In an unprecedented situation, on 30th July the ratings agency Standard & Poor’s declared Argentina on “selective default”, after New York judge Thomas Griesa blocked the payments the country had already deposited for the 93% of creditors of its sovereign debt restructured in 2005 and 2010. Argentinean government replied that there is no default, as the country has already paid (the money is currently in hands of the Bank of New York Mellon, appointed to handle the payments) and has the resources and will to keep on paying. This rather absurd situation –a “default” with no relation to economic troubles, forced by a US judge against the will of both Argentina and its creditors– comes after ten years of a legal battle in US courts between the Argentine government and the hedge fund firm of billionaire Paul E. Singer. Singer never lent money to the country; ten years ago his firm purchased 1% of the bonds defaulted in 2001 for peanuts and refused to accept the deal that 93% of the creditors accepted after 2005, hoping to make extraordinary profits by means of a hostile legal campaign. In a ruling (by now universally considered poor and incoherent), 84-year-old judge Griesa decided that Argentina had to pay the total amount of money claimed by the vulture funds and that no payments to the restructured bonds would be allowed until the country complies. Not even bonds issued in currencies other than the US dollar and under legislation of other countries. As the prospectus of the restructured bonds established that any better deal offered to a single owner can be claimed by the rest, Griesa’s ruling put Argentina in an extremely difficult position. If the country obeyed the judge and paid the holdouts, it risked ten more years of legal battles from the 93% of hold-ins. Moreover, the burden of the debt would go back to its 2001 situation, which caused the default in the first place. Quite understandably, Argentina chose the lesser evil: after negotiations with the vulture funds failed, the country decided not to obey Griesa’s absurd order. As Singer did not get the money he claimed, the judge froze the funds that the Bank of New York Mellon had already received, thus leaving it in a legal limbo –neither the property of Argentina, nor in the hands of the restructured creditors. This situation is what ratings agencies rushed to call a “selective default”.
Initially a dispute between one country and one firm, it has become evident that its resolution will cast effects far beyond the parties involved. By now most countries –including Obama’s administration and the European Commission, the G77 + China, BRICs and UNASUR–, international bodies such as the IMF and the OAS, over a hundred human rights organizations –including the Ligue de Droits de L’Homme, Conectas Direitos Humanos, CLADEM and the International Federation for Human Rights– and hundreds of politicians, academics and Nobel prize winners from all over the world have supported the Argentine position. Some of them can hardly be considered friends of Argentina. Most declarations in support of the country actually point out that, by ruling in favor of the vulture funds, judge Griesa is affecting the stability of the whole international financial system, making virtually impossible for countries to restructure their debt after defaults. “We’ve had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system,” said the economist Joseph Stiglitz; “We don’t know how big the explosion will be — and it’s not just about Argentina.” American voices have also raised the issue of the reputation of New York as a financial plaza, put in jeopardy by Griesa’s absurdities.
The irrationality of Griesa’s ruling being so blatant, it would be tempting to simply consider this a case of a clouded old man who is no longer on top of the situation. Indeed, transcripts of the last hearings in his court show that the 84-year-old judge has troubles to follow the case. However, this would be a rather incomplete explanation for the current events, as the whole of the American judiciary (including the Supreme Court) has backed the New York judge, even against the advice of Obama’s administration. And it is not only about US domestic politics. There is another systemic issue at stake in this case: it is not just about the stability of the international financial system, but also about the role of the US as the world’s leader. The supremacy of the US is not at risk, or at least not for the time being. But the precise mode in which this supremacy is exerted seems to be in a turning point. And so it has been for over a decade. To put it in simple words, the US seems to be torn between two options. The transformations of the world system are pushing it to become a sort of king with limited powers, who shares portions of his authority with other governments and international organizations, and for that very reason, is subject to global regulations. The other option would be to remain the world’s Autocrat, and absolute ruler that follows no laws and institutions other than its own. While some political voices within the US are happy to flow with the first option, the possibility of the second has produced much anxiety and resistance among others.
The international dimension to Argentina’s debt case can be better understood under this light. Much of the support for Argentina, as we have seen, springs from a wider concern about the stability and predictability of the global financial system, which in turn requires some sort of global regulation independent from the interests and institutions of a single country. In turn, this requirement is facing much resistance from certain financial actors –mainly vulture funds, American ratings agencies and the like– but also from powerful US political forces, particularly Republicans. It should not come as a surprise that Griesa is a well-known Republican, while Paul Singer is a Republican donor (in his case, of the so-called “libertarian” orientation). This crossroads has been openly expressed in the US newspapers. While the New York Times has run articles bashing Griesa as an incompetent judge who is embarrassing the US, the Wall Street Journal furiously declared:
“Default is so nonsensical that it raises the question of whether [Argentina’s Minister of Economy] Mr. Kicillof is inviting it as a way to prod the International Monetary Fund and American liberals to accelerate their campaign to put debt negotiations in the hands of a new global bureaucracy. This would give more leverage to debtors and politicians at the expense of financial markets and U.S. courts—which might suit an erstwhile leftist economist professor like Mr. Kicillof, who seems to think default could make him a political hero and carry no costs.
The best outcome for all parties, and especially Argentina, is still for Buenos Aires to negotiate in good faith and avoid default. But if it refuses, Judge Griesa deserves support from everyone who cares about the integrity of U.S. financial markets for upholding the law and American property rights.” (“Argentina Dances With Default”, WSJ, July 27, 2014).
More or less power to unregulated markets and US institutions: this is what is (also) at stake in Argentina’s debt case. The outcome is likely to have lasting effects on world order, for good or evil.
A Conversation with Eric LeCompte
One of the most active organizations campaigning for Argentina in the international arena has been Jubilee USA Network, an alliance of more than 75 US organizations, 400 faith communities and 50 Jubilee global partners aimed at reforming economic rules to protect the most vulnerable. I contacted its Executive Director, Eric LeCompte, to discuss the international implications of this case:
ELC: The implications of this case are global. The Supreme Court’s ruling will make it harder for poor countries to restructure their debts, will diminish New York as a center for finance and will threaten 15 years of bi-partisan US debt relief policy. For poor countries like the Democratic Republic of the Congo and Grenada, this ruling is deeply troubling. Predatory hedge funds now have a legal precedent they can use to litigate poor countries into submission. But it’s also bad news for New York: countries seeking to sign debt contracts will do so in London, Paris or Frankfurt where the legal system has not promoted this type of predatory behavior.
We agree with the IMF’s concerns that this ruling will make it harder for countries to restructure their debts. Debt relief has had a profound impact on people’s lives across the globe. Country after country that received debt relief saw child mortality drop, education and health spending increase. Classrooms were built, teachers were hired and health and education fees were waived. Here in the United States, debt relief was supported by both major political parties. But this court ruling will make it much more difficult for countries to obtain debt relief. The message from this ruling, unfortunately, is that it pays to hold out. That makes compromise and negotiation much more difficult.
EA: Do you think that there are chances that the international support for Argentina may open the way for actual changes in rules of international finances.
ELC: There has been a remarkable international consensus in this case, and we are hopeful that the silver lining in the court’s ruling will be that this consensus is transformed into meaningful action. We need a system for resolving debt issues that is fair and transparent, that takes into account the needs of people living in poverty. I do believe that momentum is building to pass major reform. This case illustrates the need for those reforms.
In most domestic economies we have some form of bankruptcy. Unfortunately, we still lack an international bankruptcy process for countries. That sort of international process is what the father of modern economics, Adam Smith, called for. If this process was in place, Argentina never would have defaulted and vulture funds would have been forced to sit at the table. I believe there’s a growing call for creating systems to protect vulnerable communities from predatory behavior. The United States government, the IMF, the World Bank, the United Nations, they all understand the implications of this case. So there’s hope that this harmful court ruling can bring about positive reform.
EA: What are the possible scenarios if Griesa does not authorize payments?
ELC: There has been a lot of speculation about what Argentina will or won’t do dating back to the immediate aftermath of the Supreme Court’s decision. Its options have been limited, and if negotiations fail and no stay is granted, those options will diminish further. In that scenario, I think Argentina will attempt to find some avenue for paying its restructured bondholders without subjecting itself to US law. No matter what route Argentina takes, its citizens are likely to be the first people harmed by this ruling, but they won’t be the last. No matter how Argentina resolves this situation, the global precedent this case created is here to stay. The damage to heavily indebted countries in Latin America, Africa and the Caribbean is already done, unless we all work together to undo it.
EA: What are the chances of Argentina to get away by using other legal options (unexplored US doctrines like the Champerty, or international courts, for instance)?
ELC: Alternative legal options are probably not a possibility at this point. Again, this comes back to the question of how international debt problems are resolved. Is there a fair and impartial system for assessing a country’s ability to pay its debt? Does that system take into account the needs of that country’s citizens? Does it treat all creditors equally? Does it encourage or discourage speculative and predatory behavior? We need a system in place that would resolve a country’s debt problems in a fair and transparent way. This was true 13 years ago when Argentina first defaulted. It’s still true today.