Argentina Thumbs Its Nose @ US Courts, Vulture Funds and White House
Cristina Kirchner, Argentines' President
Argentina has yet another financial debacle on its hands as it has refused to pay up ransom to the vulture funds that bought up its New York issued bonds at discount prices and it's continued refusal to play ball with the western financial elite. In my opinion, this is the most significant financial story being played out in the western hemisphere and the US media as usual is not telling the full story. The same external forces that assisted in creating Argentina's hyperinflation in the early 80's wouldn't blink an eye to do the same.
After Argentina's 2001 collapse, Argentina sold the bonds as a way to stay out of the claws of the western Anglo run IMF. However, a US Court of appeals has sided with the vulture funds and Argentina must pay-up. The IMF and the Obimity administration have rescinded their offer to write a briefing on Argentina's behalf for the case that will go to the Supreme Court.
Argentina has no intention of paying the vulture funds and has offered the funds a bond swap from New York issued bonds to Argentina issued bonds with the same terms. The court has threatened to hold any bank liable that pays interest to other bond holders until Argentina pays the full amount owed to the Vulture funds. The NYTIMES points out that the case could seriously damage New York as a world financial system. The courts can rule against the debtor country but cannot force a sovereign entity to make a settlement. And foreign entities can now issue worthless bonds through New York that neither the courts or the IMF have the authority to enforce short of war.
The vulture funds have tried to seize Argentina property without too much success when they petitioned a Ghana court to seize an Argentinean military ship which was later released. Argentina's refusal to pay will have major consequences on it's future ability to have debt restructuring.
The story that seems to escape the western media including the NYT and WSJ is the informal bilateral trade agreement between Argentina and China, to be denominated in Yuan and payable in it.
Argentina is giving the finger to western oligarchs and they are not looking for dollar bailouts or to payout large sums to vulture funds because it looks like China has it's back especially as more and more China investment moves into Argentina to support Argentina's shale and gas deposits. With this backing, the western elite might find it difficult to collect on old debts especially by stealing another countries military ships.
CHINA TO THE RESCUE
THE BIGGER PICTURE
Argentina political history is a whose who of snake oil salesman who have mastered the art of political pandering to an uninformed underclass. Like the King float in the Mardi Gras parade, the Argentinean elite throw worthless trinkets to an excited crowd. The parade watchers fight with one another to catch the worthless doubloons and beads only to realize later, that they were scampering for worthless goods.
A couple of years ago, I was interested in purchasing some products from a business man in Argentina. He told me that my first purchase included a mandatory first time tax for foreigners as the price of doing business in Argentina. I made a short snide comment about governments, which went unanswered, and I sent him the cash. Later, I was exploring the possibility of importing a large shipment of his goods. I explained to him that my continued business was dependent on the fate of the US economy and I asked him if he was aware of the global financial challenges the US and world markets were facing. He replied, "I survived the Argentinean inflation and subsequent collapse. At this point, the only thing that would get me concerned is if a meteor was going to strike the earth." When I asked him if he was investing in the precious metals he informed me that Argentinean citizens are not allowed to own gold or silver.
By now the average Argentinean realizes he has been had after years of government corruption, capital controls, pillaging of their retirement accounts, nationalization of large private holdings and having their currency routinely defaulted. Capital flight has been a problem for the Argentinean government as it's citizens try to preserve their wealth by buying US real estate and trying to prevent the rise of a black market exchange of peso's for US dollars and peso's. Argentina's capital controls have banned the US dollar and the ownership of precious metals. Money changers operate in small alley's where concerned citizens can exchange peso's for the US dollar for a generous fee.
Since the election of Juan Peron in 1946, Argentines have experienced an ongoing wave of serious financial crisis's. Once again, Argentineans must be uttering that famous laurel and hardy line, 'What a fine mess you've gotten us into this time Ollie." Argentina has once again has found themselves in an international showdown between the western elite run IMF, the US government and vulture capitalist including billionaire Paul Singer. The outcome of the case could have significant consequences to the US and global markets yet realized.
For those of you unfamiliar with the Argentina's here is a very brief flashback on how a country who once sported a gold standard where it's hard peso weight almost two grams of pure gold got themselves into this international pickle. Argentina has gone back and forth between military and constitutional governments. The Peron's were a populist government who promised it's citizens everything short of the kitchen sink. Similar to FDR, they implemented a wide array of social programs through heavy taxation and deficit spending. However, the real monetary crisis began in 1972 well after the Peron's were out of office when the rate of inflation increased 700% from what it was in 1943! The peso, once one of the world’s strongest currencies, had been significantly depreciated.
In the 1980's Argentina experienced hyperinflationary episode where the peso shot up over 5000% which was proceeded by a very complex set of events that is wonderfully detailed in a paper by Carlos Escude and Argentine Economics Professor.
"From Captive to Failed State"
This is not light reading and is a serious investigation into the events that led to Argentina's default which included an "intentional" devaluation of the peso by "dropping the peso's dollar peg a fraction of it's previous value" and "according to insiders, with the intent of creating economic chaos"
In 2001 Argentina would make the history books by defaulting on its $155 billion public debt, the largest such default by any country in history. Days after the default structural adjustments were put in place and savings accounts were frozen. The government declared bank holidays depositors faced restrictions on how much they can withdraw from current accounts and dollar savings had been turned into devalued pesos. The country saw massive unemployment, social unrest as protestors turned their anger on politicians beating them up and abused on the street and banks were boarded up with wood and steel plates to protect them from mob attacks.
The hyperinflationary event began a long battle between Argentina and the IMF. At first Argentina, accepted loans from the IMF essentially taking away Argentina's financial sovereignty and make it essentially a slave state of the IMF. The peso was again pegged to the dollar with a 1 to 1 ratio and eventually the peg included the euro, and Argentina no longer had the sovereign right to print it's own money unless each peso was backed by the US dollar or the Euro. The government's key austerity bill is passed. A zero deficit law was enacted and state salaries were slashed and pensions were pillaged.
Eventually, Argentina could not pay back the loans to it's creditors in part due to the rising interest rates fo the petrodollar loans that they were given. The austerity measures meant that Argentina could not compete in international markets. Argentina simply got up from the table, stopped paying it's bond holders and walked away from it's debts. At this point, the Argentinean government did something ingenious, it took what little financial resources it had and began stimulating real GDP. The economy started growing and the currency became stable again. Argentina was eventually able to pay back it's 9 billion dollars in debt to the IMF and they began restructuring it's debt. However, to do this Argentina had to start issuing more peso's. At first, they were keeping the peso stable by buying US dollar reserves to back the peso. Both the US dollar reserves and the increased GDP was enough to stimulate growth. But the problem was that they started printing peso's exceeding their dollar reserves and GDP.
ENTER VULTURE CAPITALISTS.
To stay out of the claws of the IMF, Argentina began selling it's bargaining it's financial soul to what is known as Vulture Funds aka The Gordon Gekko's of the world. Vulture funds buy debt at a discounted price to a secondary market thereby putting Argentina in an untenable position where the vultures are able to blackmail the sovereign nation.
In 2006, Nestor Kirchner, the then President of Argentina ,wanted to pay off the IMF debt by having Argentina's Central bank by using their dollar reserves without printing unbacked peso's. However, this didn't sit well with the Vulture capitalists and they basically blackmailed the Argentinean government and said if you do so, they will attack the countries bonds by creating speculation against the Peso. Argentina was forced to begin issuing public debt printing and issue $11 billion to prevent a total devaluation of their currency at the hands of the Vulture funds.
One such vulture is Paul Singer and his hedge fund mob at Elliott Associates. Singer, Republican parties number 1 contributor in the Romney election, has a history of picking injured companies for a song and a dance. He then turned his efforts to countries on the brink of financial collapse buying up a countries debt at a significant discount, such as he did in the Congo and Peru. He then essentially holds the national hostage and demands humongous sums of money to not decimate their national treasuries.
His prizes include $400 million dollars form the Congo for debt he picked up for $10 million and $58 million pillaging the national treasury of Peru from former exiled President Alberto Fujimoi. It is said that Singer seized's Fujimori's get away plane until he payed up.
Last week, a U.S. appeals court ruled that Argentina must paying up it's debts to Singer to a tune of $1.3 billion. Kirchner made an offer of a debt-swapping plan of reissuing new bonds out Argentina in place of bonds that were issued of out New York with the same terms as a way to bypass the US judicial system. Singer and his bantido's are not having it as the US appeals court upheld a ruling that Argentina is in violation of it's debt contracts and must pay the face value plus interest. However their is a temporary stay on the ruling as the case has now been taken to the Supreme Court.
Enter stage left, the IMF and the Obama administration which both had initially agreed to support Argentina against the hedge funds by writing a briefing. However, the last minute both the IMF and the Obama administration rescinded their offer citing it would set a bad international precedent.
Now the case is slated to be heard in the US Supreme Court as we continue to watch what offers the Chinese will offer the Argentineans. We know one thing, if China is going to rise to the top, it needs to continue it's foreign affairs blitz by making itself invaluable to emerging countries that want to get out of the grasp of the western banking elite. And Argentina has demonstrated it won't play ball and have it's economic future dictated by US courts, the O' administration or the IMF.