On Wednesday, Argentina defaulted on its sovereign debt for the second time in 13 years, defying a US court ruling and a small cabal of financial fundamentalists led by the right-wing multi-billionnaire hedge fund mogul Paul Singer. Needless to say, most mainstream analysts are already bandying the usual platitudes, having us believe that Argentina’s populist government and its economic mismanagement are to blame for this outcome. While there is little point in defending Argentina’s corrupt political elite here, it is important to provide a much-needed corrective to this tired mainstream narrative.
The first thing to note is that, despite repeated accusations by the vultures that Argentina is in contempt of US court rulings, Argentina’s willingness to pay its debts is not in question. The country has credibly committed itself to repaying its foreign creditors ever since it restructured its unsustainable debt load in the wake of its historic 2001 default, with over 93% of bondholders accepting crisp new bonds in 2005 and 2010. In fact, the government last month deposited $539 million with the Bank of New York Mellon to honor its commitments — in full and on time. Willingness to pay is simply not an issue.
So if Argentina is willing to pay, and actually fulfilled its obligations by transferring the money to its creditors, why is it now considered to be in default? The problem is that the Bank of New York, like all financial institutions, was under orders from Judge Griesa of the District Court of Southern New York not to transfer any of Argentina’s cash to its claimants unless the government first paid a small group of so-called “hold-out” creditors who have been tirelessly suing the country for full repayment ever since its initial 2001 default. Far from being unwilling to pay, US court orders thus left Argentina unable to pay simply because its creditors could not receive their payment.
President Fernández was therefore not entirely wrong when she thundered that Argentina cannot be said to be in a state of default, and that “they’ll have to invent a new term to define what’s happening.” Moments after she spoke these words, a new hashtag started trending on Twitter: #GrieFault. The term does indeed seem to approximate much more closely what is really going on.
The deeper problem behind the GrieFault, however, boils down to the fact that Argentina is facing not just one group of bondholders, but two: first, a group of “exchange bondholders,” with whom it has maintained good relations ever since the restructuring, and then the group of “hold-out” creditors, mostly vulture funds, who refused to accept the terms of the deal and held out for full repayment. In June, Griesa’s ruling made it impossible for Argentina to pay its exchange bondholders if it did not first pay the hold-outs (i.e., the vultures).
Griesa’s ruling affects only $1.5 billion in claims, which Argentina is technically able to repay without running into serious trouble. The problem, however, is that the country’s government is bound by domestic law to honor the so-called Rights Upon Future Offers, or RUFO clause, included in the restructured bonds. This clause precludes the government from offering better terms to the hold-outs than to its exchange creditors. In other words, if Argentina were to give the hold-outs a better deal under pressure of Griesa’s ruling, it would have to offer the same deal to all of its creditors — potentially triggering $120 billion in additional claims, according to the most conservative government estimations.
With the country’s economy in recession and its foreign exchange reserves depleted to a mere $30 billion, such claims would totally overwhelm Argentina’s finances and would lead to a much more dramatic default than the current one, which affects only the aforementioned $539 million that fell due on June 30 and whose grace period expired on Wednesday. In other words, by refusing to pay the vulture funds and trying, in good faith, to honor its obligations towards the slightly more sensible exchange bondholders, Argentina can be said to be more committed to preventing default than Paul Singer or Judge Griesa. Argentina, in other words, is the better business partner here.
The vulture funds, by contrast, constitute the Taliban of global finance. Unlike many of Argentina’s exchange bondholders, the vultures were never a proper creditor to the country to begin with. They did not lend Argentina a single dollar; rather, they bought up its distressed bonds on the secondary market for mere cents on the dollar. This was easy to do because, by late 2001, many of Argentina’s bondholders were small retail investors, including pensioners in Italy, Germany and Japan. Terrified at the prospect of losing their life savings, many of these desperate retail investors sold their bonds to Wall Street hedge funds at greatly discounted prices in the wake of the default.
The majority of these hedge funds subsequently accepted the 2005 restructuring deal. Having bought the bonds for as little as 15 (some say 6 cents) on the dollar, they restructured for 30 cents — landing the speculators handsome profits in the process. Besides this, the deal included a number of sweeteners to incentivize high investor participation. Most importantly, the new bonds came with a so-called GDP warrant attached, which meant the exchange bondholders would receive greater returns if Argentina’s growth exceeded a certain threshold. With the country’s economic growth at a steady 7-9% between 2001 and 2008, the exchange bondholders made a windfall.
For some, however, even this was not enough. Led by Singer, the vulture funds — true to name — displayed even more opportunistic behavior than the exchange bondholders: they simply wanted it all.Of course, the demand for 100 cents on the dollar was entirely unrealistic to begin with, but by chasing Argentina around the globe over the past decade, taking it to court in various countries and trying to lay claim on its foreign assets, including its embassies and even the presidential airplane, the vultures have tried hard to claw back as much as possible — unsuccessfully, so far.
In late 2012, Paul Singer’s minions seemed close to success when they briefly managed to attach Argentina’s flagship navy vessel, La Libertad, in Ghana, holding the ship ransom to full repayment and nearly triggering an international crisis when the warship’s sailors brandished automatic rifles at Ghanian port officials after they were denied permission to leave the port. Apparently, barring outright mafia methods, no means are too extreme for the vultures. The Griesa ruling, however, surpassed any of the previous methods in its ferocity. “We’ve had a lot of bombs being thrown around the world,” Joseph Stiglitz said, “and this is America throwing a bomb into the global economic system.”
To some, Argentina’s outright repudiation of Griesa’s ruling may therefore look like yet another sly feat of debtor defiance. Still, we should not be deceived by first appearances. In truth, Argentina’s two defaults never really targeted global finance. While the 2001 default mostly harmed an unsuspecting panoply of small retail investors in Europe (Wall Street had already dumped its bonds in the scandalous mega-swap earlier that year), the current one is narrowly directed against a very small subset of speculative investors — a particularly fundamentalist faction of global finance that is so ruthless in its pursuit of profit that it does not shy away from hounding crisis-ridden developing countries even as their citizens face widespread social dislocation to repay the public debt.
Of course, Argentina did the right thing by telling these vulture funds to get lost — just as it did the right thing by refusing to fully honor its unsustainable external debt in 2001. A victory for Singer and co would have set a disastrous precedent that could have made it much more difficult for heavily indebted countries (not just Argentina) to restructure their debts in orderly fashion in future crises. But, even as we should applaud Argentina’s decision to reassert its economic sovereignty, it is crucial to note that the default is not as bad for foreign creditors as it may sound. In fact, in a particularly astute analysis, financial commentator Felix Salmon has convincingly argued how both exchange bondholders and holdout creditors actually stand to gain from the GrieFault.
Moreover, as I have argued in a previous column, the Argentine government has in recent months been forced to seek rapprochement with its foreign creditors in order to satisfy the country’s growing structural dependence on foreign capital. Ever since 2005, the government’s scathing rhetoric against global finance — the vultures above all — has gone hand-in-hand with a pragmatic policy approach aimed at gradually restoring investor confidence and access to international capital markets. While the GrieFault may appear to the unsuspecting and ill-informed eye as yet another radical rupture with the logic of neoliberal finance, a closer inspection suggests otherwise: it was precisely in an attempt to maintain good relations with the exchange bondholders and the global financial community more generally that Argentina decided to defy the vultures.
Many ordinary Argentinians, fully cognizant of this fact, and increasingly frustrated with the protracted and deepening economic crisis back home, no longer hold out much hope for conventional solutions — whether neoliberal or neo-Peronist. “It doesn’t matter if it is a judge in New York City or a president in Argentina,” one Porteño was quoted as saying. “I feel that neither cares about people, and about the future of this country. It’s as if these people who have power were laughing in the face of us common citizens.”
Jerome Roos is a PhD researcher in International Political Economy at the European University Institute, and founding editor of ROAR Magazine.