Argentina

The judge who took an economy hostage

Mark Weisbrot

08/11/2014

Opinión

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Argentina’s fight against the vulture funds is a drama full of intrigue, mystery, greed and political machinations, with some real villains. (OK, Paul Singer is hardly ISIS, but vulture moguls and a judge/advocate who endorses their demands are scary dudes not afraid to take hostages and make good on their threats.) Among the creditors’ assets are former US government officials turned lobbyists who, as described by Mark Leibovich, “stick to Washington like melted cheese on a gold-plated toaster.”

On 21 November 2012 a US New York District Court judge, Thomas Griesa, ruled that Argentina must pay vulture fund plaintiffs (who were led by hedge-fund chief Paul Singer’s NML Capital) before it could be allowed to pay the other 93% of its bondholders, who had accepted debt-restructuring haircuts in 2005 and 2010. The case reaches far beyond Argentina’s creditors and the nation’s ability to borrow on international markets: it could shift the balance of forces significantly in favour of creditors against debtor nations. It also involves long-standing divisions within the US foreign policy establishment, inside and outside the Obama administration, about how to handle the independent South America that has emerged over the past 15 years. On 16 June 2014 the US Supreme Court refused to review Judge Griesa’s decision in favour of the plaintiffs for full payment of around $1.33bn, including accrued interest.

The story first began in 2001, when Argentina defaulted on about $100bn of sovereign debt after more than three and a half years of depression: it could not continue making interest and principal payments. There really wasn’t much choice. After years of negotiation, the government reached agreement in 2005 with 76% of the bondholders, and by 2010 that was 93%. They were given “restructured” bonds, and on these Argentina has not missed a payment.

The vulture funds (the moniker long preceded this case) had meanwhile bought up some of the defaulted bonds for around 20 cents on the dollar, with Singer’s NML capital holding hundreds of millions, and then sued the nation, seeking payment of the bonds’ full value (including accrued interest). That is what vulture funds do for a living. Judge Griesa’s ruling would give them about a 1600% return on their investment, rather than the 300% return that the Argentinian government is offering, according to government estimates.

The restructuring was in some ways a model, postponing or getting rid of enough debt to allow the economy to recover while giving the defaulted creditors a stake in this recovery. But much of the business media has not forgiven the Argentinian government for putting the interests of its citizens above those of foreign bondholders, and this explains the overwhelmingly negative coverage of Argentina over the past decade, although its economy — and most of its citizens — have done quite well. The economy shrank for a single quarter after the default, then began a robust growth ascent that brought it back to pre-recession GDP in just three years. Compare this with Greece: more than six years of recession, 27% unemployment and a 40% cut in healthcare spending. Even after its debt restructuring, Greece’s public debt is 170% of GDP, and it is not projected to reach 2007 income levels until well into the 2020s.

Using independent estimates of inflation, Argentina had cut poverty by nearly 75% and extreme poverty by even more. (They peaked in 2002.) The economy had one of the highest growth rates in the hemisphere, and inequality was sharply reduced: between 2001 and 2010 the ratio of the income of the highest earners (95th percentile) to that of the lowest earners (5th percentile) had fallen from 32 to 17.

However, in the past three years the economy has run into trouble, with inflation at about 38% annually and a black market for the dollar, now reaching a premium of around 70%. The world economy has slowed markedly since 2010 (from 5.2% in 2010 to 3% in 2013), including Argentina’s two principal trading partners, Brazil and Europe. Thanks to the legal actions of the vulture funds, Argentina cannot borrow on international markets, which makes it more vulnerable than other countries to potential balance of payments problems. The country’s media, which is overwhelmingly anti-government, encourages flight to the dollar with its prophesies of imminent doom.

No one can say why Judge Griesa decided to take more than 90% of Argentina’s creditors hostage. His decision at the very least violates fundamental principles of equity in the US legal system: What did the holders of restructured bonds do wrong that their property should in effect be confiscated by the court? Serious questions have been raised about the competence of Griesa, 84; when he presided over a hearing this year, he was clearly confused about which bonds were covered by his previous rulings, and whether payments could be made to these bondholders. Legal experts were amazed, and Brazil, Mexico and Unasur (Union of South American Nations) supported Argentina. Yet his decision was not reversed on appeal. The US Court of Appeals upheld his ruling.

The US Treasury had initially backed Argentina, and on 17 July 2013 IMF managing director Christine Lagarde had confirmed that the IMF would support Argentina in the US Supreme Court. But on 23 July the IMF board of executive directors reversed this decision. This was an embarrassment to Lagarde and the IMF, which did not hide its irritation. At a press conference, IMF spokesperson William Murray was questioned about the reversal. He replied: “Go to the US Treasury and ask them to explain their decisions.” There is no record of any reporters being curious enough to do so. Within the US Treasury and IMF, there were plenty of people — including Lagarde — who understood exactly how important Judge Griesa’s decision was. “The IMF’s management and staff remain concerned about the broad systemic implications that the lower court decision could have for the debt restricting process,” said Murray.

In domestic legal regulation in the United States, France and most other countries, there are laws that allow borrowers with unpayable debts to file for bankruptcy and make a new start. But there is no such mechanism at the international level for governments. The international financial system therefore relies on a negotiated debt restructuring, as with Argentina, to avoid disorderly defaults. Griesa’s decision has made it much more difficult for any of these negotiations to reach agreement, or to be effective if agreement is reached. Any small group of vulture bondholders could break the deal.

There are many suspects who may have persuaded the US Treasury to reverse its position. The vulture funds have their own lobby, the American Task Force Argentina, well connected, and led by former Clinton administration officials; in 2013 it spent over $1m on the case. But the decisive players are more likely to be the neoconservatives in Congress, particularly the rightwing anti-Cuba delegation (mostly from Florida), who have consistently blocked a divided Obama administration on the few occasions when it has tried to improve diplomatic relations with Latin America. They want to get rid of all left-of-centre Latin governments, including Brazil’s. Their strategy has generally prevailed within the US government, especially when there have been targets of opportunity, whether real — the military coup in Honduras in 2009, Paraguay in 2012 — or perceived — Venezuela after the 2013 elections and protests earlier this year.

It is not true, as has been reported in the financial media, that Argentina defaulted on its bonds for the second time in 13 years: The government made its required payments but Judge Griesa’s ruling blocked payments of $539m from going through the Bank of New York Mellon. The funds persuaded Griesa to deny Argentina access to the US banking system if the country refuses to pay them in full, but Argentina will find a way to pay its creditors outside that system if necessary, and has already taken legislative and other steps to do so.

The real fix to the international system is likely to come from increased solidarity among developing countries. The rich countries showed their solidarity with the financial elite, including hedge funds and vultures, at the United Nations on 9 September, when the vote was 121 to 11, with 41 abstentions, to establish a sovereign debt restructuring mechanism. The United States and some of its allies (including Israel, Canada, Australia and Germany) voted no; the rest of the EU obediently abstained. But developing countries can win if they are willing to move the location of their bond issues out of New York (in 2009 about 70% of emerging market bonds were issued there). They have every reason do so, and without making a political statement: This case has raised serious questions about the independence of the US judiciary and political process when it comes to the rights of international investors. Both the UK and Belgium have laws that prevent Griesa-like abuses, and it wouldn’t take too many new issues transferred from New York to other financial centres to incentivise a change of US law to comply with prevailing international norms.

- Mark Weisbrot is co-director of the Center for Economic and Policy Research, Washington, DC (www.cepr.net) and president of Just Foreign Policy (www.justforeignpolicy.org).

https://www.alainet.org/fr/node/165361?language=en