[contraste.netz-bb] From the Guardian: Why Argentina is now paying for its dangerously successful economic story | Jayati Ghosh and Matías Vernengo

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Guardian: Why Argentina is now paying for its dangerously successful  
economic story | Jayati Ghosh and Matías Vernengo

A vulture fund has won a court bid to force Argentina to repay debt, after  
the nation rejected austerity as a way out of crisis
Jayati Ghosh and Matías Vernengo
Monday 3 December 2012

guardian.co.uk

http://www.guardian.co.uk/commentisfree/2012/dec/03/argentina-paying-economic-vulture-fund

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Argentina is in the news again. The country that successfully managed an  
external debt restructuring after a major financial crisis in 2001-02, and  
eschewed the standard austerity package to benefit from a remarkable  
economic recovery, is being attacked by a combination of court rulings and  
aggressive moves in financial markets.


Elliott Capital Management, a vulture fund based in the tax haven Cayman  
Islands owned by conservative financier Paul Singer (a big donor to the  
Romney campaign), refused to accept the terms of the debt restructuring  
that was accepted by more than 92% of bondholders in 2005 and 2010. It has  
demanded payment in full, and has actively pursued its case in different  
courts across the world. A few months ago, the Argentine frigate Libertad,  
which ironically means freedom in Spanish, was seized in Ghana after a  
local judge ruled in favour of Elliott Capital Management. Judge Thomas  
Griesa has recently ruled in a district court in New York that the  
Argentinian government must pay $1.3bn to the same vulture fund – the full  
face value of their holdings plus accumulated interest starting in late  
2001 – on the basis of an unusual interpretation of the pari passu clause  
in debt contracts.


Elliott and other "vulture funds" are not conventional investors. They buy  
bonds at discount rates during a crisis with the explicit intention of  
taking the distressed countries to court in foreign jurisdictions, while  
also holding out for payment in full with no renegotiation of the debt.  
Obviously vulture funds are not concerned with niceties such as how the  
debt was accumulated, the principle that debts should be served according  
to the debtor's capacity to pay or how the enforced payments will affect  
the wellbeing of the most vulnerable. They represent global finance in its  
most nakedly aggressive and exploitative form.


The Griesa ruling also contained an injunction that prohibited third  
parties from "aiding and abetting" any violation of his order, thereby  
preventing Argentina from being able to continue payments to the creditors  
that had accepted the restructuring. This has far-reaching implications  
beyond this case, because it calls into question all debt restructuring  
deals that are not just likely, but also necessary to preserve  
international finance. Why would those holding Greek bonds, for example,  
accept a debt restructuring plan that might be necessary for a solution and  
beneficial to all, if they know that vulture funds can hold out and receive  
judicial support in international courts?


The ruling also contradicts US internal bankruptcy laws, which force  
minority creditors to confirm to deals accepted by 70% of creditors. If  
this ruling is supported in the higher courts (both Argentina and other  
creditors have already appealed) it will create an unviable situation for  
global bond markets. Creditors will only be making one-way bets if no  
possibility of restructuring is accepted, making the only options all (full  
payment) or nothing (complete default).


But that is not the only onslaught Argentina is facing. This week the  
rating agency Fitch, which earlier gave US sub-prime bonds Triple A  
ratings, lowered Argentinian bonds to slightly above junk status. Many  
financial analysts are now predicting another Argentinian default.


But there is no reason to believe that the country is close to a default.  
The current account is in balance, international reserves are above $46bn  
and the ratio of debt service payments to exports is less than 20%. In the  
recent past, Argentina has been one of the fastest growing economies in the  
world, with unemployment falling from around 22% to close to 7%. So what  
explains all the downgrading and undermining of the country in financial  
markets and the media?


The real reason may lie in the very success of the country's economy after  
its default and forced debt restructuring process. After 2002, Argentina  
reversed the austerity measures promoted by the IMF, renationalised key  
productive sectors like aviation, pensions and most recently oil, increased  
social protection and income transfers to the poor, and reduced poverty  
substantially. Real wages have increased, and wage inequalities have been  
reduced.


This is a dangerously successful story. It shows that there is life after a  
default, and that austerity is not the best way out of a crisis. These are  
two lessons that clearly frighten financial markets and their allies within  
the judicial system, and obviously there is concern that other countries in  
financial distress could seek to emulate this example. Hence the eagerness  
to show that this is not a success story after all, and to keep the  
pressure on Argentina through court rulings, downgrades and similar  
measures.


Ironically, this may turn out to be counterproductive. It is not just that  
these recent moves are deeply unjust and anti-democratic – it is also that  
they threaten the global financial system itself. Allowing vulture funds to  
get precedence over other bondholders that accept restructuring undermines  
any possibility of renegotiating debts, without which no credit system can  
function. The "level of rancour" in Griesa's decision shows how important  
it is to have judicial systems that are not loaded in favour of purely  
profit-motivated private investors. Allowing rating agencies with extensive  
conflicts of interest to function without regulating them and setting up  
public alternatives creates misinformation without accountability.


Even a blatantly unjust capitalist system cannot survive this way for very  
long. So once again, international finance and its partners may be biting  
the hands that have fed it, with potentially disastrous consequences even  
for finance.

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