On December 20, 2001, amidst a devastating three-year-old financial crisis and following 48 hours of unprecedented mass protests and a wave of police repression that left more than thirty people dead, Argentina’s embattled President Fernando De la Rúa was forced to resign and escape the Casa Rosada by helicopter. His successor’s first act in office was to declare an immediate suspension of payments on the country’s enormous debt — constituting the largest sovereign default in world history. On Christmas Eve, with beautiful Buenos Aires still smouldering from the insurrection, Interim President Rodríquez Saá addressed Congress and declared that “the gravest thing that has happened here is that priority has been given to the foreign debt while the state has an internal obligation with its own people.”
Fast-forward to mid-2014 and the fall-out of that decision — to honor Argentina’s internal obligation with its people — still haunts the country. Argentina is currently engaged in a protracted legal battle with a number of US-based “vulture funds”, which specialize in buying up the debt of distressed sovereigns at greatly discounted prices and then suing the government for full value. Back in 2005 and 2010, these vultures rejected the terms of Argentina’s negotiated debt restructuring with private creditors. The deal had brought the country’s default episode to a successful close, with 93% of creditors accepting crisp new bonds worth 30 cents on the dollar. The claims of the remaining 7% of so-called “hold-out” creditors were formally repudiated by the government. In recent years, however, these hold-outs creditors — led by Elliot Management, owned by multi-billionaire hedge fund tycoon Paul Singer — have been pursuing aggressive legal action to get Argentina to repay them in full anyway.
The vultures have been aided in their financial arm-twisting by a series of sympathetic court rulings back home. Last month, the US Supreme Court effectively upheld a decision by Judge Thomas Griesa of the US District Court for Southern New York, who had earlier ruled that Argentina is legally obliged to repay the hold-out creditors in full. In the past, Argentina cared little for such rulings, as US courts do not have jurisdiction in Argentina and private creditors, despite trying, consistently failed to attach the country’s foreign assets — including its embassies, warships and presidential airplane — because they enjoy sovereign immunity. This time, however, the US District Court’s decision was not just a paper tiger. To add teeth to his ruling, Griesa prohibited all US-based financial intermediaries from processing Argentina’s payments to its other creditors if it does not first settle with the vulture funds. The result has been to put a gun to the government’s head: either it repays the vultures, or it will fall into its second sovereign default in 12 years.
The threat became particularly acute when, on June 30, a bond fell due that Argentina — as a result of Griesa’s ruling — was unable to pay, even though it deposited the money with a New York clearing house to be transferred to its creditors. The government now has a 30-day grace period to avoid falling into formal default. This means that, before July 30, it will have to arrive at a settlement with the vultures over an acceptable rate and schedule of repayment. One major obstacle is that, as a result of a law passed during the 2005 restructuring, Argentina’s government is legally prohibited from offering the hold-outs a better deal than those who participated in the restructuring. Another obstacle is the political capital that President Fernández and her late husband, ex-President Kirchner, have invested in opposing and railing against the vultures. Now the government needs to weigh what laws and what audience weigh more heavily: Argentine laws and citizens, or US laws and investors?
When put in this perspective, one may wonder why Argentina does not simply reject Griesa’s ruling altogether. Why violate your own laws and your internal obligation with your own people? Why not just default again?
The problem is that default is costly — especially when you depend on good relations with foreign investors to reanimate a moribund economy. Argentina is currently mired in recession and high inflation, and over the past year its currency reserves have dwindled to $30 billion. Widespread capital flight continues to put pressure on the ever-unstable peso, and the black market for dollars is thriving as middle-class Argentinians seek to insure themselves against external financial shocks and unpredictable government behavior by saving up dollars. This, combined with a gloomy external environment — including a Chinese growth slowdown, the roll-back of the Federal Reserve’s monetary stimulus program in the US, and the generalized slump in commodity prices — renders Argentina increasingly dependent on foreign capital to maintain key economic indicators like growth, employment and price stability.
Moreover, the costs of default are not equally spread out across society. While the alternative of default (full repayment, or at least some kind of settlement with the hold-outs) would be costly for those social classes that depend more heavily on state expenditure for their own livelihoods, default itself is usually particularly costly for the domestic elite, which tends to be invested in its government’s bonds and which derives much greater economic advantage from deep integration into global financial markets. Despite the national-populist discourse of the Kirchner/Fernández governments, these elites still hold a disproportionate share of the decision-making power in Argentina today — it is just that under the neo-Peronist policy regime of the past decade the center of gravity has shifted back towards the national bourgeoisie at the expense of the deeply integrated financial establishment, or patria financiera, which thrived under the neoliberal governments of Menem and De la Rúa in the 1990s.
And so it is not necessarily the US court ruling itself that now binds Argentina’s hands behind its back. As Ezequiel Adamovsky pointed out in his TeleSUR column last week, the rulings of Judge Griesa are pronounced against a political economic background of asymmetric and peripheral integration into world trade and the global financial system. Argentina has always been a commodity exporter, dependent on world demand for meat, grain and minerals for its own economic development. The past ten years of neo-developmentalism under the left-Peronist governments of the Kirchners have done little to alter this dependent economic structure. While the country’s main export industries have since shifted to minerals and soy, the fundamental pattern of extractivism remains the same. And now that the long commodity boom of the past decade is finally coming to an end, Argentina’s financial dependence on foreign capital — which goes back to its creation as an independent state with close links to British Empire and the City of London — is accentuated anew.
As a result, Argentina currently finds itself in an increasingly precarious fiscal and financial situation. Earlier in January this year, the government received a taste of what may yet lie ahead when the peso suddenly lost 16% of its value on a single trading day, raising fears of another decennial financial collapse being in-the-making. This is why the Kirchner government has recently been pushing for a normalization of the country’s relationship with its foreign creditors, starting with the Paris Club of bilateral lenders, with whom it sealed a landmark deal in May to clear some $9.7 billion of arrears. It is also why Economy Minister Axel Kicillof is now reported to be negotiating a settlement with the hold-outs, despite the government’s decade-old game of chicken with foreign creditors and its rhetorical denunciations of the vultures. Argentina has already been forced back to the negotiating table with a gun to its head, and while it keeps kicking and screaming, the government now slowly appears to be resigning itself to its structural dependence on foreign capital.
What, then, are the lessons we should take away from this experience? In my opinion, there are two crucial points. First, governments do not simply default because they are asked to; they only default when they are forced to. Argentina’s historic 2001 default was a complex phenomenon, one that cannot simply be reduced to a “confrontation with Wall Street” (in fact, it turns out that by December 2001, many Wall Street bankers, IMF officials and even the US government openly supported an Argentine default, for the simple reason that Wall Street had already dumped most of its bonds on unsuspecting European retail investors in a major debt swap earlier that year). Nevertheless, the country’s unilateral default was “won” through the struggle of ordinary Argentinians, through the tireless grassroots work of autonomous social movements, and through the relentless pressure brought to bear on the political establishment by the spontaneous popular insurrection of December 2001. If there is to be another default, President Fernández is not likely to consent to the economic spillover costs voluntarily; her hand will have to be forced somehow.
The second and closely related lesson is perhaps more depressing, and concerns the complicated ways in which the global capitalist power structure — and the financial power structure in particular — manages over time to recode, co-opt and neutralize almost all forms of “state activism” against neoliberal orthodoxy, including progressive and leftist strategies for national self-determination and popular empowerment in Latin America. Argentina’s default of 2001 marked a partial victory for the country’s powerful grassroots movements, but subsequent developments have witnessed the re-emergence of the traditional Peronist elite, the re-entrenchment of the national bourgeoisie, and now the gradual re-integration of the country into global capital markets. As the government increasingly normalizes its relations with its foreign creditors, the disciplinary pressures of global finance will make themselves felt anew — and it is not unlikely that the government will soon find itself re-internalizing the neoliberal orthodoxy that was supposedly thrown out with the 2001 default.
Argentina is far from alone in this respect. A similar pattern is unfolding in Ecuador — the only country to have followed in Argentina’s footsteps by imposing a unilateral moratorium on its foreign private creditors in 2008. After years of railing against the global usurers, President Correa is now seeking to normalize relations with foreign investors and the World Bank, drawing the ire of his former political ally Alberto Acosta — now a prominent opposition figure on the left — who recently remarked that “revolutionary and anti-imperialist discourses rapidly dissipate faced with a proposal to modernize capitalism,” lamenting that “this regressive wave takes on more and more indelible hues, as over-indebtedness — as shown by history — will demand increasing expansion of extractive frontiers at all levels, and overpower the need to end dependency and construct authentic economic sovereignty.”
As the vultures of global finance circle over Argentina once more, the state’s internal obligation to its own people — temporarily reinforced by the 2001 uprising — increasingly begins to fray. In the process, ordinary Argentinians are re-discovering that ending dependency will require much more than railing against the vultures only to subsequently acquiesce to their demands. Constructing authentic economic sovereignty will require a number of sacrifices that — despite a flurry of public statements to the contrary — Argentina’s current government does not appear to be willing or able to make.
Source URL — https://roarmag.org/essays/argentina-default-holdouts-restructuring/