Posted on August 12, 2014 by Ellen Brown
Argentina has now taken the US to The Hague for blocking the
country’s 2005 settlement with the bulk of its creditors. The issue
underscores the need for an international mechanism for nations to go
bankrupt. Better yet would be a sustainable global monetary scheme that
avoids the need for sovereign bankruptcy.
Argentina was the richest country in Latin America before decades of
neoliberal and IMF-imposed economic policies drowned it in debt. A
severe crisis in 2001 plunged it into the largest sovereign debt default
in history. In 2005, it renegotiated its debt with most of its
creditors at a 70% “haircut.” But the opportunist “vulture funds,” which
had bought Argentine debt at distressed prices, held out for 100 cents
on the dollar.
Paul Singer’s Elliott Management has spent over a decade
aggressively trying to force Argentina to pay down nearly $1.3 billion
in sovereign debt. Elliott would get about $300 million for bonds that
Argentina claims it picked up for $48 million. Where most creditors have
accepted payment at a 70% loss, Elliott Management would thus get a
600% return.
In June 2014, the US Supreme Court declined to hear an appeal of a
New York court’s order blocking payment to the other creditors until the
vulture funds had been paid. That action propelled Argentina into
default for the second time in this century – and the eighth time since
1827. On August 7, 2014, Argentina asked the International Court of Justice in the Hague to take action against the United States over the dispute.
Who is at fault? The global financial press blames Argentina’s own
fiscal mismanagement, but Argentina maintains that it is willing and
able to pay its other creditors. The fault lies rather with the vulture
funds and the US court system, which insist on an extortionate payout
even if it means jeopardizing the international resolution mechanism for
insolvent countries. If creditors know that a few holdout vultures can
trigger a default, they are unlikely to settle with other insolvent
nations in the future.
Blame has also been laid at the feet of the IMF and the international
banking system for failing to come up with a fair resolution mechanism
for countries that go bankrupt. And at a more fundamental level, blame
lies with a global debt-based monetary scheme that forces bankruptcy on
some nations as a mathematical necessity. As in a game of musical
chairs, some players must default.
Most money today comes into circulation
in the form of bank credit or debt. Debt at interest always grows
faster than the money supply, since more is always owed back than was
created in the original loan. There is never enough money to go around
without adding to the debt burden. As economist Michael Hudson points out, the debt overhang grows exponentially until it becomes impossible to repay. The country is then forced to default.
Fiscal Mismanagement or Odious Debt?
Besides impossibility of performance, there is another defense
Argentina could raise in international court – that of “odious debt.”
Also known as illegitimate debt, this legal theory holds
that national debt incurred by a regime for purposes that do not serve
the best interests of the nation should not be enforceable.
The defense has been used successfully by a number of countries,
including Ecuador in December 2008, when President Rafael Correa
declared that its debt had been contracted by corrupt and despotic prior
regimes. The odious-debt defense allowed Ecuador to reduce the sum owed
by 70%.
In a compelling article in Global Research in November 2006, Adrian Salbuchi made a similar case for Argentina.
He traced the country’s problems back to 1976, when its foreign debt
was just under US$6 billion and represented only a small portion of the
country’s GDP. In that year:
An illegal and de facto military-civilian regime ousted
the constitutionally elected government of president María Isabel
Martínez de Perón [and] named as economy minister, José Martinez de Hoz,
who had close ties with, and the respect of, powerful international
private banking interests. With the Junta’s full backing, he
systematically implemented a series of highly destructive, speculative,
illegitimate – even illegal – economic and financial policies and
legislation, which increased Public Debt almost eightfold to US$ 46
billion in a few short years. This intimately tied-in to the interests
of major international banking and oil circles which, at that time,
needed to urgently re-cycle huge volumes of “Petrodollars” generated by
the 1973 and 1979 Oil Crises. Those capital in-flows were not invested
in industrial production or infrastructure, but rather were used to fuel
speculation in local financial markets by local and international banks
and traders who were able to take advantage of very high local interest
rates in Argentine Pesos tied to stable and unrealistic medium-term US
Dollar exchange rates.
Salbuchi detailed Argentina’s fall from there into what became a $200
billion debt trap. Large tranches of this debt, he maintained, were
“odious debt” and should not have to be paid:
Making the Argentine State – i.e., the people of
Argentina – weather the full brunt of this storm is tantamount to
financial genocide and terrorism. . . . The people of Argentina are
presently undergoing severe hardship with over 50% of the population
submerged in poverty . . . . Basic universal law gives the Argentine
people the right to legitimately defend their interests against the
various multinational and supranational players which, abusing the huge
power that they wield, directly and/or indirectly imposed complex
actions and strategies leading to the Public Debt problem.
Of President Nestor Kirchner’s surprise 2006 payment of the full $10 billion owed to the IMF, Salbuchi wrote cynically:
This key institution was instrumental in promoting and
auditing the macroeconomic policies of the Argentine Government for
decades. . . . Many analysts consider that . . . the IMF was to
Argentina what Arthur Andersen was to Enron, the difference being that
Andersen was dissolved and closed down, whilst the IMF continues
preaching its misconceived doctrines and exerts leverage. . . . [T]he
IMF’s primary purpose is to exert political pressure on indebted
governments, acting as a veritable coercing agency on behalf of major
international banks.
Sovereign Bankruptcy and the “Global Economic Reset”
Needless to say, the IMF was not closed down. Rather, it has gone on
to become the international regulator of sovereign debt, which has
reached crisis levels globally. Total debt, public and private, has grown by over 40% since 2007, to $100 trillion. The US national debt alone has grown from $10 trillion in 2008 to over $17.6 trillion today.
At the World Economic Forum in Davos in January 2014, IMF Managing Director Christine Lagarde spoke of the need for a global economic “reset.”
National debts have to be “reset” or “readjusted” periodically so that
creditors can keep collecting on their exponentially growing interest
claims, in a global financial scheme based on credit created privately
by banks and lent at interest. More interest-bearing debt must
continually be incurred, until debt overwhelms the system and it again
needs to be reset to keep the usury game going.
Sovereign debt (or national) in particular needs periodic “resets,”
because unlike for individuals and corporations, there is no legal
mechanism for countries to go bankrupt. Individuals and corporations
have assets that can be liquidated by a bankruptcy court and distributed
equitably to creditors. But countries cannot be liquidated and sold off
– except by IMF-style “structural readjustment,” which can force the
sale of national assets at fire sale prices.
A Sovereign Debt Restructuring Mechanism ( SDRM) was proposed by the IMF in the early 2000s, but it was quickly killed by Wall Street and the U.S. Treasury. The IMF is working on a new version of the SDRM, but critics say it could be more destabilizing than the earlier version.
Meanwhile, the IMF has backed collective action clauses (CACs)
designed to allow a country to negotiate with most of its creditors in a
way that generally brings all of them into the net. But CACs can be
challenged, and that is what happened in the case of the latest
Argentine bankruptcy. According to Harvard Professor Jeffrey Frankel:
[T]he US court rulings’ indulgence of a parochial
instinct to enforce written contracts will undermine the possibility of
negotiated restructuring in future debt crises.
We are back, he says, to square one.
Better than redesigning the sovereign bankruptcy mechanism might be
to redesign the global monetary scheme in a way that avoids the
continual need for a bankruptcy mechanism. A government does not need
to borrow its money supply from private banks that create it as credit
on their books. A sovereign government can issue its own currency,
debt-free. But that interesting topic must wait for a follow-up article.
Stay tuned.
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Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.
