Saturday, July 27, 2013

France backs Argentina against the vulture funds in asking the US Supreme Court to take the case

Somehow French Socialist President François Hollande managed to take time out from carrying on wars in Africa and kowtowing to German Chancellor Angela Merkel's austerity policies in the eurozone to side with Argentina against the lawsuit they are bringing in US courts against Argentina to try to collect money on loans they bought up when Argentina defaulted on some of their debt in the crisis of 2001-2.

Argentina has asked the shamelessly business-friendly Roberts Supreme Court to review the decision of the federal appeals that supported the vulture funds' claims.

Cristian Carrillo reports in Allez la France contra los fondos buitre Página/12 27.07.2013 that France has filed an amicus curiae brief in support of Argentina's position. In this case, the Obama Administration, IMF and the World Bank have also opposed the vulture funds on this. So there's hardly a united front of Big Capital behind the vulture funds on this. It also means there's nothing radical about Hollande siding with Argentina before the Roberts Court. It's just that his record on economic policy has been so bad during his Presidential terms so far that it's good to see him taking a decent position on an important issue like this.

And let's not give Christine Legarde's IMF too much credit; the IMF backed off from filing its own amicus curiae on Argentina's behalf to the Roberts Court: Anna Yukhananov, IMF backs off plan to file with top U.S. court in Argentina case Reuters 07/23/2013. Nor is the Obama Administration filing one; it's not usual for the US government to file an amicus curiae until the Supreme Court agrees to hear a case.

The case has major implications, not least for eurozone members like Cyprus, Greece, Ireland, Italy, Portugal and Spain that may well wind up bailing out of the eurozone and pursuing a recovery policy similar to that of Argentina after 2001-2. The Roberts Court won't make a decision on taking the appeal until its new term begins in the fall.

Eric LeCompte describes it in Argentina Takes on Vulture Funds in "Debt Trial of the Century" Truthout 04/26/2013:

The saga began in 2001, when Argentina was thrown into economic crisis and defaulted on its loans. Hedge funds swooped in and bought Argentine debt for almost nothing and circled until the country was in recovery to collect the debt in full. ...

The U.S. 2nd Circuit Court is the case's last stop before the U.S. Supreme Court, and if the vulture funds win, it will mean these funds will be allowed to more aggressively target poor countries in financial recovery. Argentina would possibly default. But if Argentina wins, it will be much harder for these types of hedge funds to exploit poor countries in the future, destabilize emerging economies, and target assets that should be improving the lives of the world's most vulnerable people.

Because the U.S. government acknowledges that this behavior hurts legitimate investors and poor people, the Obama Administration filed a friend-of-the-court brief that argued that a ruling against Argentina could make it much harder for poor countries or countries in financial recovery to access credit and restructure debts. The International Monetary Fund and the World Bank are similarly critical of vulture funds.
Unfortunately, the 2nd Circuit Court ruled for the vulture funds and against Argentina. Felix Salmon wrote at the time in Elliott vs Argentina: The Second Circuit’s dangerous game Reuters 03/04/2013 wrote about what a bandit-friendly ruling the 2nd Circuit made:

The Second Circuit ... clearly sees its job as being to enforce the original bond contract, which has been in default for 11 years. When Argentina proposes something roughly 4,000 days late and a billion dollars short, that’s all the provocation the Second Circuit will need to bring down the hammer and uphold the district court's orders.

Those orders are tough indeed. Commenter “paripassuwatch”, on my original post, notes that the court’s injunctive remedy is "the most powerful enforcement mechanism in the realm of sovereign debt since the era of 'gunboat diplomacy'. Blocking access both to the world payment system and world capital markets is as close one can get to blocking access to trade and customs duties".

These days, as Don Henley famously said, a man with a briefcase can steal more money than any man with a gun — and the Second Circuit is going to hand over to Elliott Associates one of the most powerful briefcase-based weapons the world has ever seen. That doesn’t mean Elliott’s going to get paid, of course. But it does mean that that the hedge fund can essentially turn Argentina into a global economic outcast unless and until that happens.
An "imperialist" policy in the old-fashioned sense, in other words. Salmon further explains how the consequences could apply:

The consequences for Argentina could well be very real and very painful. All governments need to fund themselves, and Argentina is no exception: what’s more, all governments borrow money from foreign investors, by issuing either foreign or domestic debt to those investors. Again, Argentina is no exception — foreign investors have long been a large part of the investor base for Argentine domestic debt. So in theory, losing access to US capital markets might be no big deal: Argentina could simply move all of its funding operations to Buenos Aires.

In practice, however, as DanielKoehler, another commenter, says, things are more complicated than that. Foreign investors tend to want dollar-denominated debt, and whenever you’re dealing in dollars, various intermediaries are going to be transferring those dollars into a US bank account. Similarly, Bank of New York, as the trustee for the bondholders who are receiving interest payments right now, would have to be involved somehow in any attempt to exchange those bonds for new domestic bonds. In both cases, US institutions could find themselves at risk of being found in contempt of court in New York, and might well refuse to cooperate with Argentina.
Argentina responded to the 2nd Circuit's decision by offering the vulture funds the same deal all the rest of the bondholders of that time got. Now the issue is before the Robert Court.

Anna Yukhananov article discusses the political background of the IMF's declining to file a brief on Argentina's behalf:

The Fund is no great friend of Latin America's third-biggest economy, and the two have clashed in recent years over the accuracy of Argentina's economic data. The IMF's board in February formally reprimanded Argentina for its lack of progress in improving inflation and GDP data. The country could face board sanctions in November , barring it from voting on IMF policies or accessing financing.

Argentina has cut all financial ties with the IMF and relations between them have steadily deteriorated since Argentina's 2001-2002 debt crisis, which the centre-left government and many ordinary Argentines blame on IMF policies.
Lots of bad blood between Argentina and the IMF right now. Nevertheless, the IMF has made it clear that it backs the Argentine position in this case.

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