10 09 2014

Cristina is right. And she is doing the right thing.

There is Argentina again defaulting on its debt, we are told. It shows that the big 2001 default and the posterior debt reduction in 2004-5, which has been touted by many (I, for one) as an alternative way for debt ridden countries, did not work, doesn't it? And it shows that the Kirchners instead of being the big saviours of Argentina have led the country into a dead-end, right? And all this has unravelled thanks to a stubborn US philanthropist, Paul Singer, and a courageous US judge, Thomas Griesa. Well, if you believe that story – and many do - you have got it all wrong. Singer and Griesa have made a frontal attack on Argentina, but they have overplayed their cards. Now, wait for the back-lash.

If you look at most of the international media, the above story is what happened. And there is a lot of schadenfreude: you know,we told you.... Argentina Is Classic Serial Defaulter”, “Argentina Coming Apart at the Seams… Again”, “Argentina has defaulted on its debt - for the second time in 13 years”, etc. etc. And the US media ridicule Argentina's claim that they are not defaulting this time. They are not only in default, they are in denial. But they are Argentinians, so what do you expect?

Let us get things straight:

1. Argentina wants to pay the 93% of the bondholders who accepted the restructuring deal in 2004, and had transferred funds to a New York Bank to make the payment. But Paul Singer from Elliott Capital Management, who has bought part of the 7 % of the bonds that rejected the restructuring deal, has got a judge, Thomas Griesa, to order that Argentina can't pay its bondholders without first paying Paul Singer 100% of the face value. So the Argentinians are right, they are not in default as it is normally understood – they have the money needed and the willingness to pay.

2. Singer and his hedge fund have done this before: they bought distressed government bonds (Peru, Congo) at a fraction of their face value. Then they rejected any restructuring and pursued the governments at courts in the US and other countries. To get them off their back, these governments finally agreed to pay Singer at face value. This is an extremely profitable business.

3. For Singer this is a combination of a profitable business and an ideological campaign. Debtors should not default, they should pay. That is the foundation for the whole financial system. So Argentina is an ideal target, with its centre-left government and its anti-US rhetoric. If countries start to default like Argentina did it, the whole foundation would be shaken. So it is important to set a precedent to those toying with the idea of emulating the Argentinians. Like Syriza in Greece, Podemos in Spain or the Catholic Jubilee movement. No wonder he is considered a freedom fighter by Wall Street.

The underlying problem is that unlike when a private firm defaults, there are no rules for how a country can default – historically the rule has been that debtor countries have to pay whatever happens, and if not the creditors take over the debtor countries' assets. In 1890 English creditors took over the Peruvian railways and navigation on lake Titicaca to pay for the country's debt after it lost the Pacific war with Chile (a war started by Chile and financed by England to grab the saltpetre rich Peruvian and Bolivian coast). In 1904 the US sent customs agents to take over the finances of the Dominican Republic to assure payment of its external debt. In 1910 the US marines intervened in Nicaragua, and they took over the administration of customs to collect money for debt payment to US banks.

What Singer and Griesa are doing is to try to revert to this old form of debt collection. One wonders why they don't also try to reintroduce debt prisons – the logic is that the only guilty is the debtor.

The International Monetary Fund, IMF, which then was dead against the Argentinian debt restructuring, is now nervous about the effect of the US judge's lack of judgement. IMF floated a couple of years ago the idea of introducing a code for country defaulting. The idea was immediately shot down by the US, which has an absolutely dominating position in the organisation. Now with the actions of the duo Singer and Griesa, the lack of rules are made obvious again – when there are no rules, there are no rules, and each country must make up its own rules. Argentina therefore has now passed a law which makes it possible to pay the bondholders in Buenos Aires or Paris, as it is impossible to pay them in New York. So the bondholders will have to once again swap their bonds for new bonds, this time payable outside the US. Sorry, courtesy of Singer and Griesa. Expect new actions from Singer to try to torpedo also this new deal, using some other dumb US judge addicted to extra-territorial judgements.

It is difficult these days to say something positive about Argentina's government without being ridiculed – or worse. The critics claim that Argentina will be suffering unnecessarily because of president Cristina Fernandez' stubbornness – why doesn't she simply find a solution with Singer and Co.? Morality and justice apart, the critics are wrong. The bonds have a clause giving the 93% restructured bondholders the right to get the same treatment as Singer, so if he is paid at face value, they will have the same right. Then Argentina would be back to where it was in 2001 with an unpayable debt. So Cristina is actually right, and she is doing the right thing.

And Joseph Stiglitz is also right when he says that “we've had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system." And he and a group of other Nobel laureates are right when they recently wrote to the UN requesting a legal tool to avoid “the appearance of speculative and destabilizing behaviour in international markets.” The UN General Assembly has now promised to elaborate a code for sovereign default and to try to achieve an international agreement on it.

Singer and Griesa have overplayed there cards. That will have a cost for the US as an international financial centre.

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Thorbjorn Waagstein

Thorbjørn Waagstein, Economist, PhD, since 1999 working as international Development Consultant in Latin America, Africa and Asia.

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