Argentina’s default: finance decides, the population abides
Today a vulture fund based in the Cayman Islands representing a tiny, super-wealthy élite has thrown an economy serving 43 million people into chaos.
In 2001, with the country in crisis, NML fund bought bonds from Argentina. Their strategy was to acquire defaulted sovereign debt issues at a very low price, only to later demand the totality of the payment via a judicial process. Their mark-up today would be 1,608%.
In the period since, between 2005 and 2010, over 92% of bondholders with this debt restructured. But the vulture funds held out. As Argentine Economy Minister Axel Kicillof said, “the vulture funds don’t negotiate: that’s what makes them vultures.”
The case went to the US Supreme Court, with Argentina arguing that a pari passu clause meant that they could not advantage certain bondholders over others. Unsurprisingly, because it is a den of financial interests, the US Supreme Court ruled in favour of NML and ordered Argentina to repay the full $1.3billion. This created a precedent that opened Argentina up to a further $15billion in debt repayments, which would have wiped out most of the state’s dollar reserves.
As the European Nordic and Green Left statement this week said, “The recent decision of the Supreme Court of the US not only creates difficulties – or perhaps makes it impossible – for Argentina to continue servicing its restructured debt, it also strikes at the stability of the international financial system in as much as it constitutes a precedent that can hinder other sovereign debt restructuring processes in the future. Because, if during a voluntary negotiation such as the one Argentina carried out, in which more than 92% of its creditors agreed to swap their defaulted debt (for new bonds with a considerable haircut), any creditor can demand and charge the total owed on that debt, what are the incentives to enter into a similar restructuring in the future?”
This forms part of an international régime, from the US to Europe and beyond, where the interests of private finance are placed above all others in the economic sphere. The refusal to create any sensible mechanisms for resolution or negotiation at an international level – let alone a collective action clause that might force holdout minorities to accept widely negotiated terms – is a symptom of the dictatorship of the markets over our societies. As was the case when Ireland was warned that “a bomb would go off in Dublin” if senior Anglo-Irish bondholders were not repaid. We are living in an era of gunboat democracy – where finance decides and the population abides.
There may soon be a challenge to this régime in Greece, where Syriza are favourites to win the next general election and promise to fight for a renegotiation of the EU-IMF memorandum and a restructuring of sovereign debt. There had been hope that the risk of contagion from a Greek unilateral default would force European Union policymakers into accepting a deal – but this Argentine situation is a bad omen. International financial interests, with the connivance of complicit states and transnational bodies, have threatened an entire region with a lost decade. They have done this for the sake of a principle, that the interests of private finance must come first. And for a sum of $1.3billion. Greece’s sovereign debt is around $480billion.
After the US Supreme Court’s decision Argentine President Cristina Kirchner made a speech discussing the state’s history with debts imposed by international finance and enforced by the west – it could be translated to most Latin American states. She said that debt had been “without a doubt the most powerful trap we had been in keeping us from growth, the development of Argentina, it created poverty, backwardness, homelessness, a lack of infrastructural development, investment in education, in science.” She detailed the cycles of debt crises which have plagued the country since the 1970s, finishing each with an explanation of how it led to the next and the words, “but that wasn’t the end”.
The states of peripheral Europe are now in a similar cycle. As Oscar Guardiola-Rivera remarked in 2011, Europe has colonised itself. These same processes of debt penury, austerity, financial crisis and forced under-development that Europe once imposed on Latin America and South-East Asia have, since 2008, returned closer to the core – to Greece, to Italy, to Spain, to Portugal, to Ireland.
There are examples in states like Ecuador of how to break free from this cycle, but it requires negotiation. By forcing a default international finance is now delivering a message to Latin America through Argentina: sovereignty will not be allowed. With the Greek situation lurking around the corner, the states of the European periphery should take note.