06/08/2013 by Don Quijones
In what Zerohedge has described as “nothing but pure politics between a president (one who generously rewards his backers and bundlers and cracks down on his opponents, such as S&P) and one of his wealthiest republican critics,” it appears that Barack Obama is entertaining the possibility of entering the fray between one of the world’s most ruthless venture capitalists, Paul Singer, and the Argentinean government. And (obviously) for all the wrong reasons — most of important of which is to protect his primary financial backers on Wall Street, including the usual suspects JP Morgan Chase, Citi and Goldman Sachs.
For all those of you who want to know more about this fascinating tale of one man’s struggle to destroy the eighth largest country in the world (in terms of territory) and how it could, in the very worst case scenario, trigger the mother of all financial maelstroms, here’s a piece I published on the issue in Nov. 2012 (to read the Spanish version click here):
Todos Somos Argentinos
On October 2nd 2012, in a scene that could have been lifted straight from a John le Carré novel, a coastguard unit in the Ghanaian port of Tema boarded, seized and impounded an Argentinian navy frigate.
The reason behind such a flagrant violation of sovereign property was a 370 million dollar debt that Argentina supposedly owes to NML capital, a Cayman Island-registered investment fund. In other words, the coastguard of a sovereign African nation is now getting its marching orders from a private company located thousands of miles away on the other side of the Atlantic.
NML Capital is a subsidiary of New York-based Elliot Associates that, in the words of its own corporate website, is open to new and exciting opportunities and tends “to focus on certain specialisms.” Chief among those “specialisms” is the buying up of distressed private or national debt on the cheap and then either selling it on for a profit or doing whatever it takes to get it paid in full, including, it seems, hijacking sovereign nations’ navy vessels. It is, in other words, a vulture fund.
The vulture-in-chief of Elliot Associates is one Paul Singer, an upscale New Yorker who, like many of the robber barons of the late 19th century, clearly understands the PR value of philanthropy. Among the non-profit initiatives he generously supports are the Harvard Graduate School of Education, the Food Bank for New York City, the National Gay and Lesbian Task Force Action Fund and the New York City Police Foundation.
In this world where double standards are the standard, who cares if your latest donation comes from the proceeds of one of the world’s dirtiest businesses? After all, people like Singer have been the embodiment of respectability in New York high society for decades. What New York’s crème de la crème seems content to ignore is that when he’s not dining and wining at charity dinners or sitting on the boards of the Manhattan Institute for Policy Research or Harvard Medical School, Singer spends his time dreaming up new ways to extort money from some of the world’s poorest nations, including war-torn Ivory Coast.
In going after Argentina’s debt, however, Singer may well have bitten off more than he even can chew, for two reasons: first, many of Argentina’s current bond holders include some of the world’s biggest hedge funds who, naturally, will not take too kindly to the threat Singer’s lawsuit represents to their own financial interests; and second, Argentina is a far bigger fish than Singer’s usual list of targets – which generally comprises developing countries in Africa – and given its recent history, is unlikely to cave in to this kind of financial shake down.
Argentina’s government has already made it abundantly clear it will not pay “one dollar to the vulture funds”. The Minister of the Economy Hernan Lorenzino likened U.S. Distict Judge Griesa’s recent ruling that Argentina must make immediate payment on its unpaid bond to “judicial colonialism… The only thing left is for Griesa to order them to send in the (U.S. Navy’s) Fifth Fleet.“
Which, given the U.S.’s newfound enthusiasm for “pacifying” trouble spots around the world, is not entirely beyond the realms of possibility. However, such old-school methods of imperial conquest are unlikely to be required. These days, it’s far more efficient and cost-effective to conquer countries via the cogs and wheels of the financial markets than it is to send in the dogs.
According to Zerohedge, if U.S. District Judge Griesa’s ruling is upheld and Argentina chooses to defy him, U.S. courts may inhibit debt payments to the 93 percent of creditors who actually accepted the terms of the restructuring of Argentinian bonds in 2005 or 2010, thereby triggering a technical default on approximately $24 billion worth of debt – a default that would benefit virtually nobody but the vulture funds.
As Golem XIV writes in his excellent blog:
“Although the Elliot case is often written of in terms of Argentina having to pay its debts, it is worth being clear that Judge Griesa’s judgement is not on behalf of the original bond holders. It is not seeking to redress any wrong done to them at all. In fact it is a judgement against them as much as it is against the people of Argentina.
“This judgement is purely and solely for Elliot Associates, its owners and its wealthy investors. The ruling says Argentina MUST pay Elliot Associates what Elliot wants, which is FULL payment. It is a judgement which says it is an American court in Manhattan which decides who the people of Argentina must pay and how much, not their own government. The judgement punishes everyone except Elliot. It is a judgement for their benefit only.”
Global Debt Cycle Defaults Come Full Circle
So, in what could be the cruellest of ironies, the country that ushered in the era of 21st century sovereign debt defaults could well be the one to pull the pin on the global debt Ponzi scheme.
For if there’s one thing you can bet on, it’s that hedge funds and big banks, scenting the blood of wounded prey, have been piling on their CDS positions vis á vis Argentinian debt. According to Bloomberg, credit default swaps on Argentinian debt are now the highest in the world. As such, the amount of money resting on the outcome of the Singer vs Argentina case is almost certainly many multiples of the country’s $24 billion dollars of outstanding debt.
But how did Argentina get itself into such a tight financial spot in the first place? Where did it go so wrong?
Well, actually, in surprisingly few places. As a matter of fact, pre-1999, Argentina was one of the poster boys of the Washington Consensus. For well over 20 years, it had followed the international rule book of global finance to a tee. Indeed, from the rise of the country’s military dictatorship in 1976 to its economic collapse in 2001, Argentina, like Pinochet’s Chile, was a frontline testing ground for Milton Friedman’s neo-liberal economic model.
It’s a sad indictment that the neo-liberal economic model now embraced, to some degree or other, by almost all countries in the world can trace its roots back to two of the most brutal dictatorships of the 1970s. Against a backdrop of organised state terror, entire industries were privatised, unions were banned, political activists were tortured and “disappeared” and quick, easy money began flowing through the country’s newly liberalised financial sector – all of it meticulously planned out in the ivory towers of Chicago, as James C. Kennedy explains in his piece for Counterpunch, The Dark Age of Money:
“Beginning sometime around 1970, the U.S. and most of the ‘free world’ have diverged from traditional ‘free market capitalism’ to something different. Today the U.S. and much of the world’s economies are operating under what I call Monetary Fascism: a system where financial interests control the State for the advancement of the financial class. This is markedly different from traditional Fascism: a system where State and industry work together for the advancement of the State.
Monetary Fascism was created and propagated through the Chicago School of Economics. Milton Friedman’s collective works constitute the foundation of Monetary Fascism. Knowing that the term ’Fascism’ was universally unpopular, Friedman and the Chicago School of Economics masquerade these works as ‘Capitalism’ and ’Free Market’ economics.
The foundation of Friedman’s corrupting principle is that the investor (money to be more precise) has no duty, obligation or covenant to anyone or anything. Friedman’s ‘Market’ is not subject to ‘any’ human standard of morality, political limitations or national interests. Money is free to act without bounds or conventions. Nothing is prohibited as long as the market can provide a ‘clearing price’…
… Friedman has created a model that sanctions and promotes the exploitation of his own country, in fact every country, for the benefit of the investor… He dressed up this noxious ideology as ‘free market capitalism’ and then convinced most of the world to embrace it as their economic salvation.”
In Argentina, it worked a treat… for the “investor class.” Those close to the military junta including many national and multinational corporations and the already wealthy were able to drink from a never-ending tap of what came to be called plata dulce (sweet money).
Obviously someone had to pay the price for such cheap money, and who better than Argentinian workers, many of whose real wages were crushed by 40 percent? As wages were slashed, child mortality and poverty rose sharply.
As many of the peripheral eurozone nations are discovering today, the combination of neoliberal policies and stagnant or negative economic growth are fatal to an economy, plunging it into a debt spiral from which it is almost impossible to emerge. As the Uruguayan writer and historian Eduardo Galeano said in 2002, Argentina was “a victim of the universal doctrine it accepted; it complied with all that was demanded of it. And now it’s being punished for its obedience.”
The poorer the country became, the faster its debt burden grew. From 1976 to 1996 Argentina’s total sovereign debt mushroomed from 8 billion dollars to 108 billion; a roughly 1,300 percent rise in just 20 years – all cheered on by the country’s financial and business elite, big foreign lenders, the IMF and World Bank.
Carlos Menem: A Master Class in National Betrayal
Even when Argentina’s military dictatorship was swept away in the wreckage of the Falklands War, the pace of neo-liberal economic reform continued unchecked. In 1989, the newly elected populist president, Carlos Menem, betrayed more or less all of his party’s electoral promises. After campaigning on a platform of social justice, his government accelerated the country’s program of financial liberalisation, including the wholesale sell off of all its utilities at rock bottom prices.
Even by the standards set by many of many of Latin American’s worst dictators, the reckless zeal with which Menem plundered his country’s resources was something to behold. And the more he privatised, the more the country descended into debt and the more plaudits he earned in the international press.
Here’s what Time Magazine had to say about him in their 1991 cover feature titled “The Unsinkable Carlos Menem”:
“Love him or hate him, President Carlos Saul Menem is never dull. Since taking office in 1989, he has been embroiled in enough scandals to sink a boatload of American politicians.
“Eyebrows went up when he accepted a $100,000 Ferrari Testarossa from Italian businessmen, then balked at suggestions that the gift was improper. Bowing to public pressure, Menem has auctioned off the red roadster and donated the proceeds to charity.”
In other words, “Menem may be a rascal but he’s our rascal.”
By 1999, though, the good times were as good as over, both for Menem and Argentina. Following 10 years of extreme neoliberal governance and the pegging of the Argentine peso to the U.S. dollar, the country’s economy was in tatters and Menem was ousted.
Thus began a period of remarkable political turmoil, even by Argentinian standards. In one week of December 2001 alone, the keys to the presidential palace changed hands five times.
The IMF: A Plague on All Nations
One of the main players – if not the main player – in Argentina’s riches-to-rags saga was the IMF. As countries across Europe are beginning to learn, the IMF’s traditional medicine (what it calls “conditionalities) – ever deeper cutbacks in government spending, across-the-board tax rises, wholesale privatisation and wage caps – are not meant to treat a country’s ills. They are meant to facilitate the speediest possible transfer of ownership of a country’s valuable resources from its inhabitants to the international financial cartels. Put simply, the IMF is a plague on all nations.
In the case of Argentina, the IMF’s burgeoining list of “conditionalities” did nothing but accelerate the economy’s decline, putting unbearable strain on the country’s social fabric and giving rise to a massive popular protest movement.
By December 2001, the financial markets could sense the country’s desperation and had begun massively shorting Argentine bonds. In other words, many of the same banks that had lent Argentina money during the good times started hedging their exposure by buying up CDS swaps on the derivatives markets, in turn raising the costs of insuring Argentinian bonds.
(It’s worth noting that something very similar took place when Greece’s financial crisis came to a head in 2010, as banks that were privy to the country’s acute economic situation, such as Goldman Sachs and Deutsche Bank, made very easy money by betting billions of euros against the Greek bonds, further accelerating their collapse).
On December 5th 2001, the IMF refused to extend more loans to Argentina, triggering the largest sovereign default in modern history. At least 40 billion dollars in domestic capital – that is, money belonging to well-heeled individuals and corporations – fled the nation, some of it in high-security trucks. The response of the De La Rua government was to implement the notorious corralito, a nationwide freezing of all bank accounts.
For almost a year, only a small amount of cash was allowed for withdrawal on a weekly basis (initially 250 Argentine pesos, then 300), and only from accounts denominated in pesos. No withdrawals were allowed from accounts denominated in U.S. dollars, unless the owner agreed to convert the funds into pesos.
When the new government headed by Eduardo Duhalde introduced the new peso in 2002, freeing the currency from the 10-year peg to the dollar, it collapsed in short order, losing almost 80 percent of its value. Millions of Argentinians, including many pensioners, lost the lion’s share of their life savings.
In a period of just a few years, one of the richest nations in Latin America – and arguably the only country in the region to boast a strong, broad-based middle class – was reduced to a state of penury. By May 2003, over 50 percent of the country’s population was living below the poverty line.
(For a clearer understanding of the events leading up to the Argentinian collapse and its devastating consequences on the country’s economy and society, check out the following documentary. It is, in my humble opinion, one of the best documentary accounts of any economic collapse).
A Slow Recovery
Since its outright collapse in 2001-02, Argentina has slowly got back on its feet. After a couple of years of intense political instability, a new centre-left government came into power in 2003 led by Nestor Kirchner, an obscure politician from Patagonia (and the late husband of Argentina’s current president, Cristina Kirchner).
One of the government’s first acts was to restructure its debt with its private creditors, which would ultimately pave the way to the cancellation of the nation’s entire debt with the IMF in 2006. During the public announcement of the final pay off, President Kirchner said: “with this payment, we bury an ignominious past of eternal, infinite indebtedness.”
Argentina’s recovery was also boosted by a huge surge in global demand for commodities – many of which the country produced and could now export overseas. They include the roughly 800 trillion cubic feet of shale gas recently discovered in the Vaca Muerta basin.
That’s not to say that the economy is by any means out of the woods. In recent years, Cristina Kirchner’s government has resorted to increasingly stringent capital controls and market intervention to stem rampant inflation which, according to some estimates, has reached as high as 20 percent in the past year.
Clearly, for a country that is still wholly dependent on foreign exchange earnings to sustain its economy – Argentina is the only G20 country to be effectively shut out of the international financial markets – the prospect of another currency crisis is extremely worrisome, and not only to the country’s 40 million inhabitants. As mentioned earlier, there is a slim possibility that a second Argentine default could trigger another Lehman moment as credit markets buckle amidst a chain reaction of unwinding derivatives. Given the risk of such an outcome, Argentina will probably be offered a stay of execution, at least for now.
Whatever happens, Paul Singer’s actions should, at the very least, serve as an opportunity for people to revisit the tragic events that occured in Argentina during the fin de siècle – a time when most of the world’s attention was understandably focused on the events of September 11th and their implications for the global order.
Somos Todos Argentinos
Most importantly, the collapse of the Argentinian economy needs to be studied and understood as it relates to the current European crisis, especially given that the majority of Europeans still continue to live in a profound state of denial. “No somos Grecia,” shriek the Spaniards. “Nous ne sommes pas l’Espagne,” cry the French. “We’re not France,” bellow the Brits. And all the while, the Germans continue to labour under the collective delusion that they can somehow bankroll in perpetuity a decrepit old continent in a state of terminal financial decline.
The parallels between today’s Europe and Argentina circa 2001 are striking. Like Argentina, the countries on the European periphery have been told in no uncertain terms by the Troika (the European Commission, the European Central Bank and you guessed it… the IMF) to implement brutal austerity measures and privatise key national industries and resources. Like Argentina, struggling economies in the eurozone have seen their debt burden explode as a result of declining tax revenues and increased welfare spending. In the case of Greece, public debt has skyrocketed from about 110 percent of GDP in 2007 to 189 percent in 2012. And as was the case with Argentina, unemployment and poverty have shot up in many of the peripheral countries. In Spain, for example, youth unemployment is now well above 60 percent.
Indeed, there is a strong case to be made that the stagnating economies in the eurozone face an even greater challenge than Argentina did in the early 2000s, in that they cannot inflate away their debt through a policy of external devaluation. Due to the monetary constraints resulting from being part of the eurozone, the only choice available to economies such as Greece, Spain, Italy and Portugal is to devalue internally – meaning savage cuts in salaries of up to 30 or 40 percent.
Before it’s too late, the people of Europe – and for that matter, the world – need to wake up to the fact that, in actuality, “somos todos Argentinos.” (we are all Argentineans). Like Argentina in 2001, almost all of the economies of the globe are massively overburdened with financial, government and household debt that can never and, by extension, will never be paid, as the following graph, courtesy of zerohedge, shows.
Ultimately, the only way for the global economy to recover from its current “sickness” is for the majority of its debt overhang, much of which is odious debt – that is, debt incurred by regimes for purposes that do not serve the best interests of the nation – to be written off. As the Australian economist Steve Keen argues, the only way out of the current debt spiral is through a one-off global debt jubilee – what he calls “quantitative easing for the public.”
One of just a handful of leading economists to actually foresee the 2007-08 credit crunch, Keen concedes that the quantitative easing for the public solution would not be easy or straightforward.
The alternative option, however, is to continue plodding mindlessly along the current path toward total collapse, while all the time allowing debt vultures like Paul Singer and the TBTF banks – the institutions that, lest we forget, bear the brunt of the responsibility for the financial crisis – to pick away at the juiciest parts of our national resources, leaving the people nothing but the bones and ashes of their once productive economies.
All of which leaves one to wonder what it might take for enough people to wake from their apathetic stupor and see the global financial system for what it is: a system of monetary fascism. At what point will we stand up as one and reject this economic system that was conceived in the minds of sick men and lab-tested in two of the most brutal authoritarian regimes of recent decades?