Argentina told to pay hedge funds $1.3bn
Was the headline in the FT on Thursday 22nd November 2012.
The judge who made the ruling, Thomas Griesa, said “After 10 years of litigation this is a just result.”
I’m not so sure. In my opinion the headline and the ruling it reports are just the tip of a shit-berg. Like all bergs the fatal mistake is to think the bit you can see above the water is all there is. In my opinion if you look beneath the surface, almost everything which this article and the case it reports on claim to show, is turned on its head.
The visible tip
Argentina borrowed money, got in to trouble and defaulted on its creditors. What could be simpler? That was back in 2001. Since then the bond holders, or some of them at least, have pursued Argentina through their home courts in America and a judge sitting in Manhattan’s Southern District Court has finally ruled in their favour. Justice at last for the bond holders. The rule of law, majestic, like a shining island of ice.
Now lets take a peek beneath the waterline.
Sub-level One – Vulture Funds
The Bond holders described rather coyly in the article as an ‘Hedge Fund’are not just any old hedge fund and are not in fact one of the original bond holders who lent the money to Argentina in the first place. The hedge fund in question is what is commonly known as a vulture fund. Vulture funds like most parasites have a very specific niche. Vulture funds go around buying up what is often called distressed debt. Which in their case means bonds which have been or are thought very likely to be defaulted on. Why would they do such a thing? Well the original bond holders, faced with default, will either settle with the defaulter to get back some portion of what they lent – in this case they settled with Argentina for 30 cents on the dollar – or if a circling vulture fund settles next to them they may sell to them instead. The Vulture funds will say – ‘You never know how much Argentina will offer you but we will offer this much to you right now’. The original bond holders generally want as clean an out as they can. They will have lost money but that is the the nature of lending it is it not? You win some you lose others. Exactly like lending on a mortgage or buying stocks and shares – the value of your investment can go down as well as up. You pays your money in the hopes of a reward and accept that there is an accompanying risk.
I do not mean to make light of bond holders losing their money, nor imply that a country defaulting is a mere bagatelle. I want only to remind that lending is always a risk – an accepted and normal risk – which is part of what the interest on a loan is for. Potential default is part of the risk that is priced in to the bonds as we hear every day when we are told of a county’s borrowing costs going up.
So back to the vulture fund. In this case called Elliot Associates. To be more precise, for the happiness of the corporate PR men reading, the case concerns NML Capital ( A Cayman Island registered fund) which is part of Elliot Capital Management which is part of Elliot Associates. Elliot Associates and its subsidiaries together make up one of, if not the, biggest vulture fund. It is certainly the most aggressive. It is based in New York and its founder and CEO is Mr Paul Singer. I do not know Mr Singer. He may be a wonderful person. But it is my opinion, that if there is something more repulsive than a scaly necked corpse-eater spattered with the gore of some unfortunate beast – if there is something more repulsive – it is what Mr Singer’s business does. Vulture funds Buy to Sue. They feed upon misery for their profit.
Vulture funds do not buy bonds as a form of lending. They do not lend. They are not there to help. They wait until a country is on its knees, buy its bonds while they are cheap and then use the law to insist, that in its moment of pain and misery, the government, instead of using whatever it has left to get its house in order and help its citizens, must instead pay the Vulture fund, its owners and its investors.
Now supporters will say – but it is the law. The country owes and must pay. What then is the difference between this icy attitude and the cold heartlessness which put families out in to the cold and children to the Workhouse? Debtors prisons and work-house morality. The morality of fat men and their lawyers lecturing the poor and the huddled who owe them money.
Histrionic nonsense! What about the rule of law? We are not cruel men nor heartless, but we insist the law be observed. Yes indeed. The law. Before which all men, all nations must be equal. Is that it? Yes! Yes! And what of probity and taking responsibility for ones mistakes and paying for them?
Sub Level Two – How Argentina came to default
Every level is larger than the one above it. It is 1976. Isabel Perón is gone, the military dictatorship led by General Jorge Rafael Videla, Admiral Emilio Eduardo Massera and Brigadier-General Orlando Ramón Agosti now rule. (All the following quotes are from a very good piece from the Argentina Independent which was founded and is staffed by British journalists. You can read about it here)
On 2nd April 1976, just over a week after the military coup, newly appointed economy minister José Martínez de Hoz, launched a deep restructuring of the economy, based on the principles of neo-liberalism. In his landmark speech that day, he announced a fundamental move “from stifling state intervention to make way for the liberalisation of productive forces.”
In a short space of time, wages were frozen and new labour laws (in favour of companies) were introduced, the banking sector was deregulated, and obstacles to international trade and investment flows were eliminated.
The Neo-liberal experiment had begun. For those close to the military junta, for the corporations and the already wealthy it was the time of what became called plata dulce (Sweet money). The deregulated banks opened up to cheap money and international funding. Sound familiar? But not all boats were lifted.
Just one year into the dictatorship, acclaimed writer and journalist Rodolfo Walsh wrote in his famous open letter to the military junta: “the economic policy of this government, rather than a justification for its crimes, is a greater atrocity that punishes millions of human lives with its planned misery.”
While the few prospered, real wages for the many were crushed by 40%. Child mortality and poverty rose. Did it stop the ideologues of the free market? Of course not. Mammon is Great! Mammon the all merciful. When did fundamentalists ever pay attention to the real world sufferings of those they disdain? Turban or T-bill, fundamentalists are always certain. Certain that they deserve all they have and so do you.
Like virtually all those free-marketeers who came after them in Washington and in every nation where they were installed they talked about shrinking the state but didn’t. The Generals spent. Their bankers approved. In 1976 before the military and their neo-liberal experts took over, Argentina’s external debt was $8 billion. After 7 years of their financial prudence and free-market can-do the debt was $43 billion. And not a socialist to in sight to blame it upon.
Not that it dented the zeal of those latter-day crusaders for Mammon and money – the IMF. With Argentina now in serious debt and poverty and inequality rising it was time for the IMF to insist on its special medicine – of more ‘market liberalization’ and more austerity to pay for it. Naomi Klein has written brilliantly about the wider, shameful and wicked experiment in her book The Shock Doctrine.
By 1991 the free-marketeers had been forced to dispense with their dictator. But all was not lost. Argentina’s debt had swollen like a boil to $61 billion which was earning $ 3 billion a year in interest for those who had advised them and lent to them. And better yet. this time the Argentine people voted the right way, and when Domingo Cavallo was appointed minister of Finance he embraced the free-market, neo-liberal ‘Washington concensus’ with all his stony heart. He was after all a former World Bank President. He was one of us. Not one of those left leaning radicals. No need for regime change in Argentina. Not this time. That would come later, in another country that had something Washington and the West wanted.
Cavallo embarked on more liberlization, more deregulation and more privatizations. The result was economic contraction. The IMF and the bankers offered more loans and ‘helped’ with more selling of state assets. Argentina sold off one of its crown jewels, its oil company, YPF (remember the name) at prices critics cried were corruptly low and seemed bidderless, gifts to the powerful and connected. But it was a ‘concensus’ right? It was the 90’s when ‘the smartest men in the room’ were just rolling up their power-dressing sleeves and inventing all the insanely wonderfulf financial things that we have learned about since 2008.
By 1996 Argentina’s debt had now nearly doubled to $110 billion. Cavallo resigned amidst widespread claims of corruption throughout President Menem’s government. But Menem held on for three more years in which another $35 Billion debt was added. No one was to worry though. The IMF had a plan and as long as Argentina continued to follow it, the IMF would smile upon her leaders as would the banks who were getting so very rich from all the interest.
1999 Menem fell. Fernando De la Rúa took over. But the real power, behind the presidential throne did not blink or close its eyes. Not for a second. Greed and evil don’t sleep. After nearly three decades of neo-liberal policies, away from the golden lives of the urban elite, of Polo matches and private banking, there was no better future coming for the mass of Argentinians, there was recession. But Argentina had become used to turning whatever trick her pimps told her to. So when the IMF said the answer was another loan the new President, much like the old one, got to his knees to give special thanks.
In December 2000 he wiped his mouth clean and addressed the nation.
“[the IMF credit line] is a guaranteed fund so large [$40 billion] that it clears any doubts or threats over Argentina’s future…Argentina has no more risk,
And now it is Greece which will have ‘no more risk’ just like Ireland or Portugal, as long as she can have a big enough hit of that crystalmeth bail out goodness. Now it is Greece that must do what it is told for another tranch of funding Just one more bail out and one more round of austerity to pay for it and Greece, like Aregentina who blazed down this the path before it, will be fine.
‘Greece will not need another bail out’. Of course not. ‘Spain isn’t Greece’. And Spain’s banks are secure and funded and their debts are under control. And Italy isn’t Spain and France isn’t Spain and no one wants to be reminded of Argentina. After all that was then and this is now and now is different. Isn’t it?
Argentina is safe and transparent, and can now grow in peace…2001 will be a big year for Argentina”.
And it was. Argentina continued to follown the IMF dictats of government spending cut backs and austerity. But the country’s economic decline and contraction accelerated. De la Rúa lost control.
Cavallo was brought back, this time with extraordinary powers to force through whatever the IMF said.
A patchwork collection of new taxes, spending caps, debt swaps, and cutbacks (including a 13% in pensions and some social payments) only deepened the country’s social problems and turned more people against the De la Rúa government.
September 2001 another $8 billion loan brought Argentina’s debt to somewhere around $193 billion. And then on December 5th 2001 the music stopped. The IMF felt it had done enough to help the ungrateful and said ‘no’. Argentina defaulted. And the bond holders were, as they are now, outraged.
The echoes of history are, to me, chilling. And I wonder can we really be the only ones who hear them? I cannot believe that those echoes do not whisper through the marbled walls of the Central banks and along the carpeted corridors of the IMF. And yet the lunacy and greed roles on from country to country, from people to people. Always the same true believers burning our hopes, blighting our lives, before they walk away, with a shake of their perfectly tanned heads, to their private jets to return to the place where there is no want and despair does not go.
This is the story of Argentina’s default, so crisply summarized by Judge Griesa in his judgement, when he wrote that, “at long last…Argentina must pay the debts which it owes.”
Sorry to break here, given that most of this has been background, but I have been working more slowly than I had hoped I would. Part two, in which I hope to get to my conclusions, begins –
Sub -level Three. Vulture world
Without carrion eaters the world would be strewn with corpses. Vultures eat the dead. Vulture funds, however, eat the still living.