Friday, August 08, 2014

State of the #GrieFault battle between Argentina and the vulture funds

Greg Palast takes a look at the Argentine debt situation in How Barack Obama could end the Argentina debt crisis Guardian 08/07/2014. Palast suggests that Obama could overrule the Nixon zombie judge Thomas Griesa's ridiculous ruling by declaring that it violates the Executive's prerogative over foreign affairs:

Obama could prevent vulture hedge-fund billionaire Paul Singer from collecting a single penny from Argentina by invoking the long-established authority granted presidents by the US constitution's "Separation of Powers" clause. Under the principle known as "comity", Obama only need inform US federal judge Thomas Griesa that Singer's suit interferes with the president's sole authority to conduct foreign policy. Case dismissed.

Indeed, President George W Bush invoked this power against the very same hedge fund now threatening Argentina. Bush blocked Singer's seizure of Congo-Brazzaville's US property, despite the fact that the hedge fund chief is one of the largest, and most influential, contributors to Republican candidates.

Notably, an appeals court warned this very judge, 30 years ago, to heed the directive of a president invoking his foreign policy powers. [my emphasis]
Thirty years ago was 1984, when St. Reagan was President.

Obviously, it's way too easy to criticize Obama or any political leader for not showing more "leadership" or for compromising too much. Both require assuming a counterfactual outcome if only the leader in question had done this or that.

But this Argentine debt battle with the Nixon zombie judge who's siding with the vulture funds offers a useful, real-world contrast: between Argentine President Cristina Fernández' posture toward the vulture fund head Paul Singer and Obama's posture in 2009 when Singer fleeced the federal government over the GM bailout, the bailout itself being one of Obama's most successful, politically beneficial and progressive accomplishments. Palast: "But while Fernández declared 'I cannot as president submit the country to such extortion,' Obama submitted within days."

He also lists some of Singer's Republican credentials, further raising the question of what Obama got politically from that particular cave-in.

Cristina's website has a Spanish translation of Palast's article, Cómo podría Barack Obama poner fin a la crisis de deuda argentina? 07.08.2014.

In another Guardian column Argentina default? Griesafault is much more accurate 08/07/2014, Joe Stiglitz and Martin Guzman observe, "The US financial system, already practised at exploiting poor Americans, has extended its efforts globally. Sovereign borrowers will not – and should not – trust the fairness and competence of the US judiciary. The market for issuance of such bonds will move elsewhere." (my emphasis)

They note that not only does the Nixon zombie judge's ruling not only offers potentially absurd gains on their investment in defaulted Argentine bonds, but also the possibility of their having snared huge profits by betting on an Argentine default:

What's more, the existence of credit default swaps creates the possibility of further gains for the vultures. A CDS insures against a default, paying off if the bonds do not. They can yield substantial returns, regardless of whether the bonds are repaid – thus reducing their holders' incentive to achieve an agreement.

In the runup to 30 July, the vultures conducted a scare campaign. A second default in 13 years would be a big setback for Argentina, they claimed, threatening the country's fragile economy. But all of this presumed that financial markets would not distinguish between a default and a Griesafault. Fortunately, they did: interest rates for different categories of Argentine corporate loans have not reacted to the event. In fact, borrowing costs on 30 July were lower than the average for the whole year.
Argentina is pressing for further investigation of the CDS holdings of the vulture funds involved.

Stiglitz and Guzman recount the post-2002 default bond purchases by the vulture funds:

The vultures were neither long-term investors in Argentina nor the optimists who believed that Washington Consensus policies would work. They were simply speculators who swooped in after the 2001 default and bought up bonds for a fraction of their face value from panicky investors. They then sued Argentina to obtain 100% of that value. NML Capital, a subsidiary of the hedge fund Elliot Management, headed by Paul Singer, spent $48m on bonds in 2008; thanks to Griesa's ruling, NML Capital should now receive $832m – a return of more than 1,600%.

The figures are so high in part because the vultures seek to earn past interest, which, for some securities, includes a country-risk premium – the higher interest rate offered when they were issued to offset the larger perceived probability of default. Griesa found that this was reasonable. Economically, though, it makes no sense. When a country pays a risk premium on its debt, it means that default is a possibility. But if a court rules that a country always must repay the debt, there is no default risk to be compensated. [my emphasis]
Argentina has brought its case to the International Court of Justice in The Hague, demanding that the US rein in what Argentina not unreasonably sees as a rogue judiciary on the #GrieFault case, Capitanich. ("Que Estados Unidos asuma la responsabilidad de su Poder Judicial" Página/12 08.08.2014; Argentina seeks legal case against U.S. in The Hague Reuters 08/07/2014)

The Nixon zombie judge seems to be going all Rumpelstilzchen over the thing.

He's hopping mad that Cristina and other Argentine officials keep saying they've paid the debt they legitimately owe. And he's threatening them with contempt of court if they don't stop saying that. The fool seems to think he has the power to censure public statements by the elected President of Argentina. (US judge threatens contempt ruling in Argentina case Reuters 08/08/2014; US judge Griesa insists Argentina makes 'false statements', threatens to declare the country in 'contempt' Buenos Aires Herald 08/08/2014)

The Senate Democrats should hold impeachment hearings over this guy. His performance on this looks like pathetic judicial misconduct to me, on the part of a 84-year-old judge who's mental capacities are probably no longer able to deal with this kind of complex case.

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