The idea that the root cause of this is that a group of investors come along, buy debt on the open market and then expect that debt to be paid seems overly simplistic.
The problem is that sovereign nations don't have clear bankrupt procedure and these hedge funds are holding country as hostage for their past mistakes despite the fact that majority of borrowers accepted debt restructuring that was arranged and accepted haircuts.
If the debt and its interest grows past what country gdp can ever grow, they can never pay back and they either became debt slaves forever or keep defaulting. This is attempt at debt slavery in national level. (if person can't pay his debt ever, should he and his family lineage be responsible for that debt forever?)
I think it's reasonable to expect that in these cases banks should accept haircuts and settle like wast majority of investors did. Upholding business deal is ethically less important than country of millions being able to continue their life. The logical cost of country not being able to pay for their dept should be higher interest rates in future, not shutting country down.
It would be fair to say that those caused the 2001 default. Which was a real default, but not a catastrophe; defaults happen sometimes, Argentina negotiated a settlement with (most of) its creditors (who had known all along that their investments carried a certain risk), and life went on.
What we have now is a tragedy where the overwhelming majority of Argentina's creditors were reasonable, accepted the settlement, and want to get paid, and Argentina has the money and wants to pay them. But the "vultures" are using a legal technicality to stop that payment from going through, in the hopes of extorting more money from Argentina. And sadly the US legal system is abetting this.
These funds, however, lent Argentina money, while the country promised to pay back all of it, plus interest. I wouldn't like to get back less than I was promised, or even less than I lent in the first place.
There was a subtle difference: Brazil forbade domestic contracts in dollar (with a few exceptions, mainly leasing contracts for imported vehicles). So when the market forces kicked in and Brazil was forced to devalue its artificially priced new currency, the impact was not that big.
In Argentina, most contracts were underwritten in dollars, so the government delayed devaluation as much as possible. As the result, when it finally adjusted the exchange rate to more realistic values, the guy who bought one home was bound to pay 3 or 4. The government solution was the first default (by passing a law saying you could pay these contracts with a huge discount). This is why they are in this mess, some creditors are fighting to receive the full value.
Brazil's plan wasn't to create "a currency with value attached to dollar", nor it was Argentina's plan.
Argentina made a currency board, a regime in which the central bank could only emit 1 peso more if 1 dollar more entered the country (and reached the central bank's vault).
In Brazil, Argentina's plan was called "dolarization" and was dropped by André Lara Resende, Persio Arida and Edmar Bacha when they were thinking about the brazilian plan, Plano Real.
In fact, what Brazil did was only to control government costs, stop printing money and stop the indexation of prices and contracts by creating a virtual currency whose value changed every day in the rate of inflation (so all things could be priced in this virtual currency, whose nominal value was fixed). After that, that virtual currency became real, was printed and called the Real, becoming the new brazilian currency.
The Real had no need of dollar indexation to succeed, and its price in dollars wasn't fixed at all, the brazilian central bank only made a promise to keep its price in parity, with open-market operations, for some time, to boost confidence, then it would let the price fluctuate. This was stated and clear from the beggining of the plan's implementation.
Both plans were perceived by the laymen as a new currency worth 1 dollar and that helped stopping the inertial indexation of their economies (there! somebody from a stable economy will hardly understand what indexation was like).
This is an interesting and often overlooked aspect of monetary policy in the US.
In the US, we are used to the dollar being the single currency domestically for virtually all domestic transactions, and even used to it being used abroad (which extends our purchasing power greatly) as well as in most black market transactions (which essentially acts as a free loan to the government).
It makes monetary policy changes that much more effective, because there is no other currency to compete with directly (not by fiat, as in Argentina, but by custom).
If alternative currencies like Bitcoin take off, the US government will have a very strong incentive to regulate them directly or manipulate them indirectly, because their very presence and widespread use would weaken the ability of the government to use monetary policy as an economic tool.
http://dealbook.nytimes.com/2014/07/30/in-hedge-fund-argenti...
"The hedge fund firm of billionaire Paul E. Singer has about 300 employees, yet it has managed to force Argentina, a nation of 41 million people, into a position where it now has to contemplate a humbling surrender."
"Argentina on Wednesday failed to make scheduled payments on its government bonds. The country has the money to pay the bonds. But a federal court in Manhattan has ruled that unless Argentina settles its debt dispute with Mr. Singer’s firm, Elliott Management, it is barred from paying its main bondholders." (...)
"“We’ve had a lot of bombs being thrown around the world, and this is America throwing a bomb into the global economic system,” said Joseph E. Stiglitz, the economist and professor at Columbia University. “We don’t know how big the explosion will be — and it’s not just about Argentina.”" (...)
"It is legally challenging for American investors to sue foreign governments in United States courts. But in 2012, Elliott achieved a stunning breakthrough in the Federal District Court in Manhattan. Judge Thomas P. Griesa ruled that whenever Argentina paid the exchange bonds, it also had to pay the holdouts. Argentina could not ignore the ruling and pay the exchange bondholders because Judge Griesa also ruled that any financial firm that distributed payments to the bondholders would be in contempt. Argentina placed $539 million with the Bank of New York Mellon in June to pay its bondholders, but the bank did not transfer it."
If this were a case of leders screwing over the people by having governments re-write laws (see: student loans) perhaps more sympathy would be in order.
This is a case where the borrowers have tried to disregard US law, in its entirety.
In that respect, I'm not sure there is anything bad to imply about the hedge funds who simply made bets on the integrity of US Law.
The president of Argentina obviously has her own view and interest at stake, as well.
Until I read this, I assumed that international bonds were issued under international law, with the World Bank as the arbitrator. With the US as both lender and arbitrator, it seems to give them a lot of power.
My understanding of this type of clause is not that it makes New York the arbitrator, but rather clarifies for whoever does arbitrate that New York laws should be used. This seems important when working across national (or state) boundries do prevent ambiguity as to what set of laws is being used.
I suspect that it is simmilar to copying the relevent laws into a contract and signing that, which is to say that local laws still apply.
In true, Uruguay has it owns problems.
It's not the same situation at all; context matters.
Also, everybody knows the best thing from Argentina is Uruguay (or "how to piss off argentinians and uruguayans in one sentence").
:)
The only reason they can't pay everyone but the holdouts [e.g. selective default] is because of the fact they handled them under NY law after the 2001 default. :/
That's the whole point - if you're a trustworthy borrower, then you can get money on decent terms; but if you're like Argentina then every lender needs all the protection they can get, to try to prevent cases like this one.
That is like saying "Oh, you can pay none of your debts until you pay the ones you defaulted on already in 2001."
Nope.jpg.
That is f'ed up.
They defaulted in 2001. You don't get to come back and say "Oh, but you have to pay us anyway or we will not let you pay the debts since then either."
EDIT: I'm amused by the downvotes given that is how bankruptcy law works most places. You default one time. The zombie borrowers don't get to come back later and demand money later, enforced by the courts.
The danger to Argentina is that the US government has declared that they're holding hostage the bond payments that Argentina has agreed to and wishes to make.
Most of them need some form of "low yield safe investment". But it is hard to define what is safe. That's where rating agencies come in. An insurance can promise to abide by such an agency, and that removes a lot of oportunity for bad judgement on the part of individual fund managers.
You may argue whether these agencies are doing a good job at this, but most proposals to get to a better system involve some way of increasing the power of governments or individual fund managers.
Ratings agencies are unaccountable private entities. Every time they are challenged they invoke the 1st amendment - i.e. their right to lie. Yet the law enshrines their privilege through regulation of investments (which are forced to rely upon their opinions).
There's absolutely no way the government would be any worse. They are at least accountable to their citizens via voting. Ratings agencies are accountable to nobody.
They've also used their weight to bully, too. S&P downgraded the US even though it made absolutely no sense because there were moves made to prosecute them for mis-rating CDOs before the credit crisis.
Because it's part of many private contracts and financial products. (E.g. 'in case the S&P rating of entity X drops below Z, then [...]').
Argentina is a beautiful country, with problems that are very similar to the ones that we have in Italy - but different scenarios, and different economies.
I see this as an opportunity to consider adopting Bitcoin as a national currency, and stop being hostage of 1) banks, and 2) corrupt government officials. I don't know if it would work... But I hope so.
Bitcoin as national currency might work 10 years from now in Sweden or Germany, but definitively not here.
One detail I want to add to the discussion is that in the past few years the global panorama changed for Argentina, they sit on top of the second largest shale gas reserve in the world, and plan to extract it. They need money to start working and suddenly felt the urge to settle this issue.
Known fact: There is the Argentinean way of doing things, not straightforward, which is why talking about the bondholders like victims sounds naïve. They saw they might get their money now, and with Argentina’s shell gas urge probably felt the call to make more.
To me there is a larger scope, take a look at tech companies like Google and Facebook, they placed their head regional offices in Argentina. Both companies knew well in advance that the political and judicial system in Argentina is completely corrupt but still decided to direct their regional efforts from Buenos Aires. Why would anyone place offices in Argentina, when there is Chile, Perú or Colombia, countries that have greater political, social and economic stability, extremely better infrastructure, better weather and even tastier food.
I could be going paranoid but I believe it is simple; it looks like the big guys like to get in bed with the naughty ones, rather than the honest and better-behaved gals around the corner. This makes sense to me, after all, the bigger the risk the greater the possible reward.
The country is extremely wealthy, but that wealth is not getting to everyone (not that uncommon), and maybe that’s why the demonization of the international monetary funds has so much appeal locally. The certainty is that by the end of this story, it will be the Argentinean people who will be paying for this.
http://krugman.blogs.nytimes.com/2012/05/03/down-argentina-w...
> But why exactly is Brazil an impressive “BRIC” while Argentina is always disparaged? Actually, we know why — but it doesn’t speak well for the state of economics reporting.
What is it that we know? Why is, in Krugman's mind, Argentina always being disparaged?
In Krugman's mind, Argentina is disparaged because they don't really want to be part of the western "system" of investment in the national resources of South American nations by developed powers.
It seems like a country with enormous potential. Lots of resources, limited security threat, amazing climate.
One batch of politicians and lobbyists sells the country for short-term gain. Later politicians inherit the problem, and maybe compound it with their own batch of mistakes. The "problem" in this particular case is a tiny group of foreign speculative capital creditors holding the whole country hostage. It has little to do with the country's potential.
Note these so-called "vulture funds" are doing what they do: acquire debt at low prices while a country's economy is down, then attempt to recoup it at disproportionate interest rates when the country's economy recovers. That they are attempting this now, if anything, is a sign Argentina's economy isn't in such a bad shape. The vulture funds aren't run by fools; they wouldn't attempt to extract money where there is none.
No sabre-rattling is possible. Don't confuse democratic Argentina with past dictatorship-ruled Argentina.
http://www.theguardian.com/world/2014/jan/12/argentina-falkl...
http://www.theguardian.com/uk/2013/feb/05/falklands-under-ou...
No, it has continued as recently as this year (actually, its been on a notable upswing in the last couple of years, and a similar upswing happened, IIRC, in the early-to-mid-1990s.) Its true that it reached a fever pitch and an actual brief war with the UK in the time you describe, but the sabre rattling didn't end there.
http://www.opensecrets.org/lobby/clientsum.php?id=D000047065...
edit: I summed the years and got $5.3 million since 2007. The UI doesn't seem to help you sum at all.
edit2: http://www.cepr.net/index.php/blogs/the-americas-blog/nnfarm...
excerpt from WSJ article included:
"Mr. Matlack is president of American Agriculture Movement, a farmers' advocacy group that was listed among about 40 members of American Task Force Argentina, whose stated mission is to help investors recoup money from Argentina's 2001 bond default and subsequent restructuring.
"But Mr. Matlack and some leaders of other groups representing ranchers, teachers and farmers, are baffled about why the task force listed their organizations as members 'united for a just and fair reconciliation' of Argentina's default.
"Reached while he was planting wheat on his farm, Mr. Matlack said he had never heard of American Task Force Argentina. 'We don't have anything to do with Argentina's debt,' he said.
"Also perplexed are leaders of the Colorado conference of the American Association of University Professors, which was listed under members and supporters. 'This is absolutely foreign to me,' says Ray Hogler, legislative director of the academic group.
"Both groups were dropped from the list after the Wall Street Journal alerted the task force to the discrepancies."
That usually seems to be what happens when Argentina has internal problems that need to be distracted from.
Everyone supported Germany apart from the English who supported Argentina - which rather surprised me :-)
When restructuring defaulted bonds, Argentina agree to borrow in US dollars. They further agreed:
- to pay all bond holders equally.
- to be governed by New York state law.
- to NOT include a collective action clause in the bond agreement which would have forced minority recalcitrant bondholders to enter a restructuring agreement, if a super majority of the bondholders agreed.
A small minority (2.5-3%) refused to accept the 70-75% haircut the Argentina government was forcing on the bondholders (fyi: previously the largest haircut in sovereign debt was 30%)
(from one of the dealbook article's comments)
In other words, sudden changes in valuations cause a problem. Their government bond valuations have slowly approached zero therefore there's no sudden jump. The value of the CDSs does not change suddenly when Argentina is formally considered default if everybody has expected that outcome.
