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Cry for Argentina: Fiscal Mismanagement, Odious Debt or Pillage?

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President Cristina Fernandez addressing the nation by IPS Inter Press Service

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.

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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 Mara Isabel Martnez de Perón [and] named as economy minister, Jose 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.

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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:

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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 (more...)
 

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Very well said, Ellen. I am on my way to Ottawa On... by manifesto 2000 on Thursday, Aug 14, 2014 at 12:59:17 PM
Thanks! Glad public banking is getting some play ... by Ellen Brown on Thursday, Aug 14, 2014 at 9:39:28 PM
"Argentina was the richest country in Latin Americ... by Tom Chechatka on Thursday, Aug 14, 2014 at 3:38:42 PM
The biggest risk to us, and to the BRICS' Bank, is... by Paul Repstock on Thursday, Aug 14, 2014 at 4:14:37 PM
Ha ha, you haven't read my book "The Public Bank S... by Ellen Brown on Thursday, Aug 14, 2014 at 9:29:23 PM
"Odious Debt" is a succinct description of the Nat... by Paul Repstock on Thursday, Aug 14, 2014 at 4:24:34 PM
My understanding is Argentina is balking at signin... by Dennis Kaiser on Thursday, Aug 14, 2014 at 5:10:02 PM
The Hague is nolonger (If ever) an impartial sourc... by Paul Repstock on Thursday, Aug 14, 2014 at 5:26:23 PM
The Argentine treatment is moving across the Unite... by Clarc King on Friday, Aug 15, 2014 at 6:34:47 PM
More on Vulture Funds click hereOn what this has a... by Guglielmo Tell on Wednesday, Aug 20, 2014 at 4:56:08 PM