Argentina and America – of Vulture funds and Justice

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.

, , , ,

58 Responses to Argentina and America – of Vulture funds and Justice

  1. The Dork of Cork. November 25, 2012 at 11:16 pm #

    Superb piece , but I still cannot get my head around the scale of this.

    The level on top of level on top of level structure of it all.

    The media system within Ireland has me completely baffled……

    The “official ” Irish economic blog has endless pieces about the claims on the remaining wealth base but little emphasis on providing physical life support systems.

    For example as if Mortgages were somehow real and not metaphysical symbolic constructs or claims (which hold not real instriinc value)
    http://www.irisheconomy.ie/index.php/2012/11/23/local-authority-mortgages/

    Not once can I remember them having a article of a treasury printing money to sustain physical life support systems.
    Instead we get increases in gas prices with stagnant or falling wages
    This is a constant throughout this economic debate – conflating state money tokens with bank credit.

    http://www.irishtimes.com/newspaper/breaking/2012/0904/breaking48.html

    A entropy loop designed to preserve money claims on a now tiny rump domestic economy.
    All of these “economists” know that money must flow or else the pool of capital both human & physical capital becomes stagnant & decays.
    As you don’t need a degree to have a understanding of basic stocks and flows.

    I keep thinking of ancient Rome now and its decay.
    When the physical systems could not grow anymore due to the technological limitations of the time I imagine the people who held money claims charged a rent on it to sustain the lifestyle they had grown accustomed to.
    But money as a token is not a private good.
    It is the very heart of the commons , the state.

    What is striking about ancient pompeii is that most free people did not have much kitchen facilities
    The money supply was available for them to eat out in Tacco bars……..when the money supply became constrained in other cities during 200s & 300s I imagine city life became impossible destroying the Efficiency of the city as people spent more time & energy cooking in their tiny apartments.

    http://www.youtube.com/watch?v=3uG6IIpTXNI

    See 14.40 – 17.00
    & 39.00 “fast food joints is the commonest feature of the Pompeii urban landscape”
    I.e. the + money supply made the place work…
    A negative or static money supply can never work.

    This same monetary phenomenon is happening throughout the eurozone today which is forcing people to consume more real resources so as to preserve these money claims.

    Village & market town life in France and Indeed Ireland – once the backbone of these countries real wealth base is being destroyed to achieve this goal.

    For example
    If you remember that Southern French rural , inter village train line that I was talking about earlier in the year (they closed the line in July)
    Well the replacement bus route is now suspended…………..

    http://www.midilibre.fr/2012/10/06/ales-besseges-les-bus-etaient-provisoires,573775.php

    I really can’t see much wrong with the domestic French economy other then a very serious lack of Francs.

    As the neo – liberal era polices of the 80s can be still be reversed quite easily (with the will) unlike countries such as the UK which is much further down this road.

    The Euro boys obviously wish to rob all former nation states of domestic currency which made their internal commerce functional and thus more redundant and resilient to outside input shocks.

    Who can not say now the European experiment is the greatest market state conspiracy in the history of mankind ? (only Yanis V. I Imagine)
    French market towns were once the backbone of France.
    Now what the hell are they ?
    More conduits for the now international corporate fascist super state I imagine.

    The Euro is the most anti labour money concept imaginable – its prepared to burn through massive capital inputs (fuel for cars rather then pay a bus driver)

  2. Tony C. November 26, 2012 at 12:24 am #

    Very fine work. Thank you – I look forward to the conclusion.

    Please note that toward the end of the paragraph just above this line:

    “In December 2000…” you have omitted the letter “d” in the word “President”.

  3. John G November 26, 2012 at 12:43 am #

    Getting your Chile mixed with your Argentina there David.

    • Golem XIV November 26, 2012 at 9:30 am #

      Yes I was, Sorry. Two ideas mingling when they shouldn’t. MOST embarrassing. Fixed now.

  4. GeoWaveRider November 26, 2012 at 1:03 am #

    Golem

    I’m a bit confused at this late hour.

    You mention Pinochet and I seemed to think you have him confused with someone else as he was President(aka Dictator) of Chile if I’m not mistaken.

    Please can you clear up my confusion?

    Thanks

    Brian

    • Roanman November 26, 2012 at 1:34 am #

      That’s some extremely lame research and/or editing you got going on there Golum.

      Pinochet was Chile, Milton Friedman and “The Chicago Boys”. Argentina is The Perons, The Kirchners, rampant inflation, currency and capital controls, nationalization of retirement funds, chronic street protests despite a silenced press and an impending second default, maybe sometime as soon as next month.

      • Golem XIV November 26, 2012 at 9:32 am #

        Sorry Roanman. It is fixed now.

        • Roanman November 28, 2012 at 2:58 pm #

          Props for being man enough to admit it.

  5. CArratiaM November 26, 2012 at 3:51 am #

    Chile’s ex-president Allende and ex-dictator Pinochet are indeed mislaid. The Argentinian dictator from 76 to 81 was Videla (the dictatorship continued till 83 with 5 or 6 other military men as de facto presidents) and the rest of the names and dates correspond well to Argentina’s history as far as I can tell.

    Some months ago I posted here the link to a documentary on Argentina’s economic collapse which is clearly pertinent to repeat here:

    http://www.youtube.com/watch?v=rH6_i8zuffs

    It is quite long but definitely worth watching…

    By the way, being myself from America (therefore I’m American) but NOT from the country called United States OF America, I can’t help but feeling frequently bothered by the widespread use of the word America to imply USA exclusively, and the word American to imply from the USA exclusively. I know is nobody’s here fault that things are like that and that I’m not gonna change it, but sometimes I just feel the need to make the conflict visible. Sorry for the rant.

    Thanks for keeping up the nice work Golem!!

    • Golem XIV November 26, 2012 at 9:43 am #

      CArratiaM,

      Point taken about America v United States of America. I am guilty of the short hand and will try to stop using it. I lived in the USA for years and the ‘America’ habit is an old one.

      As for my ridiculous intrusion of Allende into Argentina’s history..well what can I say – other than I feel like an idiot. I have fixed it all now.

      • CArratiaM November 26, 2012 at 11:24 am #

        Thanks Golem, I appretiate it.
        I clearly understand you getting the habit, it is of common use and many people don’t even know there could be a conflict.

  6. Phil T. November 26, 2012 at 3:58 am #

    I am confident that Golem will sort out any ambiguities in this very ambitious article – as sited by John G., GeoWaveRider and Roanman.

    That said, here is the actual link to the FT article as the one included atop takes me to an FT reprint on CNN’s website. …

    ==> http://www.ft.com/cms/s/0/6298aad8-3478-11e2-8986-00144feabdc0.html#axzz2DIF6hSI3

    @ CArratiaM — just curious- what is your preferred moniker for the USA ?

    • CArratiaM November 26, 2012 at 11:38 am #

      Phil T.

      I prefer USAmerican as a demonym, it is self-explanatory and it rimes with the common use so that one doesn’t get missunderstood. Years ago I used to like USian, but I realized that it might not sound very good and could be taken as offensive.

      Thanks for the link by the way!

      • Phil T. November 26, 2012 at 9:42 pm #

        Fascinating CArratiaM !

        Did you leap from “USian” to “USAmerican” in one stride or were there other iterations in between?

        Yes, the FT link had the embedded bonus of a video … and some superb comments to boot.

        Best wishes ~

        • CArratiaM November 27, 2012 at 1:56 am #

          I can’t remember any other iterations Phil T, but at times I must have avoided the issue by taking the detour of using the longer “from the US” (but now that I think of it, it’s possible I’ve also used “US” as a prefix, like “US-person” or “US-citizen”…). I know that there have been several other proposals, there is an article on wikipedia called “Names for United States citizens”…

          Cheers and thanks for the interest!!

  7. Golem XIV November 26, 2012 at 9:38 am #

    Hello all,

    Profound apologies to all. Just to be clear – I am writing about Argentina here and the references to Allende were interpolated where they had no place to be. It’s a bad habit that comes from having a bee in my bonnet about Allende and what was done to Chile.

    That said I managed to possibly insult the entire populace of two countries by not being able to keep their histories clear and separate.

    OK now that I am suitably embarrassed I can at least say the rogue references to Allende are gone, the proper names of all the correct actors are in place where they should have been from the start.

    • CArratiaM November 26, 2012 at 11:42 am #

      It’s OK David, no offense taken.
      It can happen in the best families…

    • Jim M. November 26, 2012 at 4:58 pm #

      The man that never made a mistake never made anything

      Having said that, you might want to stay away from Twitter tho!

      ;)

    • AndrewW November 26, 2012 at 5:06 pm #

      Nice to know you are Human, I was thinking you had supernatural powers for a bit. Great blog, I love it, and appreciate the time you must put into it. keep it up.

    • Roanman November 28, 2012 at 3:53 pm #

      Regarding that bee in your bonnet about Salvadore Allende and General Pinochet.

      If you haven’t and get the opportunity to spend some time in Chile’ and/or Argentina you will hear a much different and significantly more nuanced account of the times and consequences Chilean history with regards to those two. I’m not talking about just the estancias, business interests and tour guides, but rather, bartenders, cab drivers, the girls working in the cafés con piernas, the door man.

      Nobody likes Pinochet, but there is more than grudging appreciation for Chile’s prosperity relative to the balance of South America and Argentina in particular, along with severe doubts about Allende, his plans for the country, his disdain for and attempted expropriation of private property. In a nutshell, he was/is far more respected in the United States than he was/is after two years in power in Chile.

      What is almost never mentioned by Allende supporters is the fact that he was impeached by the Chilean Senate, which impeachment was upheld by the Chilean Courts. Pinochet acting under the authorization of the impeachment moved to remove Allende from office which resulted in Allende’s suicide/murder take your pick. Then the prick Pinochet refused to return control of the gvernment back to an elected government choosing to implement a military dictatorship.

      i recommend Chile’ to anybody who will listen, Uruguay even more so which despite a similar history with violent leftists and military dictatorships has worked through it to the point of electing a former jailed leader of the Tupamaros as President.

      I’d stay the hell away from Buenos Aires for a while.

      • Golem XIV November 28, 2012 at 10:40 pm #

        I would dearly love the chance to spend some time in both Chile and Argentina and learn more of the nuances of which you speak. The only country I have spent any time in in that area is Peru. Which I liked a great deal.

        I am quite sure there are those who disliked and distrusted Allende. And I would not claim sainthood for anyone. But Pinochet’s was a military coup led by the Chilean army and police opposed by the armed forces of the nation only by elements within the navy. It was a coup that got plenty of funding and active, on the ground, military help from the CIA and another country.

        I do not say this based on vague readings of ‘conspiracy’ internet sites but from first hand testimony given to me by people who were there, involved in those events, at the time, on the ground.

      • Riabuchinska March 4, 2013 at 3:13 am #

        Please you do that, do stay away form this country as FASCIST as you are not welcome in these lands.

  8. steviefinn November 26, 2012 at 10:22 am #

    I watched a long but brilliant documentary some time ago regarding Argentina, unfortunately I do not have a link. What struck me besides what you are listing was how long it took for Argentinians to rise up against their cannibal government. If I remember rightly it was a movement of pots & pans, which was successfully used by the Quebec students Before watching this I kept expecting the Greeks to rise up at any moment, unfortunately it seems as though an overthrow of this type of tyranny takes more than a little time.

    On a small scale we seem to have companies here buying up none performing loans from banks & then pursuing individuals to try & screw them out of as much as possible. According to my much better half, this practise is illegal.

    • Riabuchinska March 4, 2013 at 3:17 am #

      Say, are you up against YOUR OWN cannibal goverment? Right, the internet is much comfortable, isn’t?

  9. CArratiaM November 26, 2012 at 12:04 pm #

    Hi Stevie

    the link is the one I’ve put a few comments ago, here goes again:

    http://www.youtube.com/watch?v=rH6_i8zuffs

    It is indeed a brilliant documentary, the original name is ‘Memoria del saqueo’, literally translated as ‘Memory of the looting/plundering/sacking’. Being from Chile, I have clear memories from 2001 when the Argentinian collapse came. Still I wasn’t aware of the magnitude of the theft untill I saw this documentary.

    • steviefinn November 26, 2012 at 12:56 pm #

      Cheers mate – well worth watching again.

  10. gatopeich November 26, 2012 at 1:59 pm #

    Thanks, Golem (and the active correctors here!). Another awesome piece in the works here…

    Regarding the Chile-Argentina mix-up, it is very understandable since the parallelisms are obvious. More echoes in a chamber full of them.

    Luckily enough you have no shortage of correctors. A well deserved privilege.

  11. Phil November 26, 2012 at 2:02 pm #

    You’re in excellent company, David, Cambridge economist Ha Joon Chang has just written about this issue:

    http://www.guardian.co.uk/commentisfree/2012/nov/25/greece-debt-crisis-didnt-need-to-be-this-bad?fb=native&CMP=FBCNETTXT9038

    “Colonialism is back. Well, at least according to leading politicians of the two most famous debtor nations. Commenting on the EU’s inability to deliver its end of the bargain despite the savage spending cuts Greece had delivered, Alexis Tsipras, the leader of the opposition Syriza party, said last week that his country was becoming a “debt colony”. A couple of days later, Hernán Lorenzino, Argentina’s economy minister, used the term “judicial colonialism” to denounce the US court ruling that his country has to pay in full a group of “vulture funds” that had held out from the debt restructuring that followed the country’s 2002 default.

    While their language was deliberately incendiary, these two politicians were making extremely important points. Tsipras was asking why most burdens of adjustment for bad loans have to fall on the debtor country and, within them, mostly on its weaker members. And he is right. As they say, it takes two to tango, so those who condemn Greece for imprudent borrowing should also condemn the imprudent lenders that made it possible.

    Lorenzino was asking how we can let one court ruling in a foreign country in favour of one small group of creditors (who bought the debt in the secondary market) derail a painfully engineered process of national recovery. The absurdity of this situation becomes clear when we recall that, partly thanks to the default and subsequent debt restructuring, Argentina, expanding at close to 7% per year, has been the fastest growing Latin American economy between 2003 and 2011.

    But there is far more at stake here than the national welfares of Greece and Argentina, important though they are. The Greek debt problem has dragged down not just Greece but the whole eurozone, and with it the world economy. Had the Greek debt been quickly reduced to a manageable level through restructuring, the eurozone would be in a much better shape today. In the Argentinian case, we are risking not just an end to Argentina’s recovery but a fresh round of turmoil in the global financial market because of one questionable US court ruling.

    Many people argue that, regrettable as they may be, such situations are unavoidable. However, when it comes to debt problems within our borders, we actually don’t let the same situation develop. All national bankruptcy laws allow companies with too big a debt problem to declare themselves bankrupt. Once bankruptcy is declared, the debtor company and its creditors are forced to work together to reorganise the company’s affairs, under clear rules.

    First, a standstill is imposed on debt repayments – for as long as six months in the case of the debtor-friendly American bankruptcy law. Second, subject to the majority (or in some countries a super-majority of two thirds) of them agreeing, creditors are required to accept a debt reduction programme in return for a new company management strategy. This programme could involve outright reduction (or even cancellation) of debts, lowering of interest rates, and extension of the repayment period. Third, lawsuits by individual creditors are banned until there is an agreement, so that individual creditors cannot disrupt the restructuring process. Fourth, the claims of other stakeholders on the company are also taken into account, with wages being typically given “seniority” over debts.

    Unfortunately, no mechanism like this exists for countries, which is what has made sovereign debt crises so difficult to manage. Because they don’t have any legal protection from creditors in times of trouble, countries typically postpone the necessary restructuring of their economies by piling on more debts in the (usually unfulfilled) hope that the situation will somehow resolve itself. This makes the debt problem bigger than necessary.

    What’s more, because they cannot officially go bankrupt, countries face a stark choice. Either they default and risk exclusion in the international financial market (although countries can overcome it quickly, as Russia and Malaysia did in the late 1990s) or they have to opt for a de facto default, in which they pretend that they have not defaulted by making full repayments on their existing loans with money borrowed from public bodies, like the International Monetary Fund and the EU, while trying to negotiate debt restructuring.

    The problem with this solution is that, in the absence of clear rules, the debt renegotiation process becomes lengthy, and can push the economy into a downward spiral. We have seen this in many Latin American countries in the 1980s, and we are seeing it today in Greece and other eurozone periphery economies.

    Meanwhile, the absence of rules equivalent to the protection of wage claims in corporate bankruptcy law means that claims by weaker stakeholders – pensions, unemployment insurance, income supports – are the first to go. This creates social unrest, which then threatens recovery by discouraging investment.

    It is not because people condoned defaulting per se that they came to introduce the corporate bankruptcy law. It was because they recognised that in the long run, creditors – and the broader economy, too – are likely to benefit more from reducing the debt burdens of companies in trouble, so that they can get a fresh start, than by letting them disintegrate in a disorderly way.

    It is high time that we applied the same principles to countries and introduced a sovereign bankruptcy law.”

    • Phil November 26, 2012 at 2:08 pm #

      Not the end of the world to insert Allende into the tale, by the way. Both Chile and Argentina felt the cold hand of neoliberalism in the 70s and 80s. And I think both suffered with Operation Condor – y’know throwing socialists out of helicopters, raping nuns, shooting priests – the standard CIA-backed fare.

      Incidentally if anyone from Naval Intelligence is reading today, how’s about serving the people whose taxes pay you? The plutocrats wouldn’t give you the steam off their…

  12. Totekramer November 26, 2012 at 2:23 pm #

    If you do not borrow money, you do not have troublesome creditors.
    In the financial markets there is an expression; “To an Argentine, a dollar borrowed is a dollar earned.”

    • Hawkeye November 26, 2012 at 4:37 pm #

      Totekramer

      And by extension, if you don’t extend credit indiscriminately, you won’t risk getting defaulted on.

      Surely the lenders are not beyond reproach?

      What about irrepressible, irresponsible, illegal and insidious lending?

      http://www.golemxiv.co.uk/2011/06/guest-post-by-hawkeye-irresponsible-borrowing-and-irresponsible-lending/

      • Jim M. November 26, 2012 at 5:10 pm #

        Surely you’re not suggesting that lenders might somehow and sometime have to pay a price for all that lovely vig?

        ;)

      • Phil November 26, 2012 at 8:48 pm #

        Hawkeye, I’m really sorry about the no-show last week. It’s a long but ultimately pathetic story.

        Falling Leaf has my email, can we get in contact via him?

        • FallingLeaf November 26, 2012 at 11:34 pm #

          Email away, chaps, am hoping for a match report from Hawkeye, soon, or at least another appointment to head down to Occupy

          • Hawkeye November 27, 2012 at 2:25 pm #

            No worries chaps.

            I met up with Jamie_Griff on Monday but we didn’t break into the Occupy group as they were quite intense. Spoke to one of them afterwards who was very helpful and provided a bit of background on the Occupy Economics activity. Will email details and match report through to email address for FallingLeaf shortly!

    • guidoamm November 27, 2012 at 9:34 am #

      Totekramer,

      In this particular variety of monetary system, everyone borrows money. Even those of us that have not borrowed money personally, still have to pay for the money that is borrowed on our behalf by our governments. This particular variety of monetary system does not and cannot contemplate any other variety of money that is not a form of debt.

      Hence the problem we are facing today.

  13. Nicholas Dyson November 26, 2012 at 4:45 pm #

    On looking up Paul Singer on Wikipedia one finds that, of course, he supports various charities, including the Food Bank for New York City, and that “At a September 2006 financial conference in New York City, Singer delivered a speech called “Complexity Made Simple,” advising that the purchase of collateralized debt obligations (CDOs) was a serious mistake, anticipating the downturn of the housing market by nearly a year before the $770 billion taxpayer-funded bailout.” Seems like a man with his finger on the basics.

  14. Alan D November 26, 2012 at 5:09 pm #

    Sorry Mr Dyson and just for info a small sample of what about Mr Singer is about try
    http://truth-out.org/news/item/12210-greg-palast-mitt-romneys-bailout-bonanza

    There is probably more but hey 4 billion bucks from the US taxpayer nice work if you can get it and why Mit Romney kept his 2009 tax returns stuck firmly up his jumper.

    Great article as usual always thought provoking

  15. Nicholas Dyson November 26, 2012 at 9:33 pm #

    Thank you, Alan. Tongue somewhat in cheek I am afraid. It’s a bit like the sainted George Soros. Why don’t the poor ever get off their backsides and endow art galleries or save the world from malaria? But the New York Food bank is a nice touch. Perhaps he’ll start one in Buenos Aires next. And the warning about CDOs. Why bother with such complicated stuff when you can make your money out of simple debt collection?

    • Alan D November 27, 2012 at 4:28 pm #

      Sorry I missed the subtlety still with his share of of just the Delco payoff he can set up soup kitchens in all the towns that used to have Delco plants.

  16. FallingLeaf November 26, 2012 at 11:40 pm #

    Great stuff as usual, David. I spend more time than I like debating people about the financial crisis – on that note, I find people are reasonably open-minded if the right tone is used as it is by David and many posters here – and I fear that the propaganda war has been so heavily piled on that popular opinion is not even aware how far from the truth it lies. The ideas on this blog strike some initially as faintly audible messages from some alien race. It’s not just the Tory austerity big boys’ brigade, Labour implicitly go along with all the propaganda attacking public services and no one sees the fascinating knot that we’ve been tied into: Labour and the “opposition” to austerity keep defending the public services to such a narrow degree that it allows a covert undermining of the public services which will eventually lead to a wholesale sell-off of the public sector itself.

    I would go on but I’m going to go away and read so as not to get depressed.

  17. Ken Lorp November 27, 2012 at 1:53 pm #

    David,

    I think the travails of Argentina, along with the travails of some Eurozone countries, highlight one significant factor that has been ignored – the degree of financial pillaging that has been conducted by the political and business elites in each country. This is irrespective of whether they’re on the left or right of the political spectrum.

    Argentina’s on-going troubles highlight that actions from 20 years ago are still hanging around the country’s collective neck. I think we’re reaching a point where democracy is failing (at least in those countries that are democratic) as most electorates appear to not consider the longer term implications of their responsibilities.

    K.

  18. James Dixon November 27, 2012 at 4:12 pm #

    Over the last decade-or-so, as Latin American Countries have gradually started to tell the IMF etc to go f*ck themselves, my sense of relief, or of justice-being-done, was always slightly tempered by a nagging feeling that a) they’d be back with a different plan of attack (and a slightly different ally) and b) suddenly deprived of rich pickings in ‘America’s backyard’, the usual suspects would, somewhat predictably, turn their attention to areas closer to home.

    The second thing happened fairly rapidly, on both the ‘fringes’ of Europe, and on the fringes of individual countries (read “austerity” for both!), and now, it seems, my first fear has been realised too, and one can’t help but feel this could be the drop that opens the floodgates (or however you make that into a suitable analogy…!?) should it be upheld, or somehow enforced!

    But, on that note, my question is this:

    how does this all work, jurisdictionally speaking? How is a decision by a court in the US, specifically relating to “events” which occurred outside of the States, legally binding on a foreign government or company operating wholly outside of it’s jurisdiction? Can it be enforced, or upheld?

    (Christ knows when it’s the other way around (when a US registered company is ordered to do x, y or z, by a foreign government or court), there usually follows a shit-load of legal and diplomatic wrangling about ‘legal standing’, ‘enforceability’ and whatnot, and this tends to drag out for a fair while, at least long enough to find all favourable material in Treaties and WTO rulings……)

    So, in essence, I guess, what I’m asking is why can’t Argentina just ignore the ruling? Setting issues of precedent, floodgates etc aside for a moment, what would happen if Argentina just said, ‘Bollocks to that for a game of Soldiers, fellas!’, and carried on as if it hadn’t happened!? 

    Would the US government really go to bat for the hedge funds, would they use up the necessary resources to pursue it through the WTO, IMF, or whatever!?

    I know that the US government used specifics in NAFTA to screw the Mexican Government on behalf of US companies, but I’m genuinely not sure if there’s an equivalent or similar mechanism relating to Argentina.

    Anybody know??

    • Golem XIV November 27, 2012 at 8:17 pm #

      That is the right question, detective. (I-Robot)
      I have an answer for you. You’ll have it as soon as I get part two finished and up.

      • James Dixon November 27, 2012 at 8:43 pm #

        Excellent, I look forward to it!!

        And, also, apologies for jumping the gun too, obviously!

  19. The Dork of Cork. November 28, 2012 at 3:51 am #

    What do you make of this document (Leaked ?) ……….it makes for interesting reading…….

    Greece appears as a sort of vaacum flask for the banks most extreme experiments but I am sure Ireland and the rest are not too far behind this.

    http://blogs.r.ftdata.co.uk/brusselsblog/files/2012/11/Greece_MoU2.pdf

    This document raises much deeper questions.

    The objective seems to be a massive socio – economic change not unlike the cromwellian ranch experiment in Ireland & the later final hanoverian displacement in western scotland.

    Namely to drive the peripheral area into a form of extreme energy surplus that can continue to feed the cold dead heart of the core even if it means massive losses of productivity.

    The implications of this is profound.
    With the final destruction of the nation state after the single European act of 1986 these areas have become rich areas of extraction for the financial capitals and the former nations that give them sucker.

    The similarity with the formation of the early UK in the 1700s is striking , with favoured nation status granted to England and other minor areas such as Dublin & Edinburgh while the remaining areas feed these cities which must always remain in real goods deficit.

    The plan is now finally becoming very easy to read.

    These former countries no longer borrow from their own hinterland on any level – they transfer a ration to the central financial districts / centre of banking operations and then plead for some gruel. This is nazi rule , banking rule – whatever you would like to call it. These bastards are very much back in business. Notice the language The government will, The government undertakes, The government ?
    Europe is in a dark place once again.

  20. Buck Turgidson November 28, 2012 at 5:19 am #

    Golem I understand your compassion for the poor who are caught up in all of this however please cut mister Singer some slack. The term Vulture is a apt description if the dead do not remind the living what is is store then I am missing something. It’s a tough world out there and someone is going to pay the price. A deal is a deal.

    • Roger Lewis November 28, 2012 at 9:16 am #

      An odious debt is an odious debt, a fraud by any other name is a fraud?
      Not all deals are created equal, perhaps?

    • Golem XIV November 28, 2012 at 11:11 am #

      Hello Buck Turgidson,

      (name made me smile by the way) Turgid son indeed.

      Anyway,I think I understand your concern that if we say contracts are tissue paper then it becomes difficult. Of course. But I think Roger Lewis’ reminder about Odious debt is timely in this respect.

      The notion of Odious debt does have stabnding in international law and simply points out that an agreed contract, can still be null and void if it was agreed fraudulently. By which is meant that the political party (the poltician involved) made an agreement nominally on behalf of a nation and for the nation’s benefit but in fact made the agreement primarily for his own and the lender’s benefit.

      The vulture funds are basically trying to over-write this legal notion with another which says forget looking to see if the orignal agreement was fraudulent and simply honour it. In other words honour the dishonourable. Which seems strange to me.

      Second point – is that if we are concerned with the right application of laws, equally and fairly and consistantly then I am fairly happy to argue on these ground. And so I think would most of S. America.

      I hope to explain a little of what I mean in part 2. I hope you will let me know what you make it it.

  21. John Souter November 28, 2012 at 1:59 pm #

    In the matter of odious debt – it is believed something like $25 -40 trillion is being nurtured in the honeypots of tax havens?

    Let’s be kind and award these a liability saving from the tax account of all nations of around 20%. Would not that $5 -8 trillion go some way to re-generating the economies of many nations.

    And since one, if not many of the devious methods used to squirrel away these monies is through the use of shell companies under nominee directors; often (and this is the ridiculous part) where the original depositor in order to evade and remove any direct link to himself has in all practicality to remove his claim of ownership to the point where it is effectively controlled by his scrupulously amoral financial advisor, is this then not a case of alien contracts for odious purpose.

    Perhaps, if miracles happened and we had a financial system based on probity and integrity in conjunction with government’s with a semblance of a backbone we could garnishee all of these deposits and demand proof of ownership before releasing them after all taxes and fees attributable have been paid.

  22. sumo November 29, 2012 at 11:44 am #

    David, thank you for your blog. It is a disturbing experience for me, to glimpse the predatory, even psychopathic, nature of business and politics. I admire how you lay it out for us, clearly and incisively. Few finance writers know the truth and want to tell the truth. Please keep it up.

    • Golem XIV November 29, 2012 at 11:32 pm #

      Sumo,

      Thank you for reading and for commenting.

  23. sheepshagger December 3, 2012 at 2:00 am #

    I like the exploitative sex analogies.
    They say a lot.

Trackbacks/Pingbacks

  1. From the Archives: 11/26/2012 Edition « whatsjohnreading - November 27, 2012

    [...] http://www.golemxiv.co.uk/2012/11/argentina-and-america-of-vulture-funds-and-justice/ [...]

  2. Argentina and America – of Vulture funds and Justice « Economics Info - March 2, 2013

    [...] Source [...]

Leave a Reply