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  July 31, 2014

The Forces behind Argentina's Default


James Henry explains why Argentina has a U.S. court deciding its financial fate and how this profits vulture capitalists like Paul Singer
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biography

James S. Henry is an investigative economist and lawyer, a Global Justice Fellow at Yale University, and a Senior Advisor at the Tax Justice Network. Previously, James served as Chief Economist at the international consultancy firm McKinsey & Co. As an investigative journalist his work has appeared in numerous publications like Forbes, The Nation and The New York Times.


transcript

JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I'm Jessica Desvarieux in Baltimore. And welcome to this edition of The Henry Report.

Now joining us is James Henry. He's a leading economist, attorney, and investigative journalist who's written extensively about global issues. He recently returned from Argentina.

Thanks for joining us, James.

JAMES S. HENRY, SENIOR ECONOMIST, TAX JUSTICE NETWORK: You're welcome.

DESVARIEUX: So, James, the last time you were on the program we were talking about Argentina. And, of course, Argentina is back in the news this week because they defaulted. Can you just give us an update on what's going on?

HENRY: Well, yesterday, there were furious negotiations in New York between the Argentine government and the mediator, who had been appointed by this New York judge, Griesa, who has been insisting that Argentina settle with the vulture capitalists, these Cayman Island and Delaware based funds that are run by basically kind of right-wing New York Wall Street types who have made a career out of litigating after buying country debt that's been distressed. And they've been going after Argentina here for ten years. But at the end of the day yesterday, there was no resolution of the crisis. And so, technically, since Argentina was not allowed to pay the $539 million it had deposited in a New York bank account to its bondholders who had accepted the restructuring deal back in 2005, 2010, it was declared technically in default.

So this is just--you know, you can't make this stuff up. I mean, here we have a country has struggled with massive overindebtedness and has had several defaults in the past, and now has been trying to reduce its indebtedness and over the last ten years has had one of the most successful debt restructuring programs, reducing its debt as a share of GDP from more than 150 percent to down to 26 percent, which is a level that many European countries would envy, and has been growing spectacularly. It's a reasonably democratic society. I mean, it's just been doing much better than it has the past. Here it is being virtually ordered into default by an 84-year-old New York judge who's basically serving the interests of these vulture funds.

The funds in question basically bought this debt for a song and then refused to enter into the restructuring deal that 92 percent of Argentine creditors agreed to back in last half-decade.

DESVARIEUX: Paul Singer is one of these vulture capitalists. Can you tell us a little bit about him and what he is after, really?

HENRY: Well, he has a long history this area. He has a Cayman Island firm called Elliott, and their a subsidiary here, NML, has been pursuing Argentina. In 2008, NML bought about $48 million of Argentine bonds that were outstanding. And he's now claiming, he and his partners are claiming at least $1.65 billion, including unpaid interest, in exchange for that $48 million six-year investment. So that's usurious, I mean, it's a kind of extortion, but he's managed to find a U.S. federal court judge to rule that Argentina has to deal with him.

The problem was for Argentina that they have a very explicit covenant they have been--in their restructured bond agreement with the 92 percent of bondholders, which forbids them to give any better deal to anyone else who doesn't come into that restructuring than they gave to those bond owners. And so they are literally forbidden from having any negotiations at all with these vulture capitalists.

But Singer and other folks, like Ken Dart, have really been going around the world making a living out of this practice of buying developing country debt. As Stiglitz said today, this is an abomination. They're doing real damage to the developing country. Developing countries that want to reduce their debt are faced with these guys. You know, we had a case in the 1980s of where one vulture fund bought claims on Zambia, and Zambia was forced to settle with them, and to do so, it had to divert money from food relief. We've had Singer going after Peruvian debt, Panamanian debt. In the case of Peru, he got a court decision basically because of deals he'd done in Peru that received favorable treatment under the Fujimori regime. So there is just a long history of these vultures basically taking advantage of favorable, very conservative New York courts and pressing for a kind of a 19th-century contract law interpretation of bond covenants.

DESVARIEUX: James, but I'm sure these leaders of these countries know these vulture capitalists' record. I'm just trying to understand: why would they even decide to be in a deal with them?

HENRY: Well, they're not in a deal. I mean, the bonds are freely traded. This goes back to the developing country debt crisis of the 1970s and '80s, when the big lenders to developing countries were banks and the banks accumulated about $3 trillion of developing country debt. Then Nicholas Brady, who was secretary of the Treasury under Bush I, came in, and he had a background in Wall Street. And he suggested that to get the banks out of trouble, we allow the government to issue bonds that individual investors could buy and swap those for the developing country loans. And so that helped the banks, but basically developing countries never got more than about $300 billion of debt relief out of the $3 trillion outstanding, and they ended up having to face all of these individual investors in bonds. And so it becomes possible for almost anyone to buy bonds, country bonds, and then, when there's a restructuring, you refuse to be part of the restructuring, and then you take it to court, saying, the country has to pay you full value on the face value of the note. So that's the basic strategy.

There used to be a legal doctrine under New York law called champerty which forbade people from buying debt instruments just to litigate. But this same Southern District of New York court has basically restricted champerty and ruled it away.

The interesting thing is: why is Argentina ending up in the Southern District of New York for litigating on its bonds? And this goes back to 1976 when the military junta came to power in Argentina. Their economy minister, Martínez de Hoz, decided to satisfy the banks, who were his close friends, by moving all court cases involving Argentina to the Southern District of New York. And that's where that sort of waiver of Argentina's sovereign immunity started.

Subsequent governments never felt they could stand up to the banks and the bondholders enough to change that provision. But if you look at a country like Brazil, it has no such lame provision. And if you had to choose a course to go to to get fair treatment as a developing country, you would not choose this district.

But the real problem here goes back to a fundamental fact is that unlike individuals, countries cannot go bankrupt. There is no procedure, there's no bankruptcy court for developing countries. And this is a fundamental flaw in the international economic system. Argentina in 1976, when the military came to power, had a foreign debt of just $7 billion. Seven years later, the military leaves power, and they've run that up to $50 billion. The present value of that military debt is about 90 percent of Argentina's entire foreign debt. And so one of the things that Argentina failed to do during this period, in addition to nominating the Southern District of New York to as the place to decide these cases, was it failed to audit that military debt. There is a doctrine under U.S. law that's called the odious debt doctrine. It says that if a country's run by a dictatorship and it contracts foreign debt, the debt doesn't have to be honored. But Argentina, it was a very political situation, and so the new civilian government, Alfonsín, in 1983 and '84 was under a lot of pressure by the banks and by the United States government to honor those military debts, most of which ended up in people's pockets.

So there's just a lot in the background to know about this. But it's very ironic that here you have--I mean, you can't make this stuff up. This is a country that's struggled a long time to get out of the business of excessive debt. It's done dramatically one of the most successful restructuring programs in economic history. And at the end of the day, it's literally forced to default by this crazy New York judge.

DESVARIEUX: Yeah, it's crazy. James Henry, thank you so much for joining us. I always learn something new.

HENRY: Well, you're quite welcome.

DESVARIEUX: And thank you for joining us on The Real News Network.

End

DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.



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