Policy Research in Macroeconomics

Of Argentina’s Debt, Default and Dreck (or Javert v Valjean)

OK I should never have got into a twitter brawl today with Heidi Moore of the Guardian (of which she is US finance editor).  I have never crossed swords with her before, and I am sure she is generally a Good Thing. And I apologize if I was a bit strong in my tweet. But her piece in today’s Guardian on Argentina’s debt got my blood up.  It reflects the Wall Street Journal’s world view to perfection, but the Guardian??

She hit back on our Twitter thread, describing my article on the legal position as “dreck”, a word which on looking up in the esteemed Urban Dictionary I find comes from Yiddish and means excrement, crap, garbage and even less nice things, but apparently was once used by James Joyce, which redeems it a bit.  This was followed by a tweet complaint from Ms Moore that I had been disrespectful to her. Ah well, that’ll larn me.  Sorry Heidi.

And honest, until I read her piece, I had not planned to return at this point to the injustice of the US courts’ decisions in favour of the US tax haven vulture funds; we have previously set this out in detail here and here.  But when I realise the level of non-understanding by usually intelligent commentators, I despair.

And for the record, we do not believe Argentina has acted wisely at all points, before or after default.  Not at all.  Not before, not after. And maybe not tomorrow.

But the case is important in showing how the present international system for sovereign debt is dysfunctional and unjust to debtor states and their peoples.  Companies like NML can go bankrupt and evade their debts.  States and their peoples cannot.  That was why Jubilee 2000 (of which PRIME’s Ann Pettifor was Director in the UK) and other Drop the Debt Campaigns have worked so hard so long to get a fair system and  balanced justice between debtors and creditors in sovereign debt cases. Which the US courts have now gone out of their way to deny.

So let me try to explain the facts and our viewpoint once more, first looking at what Heidi Moore wrote.  

Point 1 – Heidi Moore’s argument

Ms Moore argues:

 “Argentina may willfully destroy its own economy in an ill-fated political attempt to look tough on foreigners, particularly in the form of mostly American hedge-fund managers. You don’t have to watch old episodes of Dallas to know that “rich Americans” is shorthand for “evil”. That stereotype has helped Argentina. In a silly form of financial rebellion, the nation refuses to pay the hedge funds $1.5bn in interest it owes on money it borrowed from them, way back in 2001.”  [my emphasis]

No, not true. Argentina did NOT borrow money from the US hedge funds in question, in particular the Cayman Island company NML which is the principal litigator.  NML is owned by US billionaire Paul Singer, a right-wing Republican who was a main bankroller of Mitt Romney’s presidential campaign.  The whole point of vulture funds is that they buy up sovereign debt dirt cheap from bond-holders in the event of a default (actual or maybe impending) and then try to squeeze usurious rates of interest out of debtor governments, knowing that states cannot go bankrupt.  And Argentina has been ordered by the US Courts to pay not just interest, but the whole of interest and principal on the face value of the debt, picked up by NML for say 30 cents in the dollar.

Next Ms Moore says this:

 “Here’s Argentina’s conflict. It’s not complicated. The country borrowed a ton of money, $132bn. Then it had a financial crisis in 2001 and decided it couldn’t pay the interest.  Argentina asked bondholders to help it out by trading in their bonds for cheaper ones, which would pay only 30 cents on the dollar. It’s better than zero, so the holders traded in 93% of the old bonds.

 A group of hedge-fund holdouts, led by Wall Street billionaire Paul Singer, wanted no part of this. They still wanted Argentina to pay the original interest, so they went to a US court. After 13 years, a US judge ruled last month that Argentina lost and has to pay up by Wednesday. Still, Argentina still refuses to pay.”

 Where to start on this amazingly, misleadingly simplistic version of events? Argentina decided on a policy of peso-dollar parity in the early 1990s.  This was foolish but in sync with the neoliberal ethos of the times. It was a form of Gold Standard (a return to which is currently argued for by another US billionaire, Steve Forbes).  Argentina’s government then tried to save the parity link long after it should have been clear that it could not work.

She had borrowed in dollars, which – when the peso had to be devalued – made the debt (much of it issued at high interest rates which reflected creditors’ risk)  hugely more onerous. The economy crashed by 25%, with widespread hunger and poverty as well as disorder.  It is amazing to see the Guardian of all papers suggest,  “oh they just decided they couldn’t pay.”  And we repeat, the US Courts did not order Argentina to pay the interest on their bonds.  The Courts ordered Argentina to pay the entire interest plus principal to NML – all in one go.  Otherwise it was not allowed to pay just the current interest to the exchange bond-holders.

There may be, among the current hold-outs, some who were the original bond-holders.  Many of the original bond-holders were indeed relatively poor people who suffered in the default.    But we can be sure that billionaire Paul Singer’s companies were not among the victims. They have and had no legitimate role whatsoever.  They are pure financial predators.

But they are defended now by the Guardian’s US business correspondent, who goes on to make the following extraordinary comparison:

 “Any American who has feared foreclosure can enjoy a bitter laugh: if you didn’t pay your mortgage or credit cards for 13 years, you would be on the street. Argentina just gets to throw a tantrum.”

With respect (in its English sense), this is facile stuff.  US citizens and companies can go bankrupt and greatly reduce their debts.  There is a process for so doing.  And many citizens just handed back the keys and walked away.

And Ms Moore at no point deals with the fact that to reward the vulture funds as the US Courts have tried to do is (a) to create moral hazard, (b) to reduce the chance of or incentive toward orderly sovereign debt restructuring by (c)  privileging hold-outs over other creditors, and (d) to reward the purest forms of exploitative rent-seeking. But enough of this point-scoring stuff.

Point 2 – the issues of contract law

 We have set these out at length in previous articles, dismissed as “dreck” by Ms Moore. With all the humility that befits an author, I can confidently say that on this too, Ms Moore is wrong in fact and analysis.

First, contract law.  No one doubts or denies that in legal terms, the vultures have bought up dirt cheap bonds which carry the original nominal rate of interest, and that since Argentina is in default on the bonds since 2001, the current bond-holders are entitled to go to the relevant courts – in this case, New York, and obtain a judgment for the full amount due.

Had Argentina been a company with the privilege of limited liability, like most companies, or indeed a simple individual, it could and would have entered into bankruptcy in 2001.  Its debts were way above its ability to service them.  But it was a sovereign state, unable to go bankrupt. So in strict law, the people of Argentina are liable to repay debts incurred by their governments for all eternity.  Just as the people of (then) Zaire were in law liable for all eternity to repay the vast debts corruptly incurred by President Mobutu, if they had not been written down or off.

Because there is no internationally agreed system of bankruptcy (see my earlier articles on this), other means have been found to reduce sovereign debts on an ad hoc basis, and the haircut is often the least damaging – accepted in Argentina’s case, however reluctantly, by 93% of creditors.  Argentina has been paying the current interest due to these exchange bond-holders as and when due, and wants to continue doing so.   But it is ordered not to by the US Courts unless it pays the entire interest and principal in one lump sum now to NML.

So in contract law, Argentina obtained its judgments that Argentina should pay it in full – but how could it enforce the judgment? Only if it could lay hands on assets belonging to Argentina which are not immune under international law

Point 3 – the issues of equity

Now, I turn to equity.

The system of equity was invented by the English kings and courts as a way of tempering the strict, rigid outcomes of the common law, since the strict legal result often did not equate in any way with justice. Over the centuries, the system of equity grew up partly in parallel to, partly intertwined with, the common law.  One of its innovations was a set of remedies, including the injunction, which are discretionary.  The judge has to decide whether or not to grant an equitable remedy, and if so, how far to go.  The fact that in law a breach of contract has taken place, does not mean that a court will automatically, and in all cases, order the defaulting party to comply.  It can and should look at all the circumstances.

As we have said, the US courts were right to find in law that there was a breach by Argentina of the pari passu clause of the original bond contracts, because Argentina had enacted the so-called Lock Laws which ordered governments not to pay out on the original bonds, and thus discriminated in law against those bond-holders.

But – no doubt annoyed by the attitude of Argentina to them – the US courts have as a matter of discretion chosen to make an “equitable” order which puts the vultures and other hold-outs in a much better position than the exchange bond-holders.

 We repeat – not only is Argentina ordered not to pay the exchange bond-holders a single cent unless it pays NML  at the same time – it is ordered not to pay current interest to exchange bond-holders unless at the same time it pays every single dollar of principal and interest to NML on the original bonds.  This is has turned discrimination against the hold-outs into its very opposite – discrimination against the exchange bond-holders.  Which Judge Griesa goes out of his way to seek to justify!

The US courts, and the Guardian’s US business editor, seem to think this is fair.  We say this outcome  is unjust and perverse, both for Argentina and for the exchange bond-holders.

For the record, I suggested in my last article what seems to me would have been a far fairer form of  injunction, namely to put NML and other hold-outs in precisely the same position financially as the exchange bond-holders – so that at any given time, the hold-outs received the same aggregate percentage of their debt as if they had taken the haircut. This would have been 100% in accord with the spirit of the pari passu clause.

Of course there is not the remotest chance in hell of this being done, but I wanted to show that there is no good reason requiring the US courts to show such exceptional favouritism towards the vulture funds.  They have done this as a matter of policy, as a matter of judicial free will and choice.

The “exorbitant privilege” of the US

The USA in general, and its hedge funds in particular, benefit from what President Giscard d’Estaing once rightly called the “exorbitant privilege” of the dollar as reserve currency, so that Americans can (for example) borrow and repay always in their own currency without fear of its value altering.  The Argentinians and the rest of the world do not have that benefit.   Paul Singer’s legal entities, like most companies, also benefit from the huge privilege of limited liability.  The people of poorer countries cannot.  Paul Singer’s companies can enter bankruptcy and escape a lot of their debt, if ever circumstances so require.  Paul Singer as an individual can also go into bankruptcy and escape a lot of his debt, if ever so required.  That is not the case for Argenina or other sovereign debtors.  The current “system” (non-system) for dealing with soveriegn debt is unjust and unfit for purpose. Indeed, it is broken.

Les Misérables

In Les Misérables, ex-convict Valjean is hunted for decades by the unyielding Inspector Javert who believes that strict adherence to the law must not be qualified by extraneous considerations of mercy or justice.  Heidi Moore seems to share Inspector Javert’s ideology.  In the book and musical, Javert finally commits suicide, aware he has gone morally astray.  Alas, I can’t quite see the vulture funds doing the same.

 Midnight note: after a further long twitter debate with Ms Moore, I have marginally amended the above article posted a few hours ago by removing one sentence that was on reflection a bit over critical.  

Ms Moore thinks I am wrong in criticizing her for saying that Argentina did not borrow from NML, since in her view it makes no difference that NML acquired the bonds (at however cheap a rate) from someone else later.  For her, a debtor borrows from whoever holds the bond legally at any given time so she considers it was fine (and accurate) for her to say Argentina borrowed from hedge funds (i.e. NML) way back in 2001.  I strongly disagree, and think she was simply wrong in her account.  

For me, there is an initial borrowing by a debtor from X, and the bond is a concurrent promise by the debtor to repay X or the bond-holder for the time being, but in all ordinary language, you do not “borrow” from a new person each time the bond changes hand, nor is ‘borrowing’ a continuing act or state (being in debt is of course a continuing state!). The new bond owner has purchased the benefit of the debtor’s promise to repay, at a price that reflects the risk of non-payment.  All this masks a deeper difference between us, since Ms Moore believes that sovereign debtors (or is it all debtors?) have an absolute duty to repay what they borrow, apparently irrespective of the circumstances (pacta sunt servanda), and does not see the vultures as morally worse in any way than traditional bond-holders.  Which I do, as for me they represent the crudest form of anti-social speculators whose business model is wholly based on the absence of a fair international sovereign insolvency process.

5 Responses

  1. Great post!One thing that intrigued me during this process that seems pretty simple to solve the prob: why Argie’s didn’t propose a fx swap under the current bond, out of usd into any other EM currency, with a well developed fx mkt?? They could even swap its entire fx reserves out of usd…(why not CNY?) Paying bonds cash flows with reminbis with be a good choice…;) and a huge political victory, don’t you think?

  2. Great post!One thing that intrigued me during this process. Seems pretty simple to solve the prob: why Argie’s didn’t propose a fx swap under the current bond out of usd into any other EM currency, with a well developed fx mkt?? They could even swap its entire fx reserves out of usd…(why not CNY?) Paying bonds cash flows with reminbis with be a good choice…;) and a huge political victory, don’t you think?

  3. There is a fairly simple solution to all this. States should constitutionally bar themselves from borrowing in a foreign currency.
    There is never *any* need for a state to do this, and it should be constitutionally blocked as a matter of course to prevent crap governments from tying the hands of future governments abroad.

    Argentina should now repudiate all foreign denominated bonds permanently and forever, and prevent itself from doing so in the future by constitutional amendments.

    Then it can get away from these costly distractions and get back to fixing the mess of the domestic economy.

    The IMF was invented for the very few instances where a country requires foreign currency funding to create essential modern infrastructure to kickstart development. And Argentina is way beyond that.

    Exporters need to export, and a clever importing state would realise that and issue trade permits among competing exporters based on the exporter enacting the necessary liquidity swaps to enable trade.

    1. Totally agree!But its kind of funny that nobody seems to understand the matter. Look Brazil for instance, Argie’s closest neighbor and trade partner, just issue a 3,50 bi usd bonds under ny law just few days ago.

    2. Not to mention Brazil’s usd 380 bi fx reserves. Seems these guys like to be under Internatinal capital Markets tutelage.

Leave a Reply

Your email address will not be published. Required fields are marked *

This website collects cookies and analytic data. To use our website you must consent.
For more information read our Privacy Policy.