I hate to agree with Argentina’s government, a bunch of moslty corrupt pseudo-progressives who have ruined the country despite benefiting from the biggest world commodity price windfall in recent history, but it is mostly right in its dispute with bondholders that led to Argentina’s default.
Without getting into technical details, the rulingl by a New York judge in favor of a small group of holders of Argentine bonds sets a dangerous precedent for the world economy by making it almost impossible for debt-ridden countries to try to renegotiate their debts.
Basically, 83-year-old judge Thomas Griesa’s interpretation of the law allowed a small percentage of Argentine bond-holders — who are referred as “holdouts” in Wall Street and as “vulture funds” in Argentina — to prohibit Argentina from paying its debts to the vast majority of its bondholders.
It all started when, after Argentina’s 2001 default amid the country’s worst economic crisis, the country offered twice to pay its creditors a portion of their money. Ninety-three percent of the country’s creditors accepted, but the remainder — the so called holdouts — sought full repayment.
Problem is, the original bond contract said all bond holders should be treated equally, and the holdouts argued that if they were not paid, nobody should get paid. Griesa narrowly interrupted the law and upheld the holdouts’ version of the contract. Argentina appealed, but lost the case in the U.S. Supreme Court.
Last week, Argentina’s failure to reach a last-minute agreement with the holdouts before a July 31 deadline triggered the country’s default. Although it didn’t bring about a collapse of world markets, it was one of several factors that contributed to Thursday’s 317-point drop in the Dow Jones.
Granted, Argentina has made every mistake in the book during the negotiations. President Cristina Fernández de Kirchner, disregarding the fact that Argentina had signed a contract submitting itself to U.S. jurisdiction in the event of a dispute over the bonds, allowed years to go by without reaching a deal with the holdouts, treating them as if they were a minor nuisance.
Then, when Argentina started losing legal battles, Fernández did what she does so often: she wrapped herself in the Argentine flag and blamed the U.S. “vultures” for her country’s economic downfall.
Despite the fact that the Obama administration sided with Argentina in the case — citing the legal precedent it could set for other debtor nations — the Fernández government plastered the streets of Buenos Aires with signs showing a U.S. flag with the words “Basta Buitres” (Enough Vultures). Fernández then called for Latin America’s solidarity at a summit of leftist leaders in Venezuela, as if any of that political theater would help convince the U.S. judge, or the holdouts’ negotiators.
Argentina’s chief of staff Jorge Capitanich claimed that judge Griesa “is clearly an agent for the vulture funds,” and that the ultimate responsibility for the crisis lies with the U.S. government.
Watching this “Argentina vs. U.S. Vultures” populist crusade, it was hard not to draw comparisons with the time when another Argentine government celebrated its invasion of the Falklands/Malvinas islands assuring its citizens that it would win the war, or when — more recently — Argentina’s Congress declared the country’s 2001 default amid euphoric chants of “Argentina!” “Argentina!” as if the country had just won the World Cup.
Now, Argentina will be further isolated from world financial markets. Fernández will most likely print more money to keep her populist policies alive, which will push the country’s 40 percent inflation rate even higher.
But having said all of this, Argentina and the Obama administration are right in that Griesa’s interpretation of the Argentine bonds’ contracts set a dangerous precedent for the world economy.
Jose Antonio Ocampo, a former Colombian finance minister who now teaches at Columbia University, told me that Griesa’s ruling in effect kills the very idea of voluntary negotiations between debtor countries and private creditors.
From now on, regular bondholders will have no incentive to negotiate, because they know that a small percentage of holdouts can force countries to pay 100 percent of the bonds’ value, he told me.
My opinion: The Fernández government has handled this case with typical arrogance and incompetence, but Griesa’s ruling can have negative international consequences that may go far beyond Argentina. Any country should be able to negotiate its debts with a majority of its private creditors, without being held hostage by a small group. A new legal system to handle government debts to private investors must be found. In that, Argentina is right.