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Argentina and the ruling of the century in the United States The return of external debt

By Carlos Marichal

Source: alainet

In recent weeks the external debt issue has returned to the limelight of finance and international politics, due to a ruling of the Supreme Court of the United States, which has emitted a resolution against the government of Argentina. This decision highlights a profound dilemma that exists between national sovereignty and financial globalization. When a government places a debt in international markets, it offers guarantees of payment that commit their taxpayers to pay up in the middle or the long term. Nevertheless, by selling public bonds these become private assets that in certain circumstances can become the object of gigantic speculation which in turn can unleash bankruptcy in the debtor States.

We recall that in 2011 and 2012, Spain, Portugal and Greece were subject to this kind of speculation from banks and investors who benefited from the abrupt increases in the interest rates of sovereign bonds. At one point it was feared that this could produce a bankruptcy of a sovereign state, and consequently, the collapse of the common currency, the euro. The intervention of Mario Draghi, director of the European Central Bank, was a key factor in dissipating the speculative bubble and the danger of “default.” But the phantasm of debt is still present and will not wait long to return.

In the case of Latin America, the brutality and the persistence of external debt crises cannot be forgotten, not only in the 1980s but also in the financial crises of Mexico in 1995, Brazil in 1998 and Argentina en 2001-2. Each of these debacles had costly social and economic impacts and their histories constitute key chapters in the recent history of financial globalization.

The experience of Argentina at the turn of the century was one of the most traumatic. Towards 2000 the government began to feel the drain, and because of this requested an enormous rescue package from the International Monetary Fund (IMF). But before this could be effected, the confidence of those with savings and of investors evaporated, and the withdrawal of money from Argentinian banks began on a large scale. To avoid the downfall of his administration, President Fernando de la Rua appointed Domingo Cavallo minister of economy in April of 2001, but his plan, known as the “mega exchange” of public debts, failed due to the lack of confidence of all the economic and financial actors. The bank panic followed its course until the ministry established control over bank deposits that was popularly known as “the playpen”. From this time on, the government’s days were numbered and in December it fell due to increasingly extended popular revolts.

This was followed by two years of political instability (with four Presidents in little over one year) and dramatic increases in unemployment and poverty. It was only with the election of the leftist Peronist Nestor Kirchner as President, in May of 2003, that a possible change of course appeared. The new government had the good fortune to be able to count on a sustained increase in agricultural and livestock exports, but their response to the financial crisis was equally important. As of December 2001, the government was in “default” on its debts, due in large part to the refusal of the IMF to come to the rescue. By early 2004, the external debt reached the stratospheric amount of 178 billion dollars. After repeated journeys to Washington the minister of the economy, Roberto Lavagna, with full support from Kirchner, managed to reach an agreement on a re-programming of their obligations with the principal multilateral financial bodies (IMF, World Bank, Inter-American Development Bank). They then negotiated with private creditors for guarantees of payment on the service of external bonds, in exchange for a reduction of their nominal value which was estimated at 100 billion dollars in March of 2005: a deduction of some 55% was agreed, one of the largest in recent international financial history.

As a consequence, the Argentinian government was marginalized from international capital markets, but during the past ten years they have paid the agreed service on the debt every year, which has represented the transfer of over 100 billion dollars to bondholders and a dramatic reduction in the external debt. Nevertheless, a small portion of bonds that were not part of the agreement were acquired by a few investment funds in the United States that are known as “vulture funds” since they bought obligations for a few cents in order to later try to cash them in at much higher prices. This depended on the possibility of convincing a New York court that speculative purchases should be repaid at one hundred per cent of their nominal value. This is what happened a few weeks ago with the decision of judge Thomas P. Griesa of the Court of the Southern District of the city of New York, which was endorsed by a superior instance of the US judicial system. In this case, the claims of speculators are determined to be of greater value than those of a sovereign government.

The Argentine government responded with two complementary strategies. On the one hand they offered to negotiate with the vulture funds during the month of July, but at the same time they initiated an international political campaign to limit damage to their economy. From Monday, July 7, judge Griesa has authorized an intermediary, the famous lawyer Daniel Pollack of New York, to supervise the process of negotiations between the speculators and the government of Argentina.

The international response, affirming solidarity with Argentina, has been impressive.

In the first place, they have obtained the support of Latin American governments, including those of Mercosur as well as a resolution of the Organization of American States (OAS), approved on July 4. Secondly, they have obtained the support of several multilateral entities, among them the Economic Commission for Latin America (CEPAL) and the group of countries in the United Nations known as the G77. In addition, this has attracted the attention of two big powers, Russia and China. On July 15th and 16th, the presidents of the group known as BRICS (Brazil, Russia, India, China and South Africa) will meet in Fortaleza, Brazil. President Vladimir Putin of Russia has announced that he will then visit Buenos Aires to show his support against the speculators. Even more important was the declaration of the President of China, Xi Jinping, who will also go to Argentina to sign commercial agreements and demonstrate his support against the “vulture funds” of New York.

To sum up, this is a geopolitical and financial episode of considerable importance. One may well wonder, what is the scope of the sovereignty of a government and above all of their taxpayers in this epoch of financial globalization? This is a core problem that impacts modern democracies. The fundamental principle of parliamentary government is that the payment of taxes is the basis of political representation: therefore, fiscal sovereignty and hence that of citizens, merits a much more visible and transparent defence than that of private financiers. In good measure, the survival and the legitimacy of contemporary democracies depend on this, and precisely for that reason, the debate over public debt will continue to grow at national and international levels.

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