August 10, 2014

The Case of the Argentine Debt

Prabhat Patnaik

WHAT is happening to Argentina’s debt at the present moment is instructive for all. In the 1990s when Carlos Menem was the president of Argentina, his government tried what it thought was a neo-liberal masterstroke. It kept the value of the Argentine currency pegged to the US dollar (in the ratio of 1:1) through what is called a “currency board” arrangement, in the hope that this would keep “investor confidence” high in that country. The reasoning was simple: if the US dollar is seen by wealth-holders all over the world as being “as good as gold”, then if the Argentine currency is pegged to the dollar, then that too becomes “as good as gold”, in which case capital would come flocking to Argentina. Now, if a currency gets pegged to the dollar, then the domestic money supply gets linked to the amount of dollar holdings that the country has. This is because if people wish to change from the domestic currency to the dollar (and the government cannot prevent them from doing so as that would undermine the entire “currency board” idea), then there must be enough dollars to give them in exchange. What this means is that if wealth-holders take money out of the country, then the dollar holdings fall, and so does the domestic money supply. And the government cannot just print money, since, unless it is backed by dollar holdings, the currency board arrangement cannot be sustained. A reduction in money supply in turn, which now becomes completely subject to the whims of the speculators (whether they wish to take money out or not), has serious recessionary effects on the real economy. To keep up the level of money supply in such a situation requires therefore that dollars should be borrowed from abroad, which means that the “currency board” arrangement requires almost automatic foreign borrowing to finance capital flight out of the economy (with no possibility of any restrictions being placed on such flight). And what is more, even if there is no capital flight, the “currency board” arrangement requires that, just to increase domestic money supply, the country has to borrow dollars from abroad, so that there are dollar reserves kept with the central bank against which it can increase money supply. UTTER STUPIDITY Argentina thus built up a huge public debt which reached almost 200 percent of the Gross Domestic Product by 2002. This debt was not because of any “profligacy” of the government; it was not even meant to finance any expenditure at all. It was there only to be held as idle reserves with the central bank against which money supply could be created, or to replenish reserves that had dwindled owing to capital being taken out of the country. The country thus built up a huge debt to no purpose, entirely owing to the utter stupidity of this supposed neo-liberal masterstroke, of a “currency board” arrangement, which, though started by Carlos Menem who was forced to resign in 1999, was continued by his successors, until Nestor Kirchner became president in 2003 and put an end to it. Since Argentina was in no position to honour all that debt, Kirchner disowned it; but he worked out a debt restructuring arrangement with the creditors with regard to around 90 percent of the debt. Argentina has since been paying the amounts agreed under this restructuring arrangement to its creditors. But with regard to around 10 percent of the debt, the creditors, instead of going along with the agreement that covered the other 90 percent, decided to sell their holdings to what are called “vulture funds”. These are financial companies which buy debt instruments on the cheap, and then use every known means of skullduggery to recover much larger amounts of the debt, and thus make a killing. In the case of the Argentine debt the most important “vulture fund” involved is called NML Capital which is a subsidiary of a company run by Paul Singer who is a billionaire and a major donor for the Republican Party. So aggressive are these “vulture funds” that they hired mercenaries to seize an Argentine ship off the coast of Ghana, and even attempted to capture the Argentine presidential plane from an airport, to keep them as collateral against the debt (which is really not very different from demanding a ransom payment). It is common for these “vulture funds” to file a legal suit before some obscure judge who cannot distinguish his right hand from his left, and then to pursue debt-recovery, armed with a favourable legal verdict handed out by this judge. They located one such judge in Thomas Griesa who handed out a ruling whereby Argentina could not pay the agreed amount to all those creditors who had accepted the debt-restructuring plan, until it had paid to those who had not, i.e., the “vulture funds”, and that the latter had to be paid the full amount of the debt. As a result of this ruling, the $539 million which the Argentine government had deposited in a New York bank as payment to be made to the bond-holders who had accepted the debt restructuring, is lying with that bank, and Argentine, for no fault of its own, is being made to appear as defaulting on the payment of loans. In fact it is not Argentina that is defaulting; the ruling of an obscure little judge is coming between Argentina which is there with the money, and the bond-holders who have agreed to accept it. What is really serious however is that the Appellate Court and the US Supreme Court have upheld the ruling of Judge Griesa. What this ruling does is that it makes all debt-restructuring impossible in the future. Even if the overwhelming majority of the creditors are willing to accept debt-restructuring, any tiny group of recalcitrant creditors demanding full payment can cite this ruling and torpedo such restructuring. And if some get full payment, then why should the others accept restructuring? In fact, one of the piquant issues now is: what happens to those creditors of Argentina who had accepted debt restructuring? If NML Capital can get full payment, why should the others remain content with the restructured payment schedule, in which case what is the status of the restructuring arrangement worked out between the Argentine government and 90 percent of its creditors? The irony is that NML Capital, the litigant before the American court, has not loaned a penny to the Argentine government. It simply picked up the Argentine bonds from the market at throwaway prices, some say at 20 percent of their face value. And it bought the Argentine government bonds after the government had already worked out a debt restructuring arrangement, when it was clear that it would not be paying the full amount. BIASED IN FAVOUR OF THE BILLIONAIRES The American judiciary is not only highly politicised but is also biased in favour of the billionaires, to a point where it rules in their favour even against the logic of the market. A market system where debt instruments are traded must have some arrangement for coping with default. In the case of private debt there are bankruptcy clauses that cover such situations. In the case of sovereign debt however, where governments of sovereign nations are the borrowers, there is no such legal arrangement. But when loans are made, even to governments, the possibility of default is already taken into account in the magnitude of the interest rate charged on them, which is why the US government can borrow at virtually zero rate of interest while third world governments have to pay higher interest rates. And when loans are not repayable, debt restructuring arrangements have been worked out in the past. In other words, while no legal framework exists covering sovereign debt, economic arrangements have been made to keep sovereign debt markets functioning. What we are witnessing now is a legal interference in this functioning which is in favour of the rich and powerful of the metropolis and against a third world country, no doubt not as poor as India, but a country with a per capita income of no more than $14800, which is almost a quarter of the US. This ruling moreover has significance for other third world countries which are even poorer than Argentina but whose governments have borrowed in international markets. Any creditor, not just a private creditor but even a bank, can sell the bonds it holds to a “vulture fund” when a third world government cannot pay in full. And the “vulture fund” will cite this Supreme Court ruling to literally demand its “pound of flesh”, which, if the money cannot be paid, will then have to take the form of obtaining control over the public resources and assets of the country in question. The Argentine debt we are discussing was contracted for keeping the “currency board” arrangement afloat. But, in the context of the ongoing world economic crisis, several governments have been contracting external debt, instead of borrowing domestically, in order to obtain foreign exchange to sustain their balance of payments. And once the US Federal reserve Board’s policy of “quantitative easing” comes to an end, and the easy flow of dollars dries up, many more governments will have to contract external debt for balance of payments purposes. The US Supreme Court’s ruling threatens all these countries with a situation where there will be no possibility of any debt restructuring; on the contrary they will have to pay their creditors, or worse still a bunch of “vulture funds”, the full amount of their debt, failing which they may have to transfer the nation’s resources to these financial sharks. Many have seen the present Argentine problem as a transitional one, merely a temporary inconvenience, that will actually hasten the coming into being of a global system for arranging debt restructuring. But while there have been proposals from time to time for such a global system, they have been vetoed by the US government. The US courts it would appear have not just thrown a spanner in the works as far as capitalist debt markets are concerned; they may have, even if unwittingly, given a push to imperialism’s efforts to acquire control over third world resources.