising sharply under the military junta, but it reached very high levels at the end of 80s-early 90s.

Borrowing patterns reached a point during the Latin American debt crisis of the 1980s that the republics were securing new loans to finance servicing existing ones, a process that entailed draining of national capital and the eventuality of a major debt crisis. This was great as long as banks and investors were making money. However, hyperinflation meant that Argentina was under enormous pressure to accept IMF stabilization measures.

The decade of the 1990s was in many ways similar to that of the 1920s that some have described as "the dance of the millions" in terms of public loans and foreign investment. At the same time, that first decade of the post-Cold War global environment coincided with enthusiasm for neoliberal policies where the state took a back seat and permitted corporations to reap as many benefits with as low taxation as possible and without many conditions on reinvesting to strengthen the economy and secure jobs growth.

In October 1994, Argentina’s President Carlos Menem and Bankers Trust to issue sovereign debt in of New York entered into an agreement on the sovereign debt of $82 billion. In return for the agreement with the bank, Menem agrees to privatization and a series of neoliberal policies intended to attract foreign investment and presumably secure enough revenue for the government to service the debt. The Menem regime assumed that embracing neoliberal policies and handing over the debt issue to commercial bankers in New York would solve Argentina's problem and make it competitve with neighboring Brazil. On the contrary, the move was an unmitigated disaster.

Toward the end of the decade, much of the region south of the Rio Grande, including Argentina faced a deep crisis, created in large measure because creditors and International Financial Institutions, public and private decided to cut off credit and force the debtor nations into an austerity regime that entailed devaluation of all assets and massive capital outflows from the periphery to the core. For Argentina, the debt crisis started with a deep recession from 1999 until 2002 when the country could not possibly service $82 billion bonded debt, half of which was issued amid the deep recession. Argentina defaulted and de-linked the national currency from the US dollar as a reserve currency, largely to make sure that the needs of the domestic economy were met. In December 2001, Argentina declared a moratorium on foreign debt, and began arrangements for debt restructuring in the years thereafter. The Argentine government plan essentially asks the bondholders to take a substantial loss, something that a number of institutional investors agreed, ending the controversy with 93% of investors. 

The immediate reaction to Argentina’s default was massive flight of capital, foreign and domestic, thus creating a massive gap in the banking system and fear spreading across the country. The nationalist solution that favors domestic producers and larger enterprises went along with the government’s plan to maintain assets under national control. As practical as the default option may have been, the question is whether the solution of economic nationalism was socially just and one that distributed the burden of the crisis evenly across all sectors of the population. On the other hand, what would have been the fare of the majority of the people if the IMF had come in to impose austerity?

Dr. Raul García Heras, Senior Research Fellow in economics at the University of Buenos Aires, has done extensive work and written in Buenos Aires newspapers and journals about the Argentine foreign debt, the IMF, and foreign creditors since the regime of Juan Domingo Perón. Reflecting majority opinion in his country, Raul's view is that the IMF, foreign creditors, the Argentine government, and local businesses are jointly responsible for the debt crisis. About half of the population has been living at poverty level during the past five years. Debt forgiveness means that someone has to pay, but Latin America paid more than twice the capital inflows in debt service during the 1980s debt crisis.

The result was a sharp drop in real wages, income redistribution from the bottom up and from the south to the north. Clearly, there is no socialism here just because a nationalist option was adopted in a country with a deep past of nationalism intertwined with Peron’s legacy. Billionaire George Soros, among other reform-minded enlightened capitalists, agrees that the International Financial Institutions (IFIs) have been part of the problem and not the solution with regard to managing the world economy under the Bretton Woods system that was established to benefit creditors. Should the Argentine workers and middle class suffer even sharper reduction in their living standards so that creditors recover their money right now? Should the US government bail out the creditors now?

The US and creditor countries, though not necessarily the individual creditors, will receive far more than the $100 billion that the Hagens Berman Law firm is demanding by virtue of re-integrating Argentina back into the hemispheric economy, strengthening its finances, and stabilizing the region by allowing Argentina to trade and to generate jobs and income growth. However, in a climate of neoliberal policies that the IMF, World Bank and G-7 central banks are pushing in order to strengthen capitalism in the core nations, the US court decision is hardly a surprise.  


All the promises that the apologists make about following the orthodoxy of monetarist policies and neoliberalism are meaningless because history has demonstrated again and again in all corners of the earth where IMF-austerity has been imposed that these promises never ever come true. On the contrary, the only ones benefiting from austerity are the domestic business elites and foreign corporations.

It is short-sighted to demand such an amount of money at the risk of alienating the entire Third World watching the Argentine case, especially considering the record of capital inflows to the Third World versus outflows to the G-7 in the past 50 years. Yet, the IMF, with the US and the G-7 behind it, has no problem making Argentina an example for others to follow and never dare try to follow its nationalist example.
Unfortunately, the transfer of capital from the southern hemisphere to the north will continue for the next 50 years at the expense of perpetually low living standards and endemic poverty. One could argue that the population rise is a source of the economic problem. However, with the exception of Central America, the South American republics have not seen population growth much above one percent. 

A nation of 40 million and the agricultural capacity to feed more than half a million, Argentina also has a highly trained, low-cost labor force makes for a very attractive investment environment  once the default issue is settled. Therefore, the argument that population pressure vs. limited natural resources is at the root of the problem is not valid.Argentinians believe that their situation is unique, partly because in its modern history Argentines always believed they were unique among Latin Americans. In reality, their situation is symmptomatic of how global capitalism operates and how private and public institutions react when a government opts out of pre-existing mechanisms to repay its public debt. If there is something unique about Argentina at this juncture, it is that its provinces continue to borrow at double-digit interest rates, causing somewhat of an alarm among financial analysts and political observers.

Whereas it is true that investment has slowed to almost nil in the last fifteen years or so, domestic large enterprises have benefited, despite the numerous instability problems. The same has not been true for the middle class and labor that has paid the price of default while running up against the police, armed forces, and the Peronist-dominated trade union bureaucracy. Pro-market and pro-Western integration policies without many checks to account for fair income distribution among various social sectors were at the center of the debt question that exploded at the end of the 1990s. As long as creditors provided liquidity, there was no problem, but when they turned off the easy credit, that is when the problems began, as they have always with creditor-debtor relations. Moreover, the debtor is always at fault, regardless of what the UN-UNCTAD states about responsibility of creditors in part to blame for creating the debt crisis.

No economy can possibly survive, even the US with its nearly self-sufficient economic base, if it does not have support from trading partners. Even North Korea has China behind it to continue going along as it does.  Political and business leaders in Argentina realize that global interdependence holds true for their country and they realize that if it were not for Asian markets, the country would not be able to withstand the kind of pressure it has endured from the US and to some degree Europe in the last decade. China’s emergence as the world’s number two economy and its intense interest in Latin America has come at just the right time to give Argentina a breather until it settles the debt question with its American creditors. Therefore, this is not an issue of capitalism vs. Socialism, but international capitalism under old-style imperialist tactics vs. national capitalism.

Government collects taxes, which is a way of punishing and rewarding, redistributing income from one social group to the other, and it spends thus deciding how to run society and where to place priorities. A redistributive policy such as the one of Norway may be an extreme example, but it is one model under the market system. In the last decade and a half, Buenos Aires has followed a mixed policy that included some redistributive measures, but it is hardly anything radical. Moreover, given the failure of neiliberalism in Argentina in the 90s, the majority of the population does not have the stomach to return there and try its luck with unchecked integration into the global economy, regardless of the consequences to the middle class and workers. 

Is there a possibility that Argentina will someday become more self-reliant, follow a more inward development path with greater control over its own destiny as Raul Prebisch once envisioned? Is there a possibility that a billionaire with money to spread around for politicians, journalist and individuals in the judicial system would be checked by the state of a sovereign nation whose interests transcend those of a profiteer? For now at least, the road for Argentina is compromise with the "holdout creditors" and a development strategy that takes into account new powerful non-Western players in the world economy. Longer term, if another debt crisis hits in 20-30 years, there may be a revolution and that would entail structural changes.

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