Argentina – Sliding Down A Slippery Slope

Tyler Durden's picture

Update: The official and black-market Peso has collapsed further today to new record lows.

  • *ARGENTINA'S BLACK MARKET PESO WEAKENS 1.7% TO 14.45/USD: AMBITO

which can mean only one thing...

  • *ARGENTINA'S MERVAL INDEX OF LEADING SHARES RISES 3.7%

Submitted by Pater Tenebrarum of Acting-Man blog,

Planned Bond Exchange Declared Illegal

You bet it is illegal – in its continued attempt to welsh on its creditors, Argentina's  government has attempted to move its debt out of the reach of US courts by swapping its debt for new debt issued under local law. The problem is of course that “local law” can be made up to the government's liking. Simply put, investors would never have lent the government money in the first place if these bonds had not been issued under US law. By entering clauses that determined that New York would be the relevant jurisdiction, Argentina's government enticed investors to lend a lot of money to it at what were then quite favorable terms.

Obviously, for the government to attempt to alter these clauses retroactively by means of a swap makes a complete mockery of these contractual agreements. Hence, judge Griesa's determination that such action would be illegal is perfectly justified and correct (for details on the legal backdrop, we refer you to our previous article  “Argentina – Deadbeat State Goes on the Attack”). In the interest of achieving a settlement, the judge wisely refrained from issuing a contempt of court finding (he can't very well throw Argentina into jail anyway). It is obvious that judge Griesa just wishes the issue would go away, but to his credit, he continues to stand firm on the law.

According to a recent Bloomberg report:

“Argentina’s plan to pay its restructured debt beyond the reach of U.S. courts is illegal, said the judge overseeing litigation stemming from the nation’s 2001 default, while declining to hold the country in contempt.

 

U.S. District Judge Thomas Griesa said in Manhattan federal court today that the proposal, announced Aug. 19 by Argentina President Cristina Fernandez de Kirchner, is “invalid, illegal and in violation of current court orders and injunctions.”

 

Griesa declined a request by lawyers representing investors holding Argentina’s defaulted bonds that he find the nation in contempt of court. The judge told lawyers for both sides that a contempt finding wouldn’t add to the prospects of a settlement between Argentina and its creditors.

 

“The thing that is of paramount necessity is to have a settlement,” Griesa said. “There must be a settlement.”

(emphasis added)

We must once again emphasize here that it does not matter that many of the current owners of Argentine debt that comprise the so-called “hold-outs” are denounced as “vulture funds” because they have bought the defaulted debt cheaply. It is completely immaterial to the legal questions at hand whether some of the original creditors have capitulated and sold their claims in the secondary market. Anyone who becomes a bondholder inherits all the rights connected with the bonds.

We must stress once again that we are a bit torn on the issue for the reason that we believe that lending money to governments is somewhat dubious per se. After all, those who lend to governments do so in the knowledge that the State is the only entity in the market economy that legally obtains its income by coercion. Certainly investors would benefit from being taught the lesson that lending to governments is not as risk-free an activity as is widely assumed. The fact that Argentina's tax payers will pay the price for their government's folly is undoubtedly deplorable.

On the other hand, we are talking about a government here that has just raised its spending by 56% in a single year, is hell-bent on destroying the country's economy and is abridging the economic liberty of its citizens ever more. As a result, there may actually be unexpected benefits for Argentina's citizens from the action of the hold-outs as well, as it is likely to restrict the government's room to maneuver.

 

Next “Official” Peso Devaluation Imminent

The renewed default is actually a sideshow to the ongoing economic catastrophe induced by the government's policies in Argentina. Its economy minister is a declared central planner, who actually believes markets to be surplus to requirements. As Nicolas Cachanosky writes:

“Argentina’s economic minister, Axel Kicillof, has become famous for his assertion that it is possible to centrally manage the economy now because we have spreadsheets such as Microsoft Excel. This assertion comes from the mistaken view that the cost of production determines final prices, and it reveals a profound misunderstanding of the market process.

 

This issue, however, is not new. The first half of the twentieth century witnessed the debate over economic calculation under socialism. Apparently, Argentine officials have much to learn from this old debate. The problem is not whether or not we have powerful spreadsheets at our disposal; the problem is the impossibility of successfully creating a centrally-planned market.”

(emphasis added)

 

CFK and Kicillof

Argentina's president Christina Fernadez-Kirchner and her economy minister Axel Kicillof.

(Photo credit: DyN)

 

Indeed, Mises showed already in his 1920 monograph “Economic Calculation in the Socialist Commonwealth” that there was a fundamental problem all central planners were confronted with that could not possibly be overcome. Without markets and market-determined prices, economic calculation becomes impossible – therefore no rational economic choices are possible either. As the debate between Marxists, Mises and Hayek in the decades following the publication of Mises' article showed, none of the attempts to rescue central economic planning from this fundamental challenge were successful. In fact, it often seemed that Mises' and Hayek's opponents did not even fully grasp what the nature of the problem was. How powerful one's computers are is for instance completely irrelevant to the issue. As Mises noted later in Human Action:

The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark.

 

There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.”

(emphasis added)

All socialist economic planning schemes presuppose the existence of the fictional state of equilibrium (which is merely a mental tool, but has no counterpart in reality) and a static, unchanging economy, which is just as unrealistic. Even if one were to simply attempt to preserve all existing economic processes and end all economic and technological progress, change would still occur (population numbers will change, the weather will be different from year to year, mineral deposits will run out, etc.). Almost needless to say, even if such a fictional “equilibrium economy” were attainable, it wouldn't be worth having. It would be completely contrary to the human spirit.

Argentina's “economy minister” has something in common with France's Arnaud Montebourg – he is economically illiterate, to put it bluntly. In fact, the entire Argentinian government is apparently laboring under the misconception that it can successfully “plan” the economy.

For instance, deputy economy minister Emanuel Alvarez Agis believes he knows what the “correct” exchange rate for the Argentine peso is (note that the currency has lost as much of its value in the past ten years as the US dollar in an entire century). As rumors about an imminent devaluation begin to circulate – which is undoubtedly unavoidable, not only due to the renewed default, but simply due to the combination of enormous government spending and unbridled money printing that characterizes Argentina's economic policy – Agis asserts that this is “not the plan”. Of course his vehement denial essentially cinches it, based on the “never believe anything until it is officially denied” principle.

“Argentina’s deputy economy minister, Emanuel Alvarez Agis, rejected the idea that the country is heading for another devaluation.

 

“We won’t apply that program,” Alvarez Agis said in an interview with Radio Del Plata yesterday. “The exchange rate has to be competitive enough to benefit regional economies, but not so high that it makes imports too expensive.”

 

Economy Ministry spokeswoman Jesica Rey didn’t respond to an e-mail and telephone call seeking comment about another possible devaluation this year.

 

Argentina’s central bank controls the peso rate by buying and selling dollars in the spot and futures markets almost daily, as well as limiting foreign exchange purchases. Yesterday the bank sold $10 million, according to preliminary data.

 

The peso is poised for further declines, Alan Ruskin, the global head of Deutsche Bank AG’s Group of 10 foreign exchange in New York, said in an interview on “Bloomberg Surveillance.”

 

“Guys like ourselves are saying the currency could still lose something like 25 percent,” Ruskin said. “It still is one of the big shorts on the currency side.”

(emphasis added)

Argentina's citizens meanwhile are buying as many dollars as is legally possible for them. Citizens may exchange up to 20% of their salary or income into dollars, provided they leave the dollars on deposit with a bank for a minimum of one year. Otherwise, a 20% tax is imposed on the purchase (i.e., if the dollars are taken out in the form of cash currency). Dollars that are kept on deposit remain of course easily accessible for the government, which is not exactly a paragon of regime certainty, to put it mildly. Argentinians have lost their savings more times than we care to count, whether by inflation or by confiscatory deflation. They evidently know what is coming next:

“People have seen this before and they know there will be fewer and fewer dollars, while more pesos flow into the economy as the government increases spending,” Buscaglia said in an interview from Buenos Aires. “The natural reaction is to buy more dollars.” Government spending surged 56.5 percent in June from a year earlier.

 

Peso forwards showing trader expectations for the currency in three months declined 2.2 percent this week to 9.3 pesos per dollar.

 

The perception that Fernandez is radicalizing her policies is also driving investors to the dollar on concern she’ll tighten existing currency controls, according to Olaiz.

(emphasis added)

 

ARG peso-ann

The official (green line) and black market (blue line) peso rates, via dolarblu.net. The gap between the two continues to widen, a sure sign that the official rate will soon “catch up” a bit – click to enlarge.

 

The Argentine government meanwhile once again demonstrated its contempt for property rights by suing the subsidiary of a US company for daring to declare bankruptcy after having been ruined by the government's very own policies. The government is using an “anti-terrorism law” to attempt to reverse the bankruptcy. What is there to reverse one wonders? The company is insolvent. As an aside to this, it seems that the government also wants to introduce price controls and begin to “regulate profit margins” on a broad basis:

“Since defaulting, Fernandez has said she will use an anti-terrorism law to file a legal case against the local unit of Chicago-based RR Donnelley & Sons Co. (RRD) for “upsetting economic and financial order” after the printing company filed for bankruptcy and wrote off its assets in Argentina.

 

RR Donnelley said in a statement on Aug. 16 distributed by Globe Newswire that its Argentine unit wasn’t solvent and faced rising labor costs, inflation, materials price increases, devaluation, inability to pay debts and other issues that led to its decision to file for bankruptcy.

 

After Fernandez’s speech, securities regulator Alejandro Vanoli later said Argentina would seek to reverse the bankruptcy using a law against economic crimes.

Fernandez is also attempting to change a supply law that would seek to regulate prices and profit margins of goods.

(emphasis added)

In short, Argentina now has all the hallmarks of a full-blown Zwangswirtschaft based on the fascist model. Private property still exists on paper, but what may be done with it is decided by government bureaucrats. Ms. Kirchner's economic policy ideas obviously still had some room to get even worse than they already were. 

 

Conclusion:

It is actually quite sad to watch the continued downfall of Argentina's economy under the inept ministrations of its government. The only good thing that can possibly come from this is that it will set yet another example for others so they may avoid making similar mistakes. Unfortunately the example is being set on the backs of the country's citizens, who are seemingly forced to live from crisis to crisis. Politicians rarely pay the price for their atrocious policies, and we are quite sure Ms. Kirchner and her cronies have feathered their nests in ways the average citizen cannot even dream of (most recently, corruption allegations have caught up with Ms. Kirchner's vice president. Rampant government corruption has long been a hot topic in Argentina under Ms. Kirchner's rule). It is not as though Argentina didn't have great potential. If only politicians would leave its economy alone and stopped inflating the currency into oblivion, the country could easily and quickly regain its former prosperity.

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JR's picture

Could this be pay back for Argentina recently opening up diplomatic ties with Iran? 

Jewish Vulture Capitalists, Armed with US Court Ruling, Target Argentina; Country’s Bankruptcy Said Possible

Posted on July 27, 2014 by Richard Edmondson

[ Ed. note: No one seems to be posing this question, including the author of the otherwise very informative piece below, but I will pose it here: is the economic assault upon Argentina motivated strictly by greed on the part of a Jewish hedge fund capitalist, or are there other considerations at play as well? And if the latter, could it possibly involve pay back for Argentina's opening up of diplomatic relations with Iran, including in the matter of investigating the 20-year-old AMIA bombing?]

By Conn Hallinan

It is no surprise that right-wing Republican and hedge fund billionaire Paul Singer should be trying to wring hundreds of millions of dollars out of Argentina for a debt that Buenos Aires doesn’t really owe him. He screwed tens of millions of dollars out of poverty-stricken Peru and the Republic of Congo using the same financial sleight of hand. What may surprise people, however, is that key leaders in the administration of former President Bill Clinton are helping him do it.

Singer, who owns Elliot Management, a $17 billion hedge fund, is the leading “vulture investor”—a financial speculator who buys up the bonds of debt strapped nations for pennies on the dollar and then demands payment in full. When Argentina defaulted on its foreign debt in 2001, Singer moved in and bought up $48 million in bonds. He is now demanding that those bonds be paid at full-face value—$1.5 billion—plus interest and fees. It is a move that could derail Argentina’s long climb back into solvency, as well as undermine debt settlements worldwide.

A recent decision by federal District Judge Thomas Griesa in Manhattan may not only force Argentina to pay the vultures, it could unravel a 2006 debt deal between Buenos Aires and other creditors. Under the highly controversial principle of “pari passu” (“equal ranking among creditors”), if the vultures are compensated, so must all the other creditors, even those who settled back in 2006. That bill could reach $15 billion. Given that Argentina has only about $28 billion in foreign reserves, the tab could send Buenos Aires into a recession or force the country into bankruptcy.

The “sleight of hand” involves the fact that the countries the vultures prey on are not really in debt to creditors such as Singer and Eric Hermann of FH International Asset Management LLC. The hedge funds look for distressed countries, then buy their debt at bargain basement prices and sit on it. In the meantime, other creditors cut a deal to take a reduced payment on their bonds, which in turn helps improve the debtor’s economy and allows it to emerge from default.

That’s when the vultures sue, threatening to shut down outside aid programs, seize assets and freeze debtor nations out of international finance if they don’t pay up. Recent examples involving Singer include the Republic of Congo being forced to pay him $90 million on a $10 million investment. Singer’s investment of $48 million in Argentina’s debt would net him a 1,608 percent profit if Buenos Aires pays in full. Peru was similarly plundered.

It is more than dollars and cents at stake in all this. As journalist Greg Palast points out, “In Congo-Brazzaville [the capital of the Republic of Congo] last year, one-fourth of all deaths of children under five were caused by malnutrition.” That $90 million might have made a difference.

Singer’s rap sheet is consistent with hard-nosed vulture tactics. He is a leading Republican fundraiser, and a member—along with former Vice President Dick Cheney and Iraq War designer Richard Perle—of the right-wing Jewish Institute for National Security Affairs. He helped bankroll Swift Boat Veterans for Truth and is a bitter critic of “unpayable” social welfare programs, including Social Security, Medicare and Medicaid.

But the people who head up the main lobbying organization behind Singer’s current campaign, the American Task Force Argentina (ATFA), sit on the high councils of the Democratic Party and would likely be part of any Hillary Clinton administration.

The task force is essentially a front for several vulture funds, conservative and libertarian business groups, and agricultural organizations, like the U.S. Cattlemen’s Association, which would like to damage Argentina’s cattle export business. And its executive director is Robert Raben, former counsel for liberal Congressman Barney Frank, Democratic counsel for the House Subcommittee on the Constitution and assistant attorney general in the Clinton administration.

ATFA’s two co-chairs are Clinton’s former undersecretary of commerce, Robert Shapiro, and Clinton appointee to the United Nations Nancy Soderberg. Shapiro was an adviser to Bill Clinton’s 1992 presidential campaign and a senior adviser to Al Gore’s 2000 run for the White House. Soderberg, who served as a senior foreign policy adviser to Sen. Edward Kennedy, was also a member of Clinton’s National Security Council and an alternative representative to the U.N. with the title of ambassador. She is currently a Democratic Party activist in Florida and a member of the Council on Foreign Relations.

Raben, Soderberg and Shapiro have written numerous opinion pieces on Argentina using their Clinton administration credentials and, depending on the publication, have not always disclosed their lobbying ties. The three snookered the progressive Huffington Post into running opinion pieces until journalists Christina Wilkie and Ryan Grim uncovered their ties to ATFA. HuffPo subsequently removed the articles from its website.

Because of the huge debt burdens borne by nations from Latin America to Europe, the Griesa decision has opened up a Pandora’s box of trouble. A number of financial institutions and countries—including the International Monetary Fund and organizations representing 133 nations—have condemned the vultures or filed amici curiae briefs on behalf of Argentina, fearing that the decision could chill future debt negotiations and threaten economies trying to work themselves out of the red.

Given the ongoing hangover from the 2007-08 international meltdown, there is a lot of vulture food out there.

The key role being played by important Democratic Party activists in this cruel business—for there is no other word to describe taking money from countries struggling to emerge from debt and recession—may seem contradictory. And yet it was the Clinton administration that deregulated national and international finance and fought so hard for policies that ended up impoverishing some of the countries the vultures are now preying on.

In the 1990s, the Clinton administration pushed Argentina to privatize its state-owned industries, tie its currency to the dollar and institute the “Washington Consensus” of combining tax cuts with austerity. The result was economic disaster. From 1998 to 2002 Argentina’s economy shrank 20 percent and half the population fell below the poverty line.

Buenos Aires defaulted on its $100 billion debt in order to staunch the hemorrhage and pull the country out of an economic death spiral., In 2006, it negotiated a deal with 92.4 percent of its debt holders to pay 30 and 50 cents on the dollar. It was that deal that drew the vultures which swooped in, scooped up some of the debt and then refused to accept the settlement.

The 2001 default blocked Argentina from tapping into international finance to tide it over until the economy recovered, but policies to end austerity and increase government spending eventually did the job. The economy grew at an average rate of 6 percent from 2002 to 2012 and Argentina paid off the IMF in 2006 and the Paris Club countries (representing the world’s 20 largest economies) in 2014.

But the vultures now threaten to undo much of this.

The Obama administration has come down on the side of Argentina because it is worried that financial institutions will shift their business to London if “pari passu” is allowed to stand. Hillary Clinton, however, has been quiet on the subject of international debt and Argentina. Given that her husband’s administration helped push Argentina off the cliff, that is hardly a surprise.

What is disquieting is that Clinton and people such as Raben, Shapiro and Soderberg have an economic philosophy that many times marches in step with that of Wall Street.

According to The New York Times, the financial sector was the second largest contributor to Hillary Clinton’s 2008 run for the White House. She is also close to the center-right Third Way think tank that advocates cutting Social Security and tends to be allergic to financial regulations. It is hard to imagine a Hillary Clinton administration stacked with Wall Street insiders and hedge fund lobbyists coming down on the vultures.

Clinton’s most recent comment on the debt crisis was to complain that she and Bill were “dead broke” when they left the White House in 2001, rhetorically putting herself in the same boat as tens of millions of indebted people in the U.S. and around the world. “Dead broke” in Chappaqua, N.Y., is not quite the same as “dead broke” in Brazzaville, or in the growing number of homeless encampments around the U.S.

Argentina is currently negotiating a compromise with the vultures, who have Buenos Aires over a barrel. The country desperately needs outside financing to exploit its huge Vaca Muerta gas reserves and to underwrite agricultural exports. “These hedge funds are equipped with an instrument [the New York court decision] that forces struggling countries into submission,” says Eric LeCompte, executive director of the anti-poverty religious organization Jubilee USA Network.

Countries are wising up to the hedge funds. Many of them now require that a debt agreement include a collective action clause (CAC), in which a majority or two-thirds vote by creditors is binding on all and would block a handful of vultures from tying up agreements. Because they signal economic fragility however, the CACs will string out negotiations and may result in higher interest rates.

In the meantime, the vultures have backed Buenos Aires against the wall. At a minimum, Democratic candidates for the presidency should make it clear that they stand with Argentine President Cristina Fernandez de Kirchner. One way would be to endorse campaigns by organizations such as Oxfam and Jubilee to forgive foreign debt, and to make it clear they will also press for financial regulations to block vulture speculation.

In the world, vultures are estimable creatures. There is a “yuck” factor, but at least they wait until their prey are dead before making a meal of them, and they do clean up after themselves. The vultures of Wall Street prey on the living and leave behind an unspeakable mess.

Read more of independent journalist Conn Hallinan’s work at his blog, Dispatches from the Edge.

http://richardedmondson.net/2014/07/27/jewish-vulture-capitalists-armed-with-us-court-ruling-target-argentina-countrys-bankruptcy-said-possible/

NEOSERF's picture

Axel is clearly doing Christina and Christina is clearly doing bondholders.  Expect civil war in Argentina once the rest of the hot money leaves Argentina in 3...2....1....

RaceToTheBottom's picture

I kinda have to go with anyone who is against WS, especially when talking about debt.  I guess it is a bias, but they should have taken the risk into account.

Every country should pull a Iceland.

rwe2late's picture

The article is pro-bankster Acting-Man spin.

So, what is the real situation with regard to Argentina?

"Argentina is already foreclosed from international capital markets, so it doesn’t have much to lose by thwarting the US court system. Similar bold moves by Ecuador and Iceland have left those countries in substantially better shape than Greece, which went along with the agendas of the international financiers."

http://www.counterpunch.org/2014/08/26/colonization-by-bankruptcy/

JR's picture

A great find, rwe2late. 

Ah, the joy of global fianciers and interlocking megacorporations legally robbing the poor… As your article dated yesterday by Ellen Brown points out:

The Endgame: Patagonia in the Crosshairs

The deeper implications of that infernal debt cycle were explored by Argentine political analyst Adrian Salbuchi in an August 12th article titled “Sovereign Debt for Territory: A New Global Elite Swap Strategy.” Where territories were once captured by military might, he maintains that today they are being annexed by debt. The still-evolving plan is to drive destitute nations into an international bankruptcy court whose decisions would have the force of law throughout the world. The court could then do with whole countries what US bankruptcy courts do with businesses: sell off their assets, including their real estate. Sovereign territories could be acquired as the spoils of bankruptcy without a shot being fired.

Global financiers and interlocking megacorporations are increasingly supplanting governments on the international stage. An international bankruptcy court would be one more institution making that takeover legally binding and enforceable. Governments can say no to the strong-arm tactics of the global bankers’ collection agency, the IMF. An international bankruptcy court would allow creditors to force a nation into bankruptcy, where territories could be involuntarily sold off in the same way that assets of bankrupt corporations are.

For Argentina, says Salbuchi, the likely prize is its very rich Patagonia region, long a favorite settlement target for ex-pats. When Argentina suffered a massive default in 2001, the global press, including Time and The New York Times, went so far as to propose that Patagonia be ceded from the country as a defaulted debt payment mechanism...

Atticus Finch's picture

I thought the article was lacking any discussion about loans from international banks as having any factor in the discussion. How can any analysis be made without a serious discussion of accepting loans in currencies other than one's own and the horrensous consequences this has made on numerous countries throughout the world.

Redstone's picture

That’s exactly right. When the corruption of the IMF -the Fed - and the special relationship they have with their favorite oligarchs are not part of a default story then a major part of the root causes are left out
With the expanded confusion and litigation surrounding issues of credit, corruption plays a huge part in punishment of innocence. Such was the case centuries ago in England where proper rules had to be clearly set down for protection against deception.
Consider this final dictate in 1215 of the Great Charter, the Magna Carta:
“If anyone who has borrowed from the Jews any amount, great or small, dies before the debt is repaid, it shall not carry interest as long as the heir is under age, of whomsoever  he holds; and if that debt falls into our hands [the Crown], we will take nothing except the principal sum specified in the bond.”
Also: “And if a man dies owing a debt to the Jews, his wife may have her dower and pay nothing of that debt; and if he leaves children under age, there needs shall be met in a manner in keeping with the holding of the deceased; and the debt shall be paid out of the residue, saving the service due to the lords. Debts owing to others than Jews shall be dealt with likewise.”

dkjm's picture

Argentina has tried to pay its restructured debt and has been prevented from doing so by a judge who has essentially declared that there is no risk in bonds by requiring 100% payment. This can hardly be described as welshing on its debt. The illegal action here seems to be the judges' decision to create a new class of bonds that are risk free.