Cry for Argentina: Fiscal Mismanagement, Odious Debt or Pillage?

Argentina has now taken the US to The Hague for blocking the country’s 2005 settlement with the bulk of its creditors. The issue underscores the need for an international mechanism for nations to go bankrupt. Better yet would be a sustainable global monetary scheme that avoids the need for sovereign bankruptcy.

Argentina was the richest country in Latin America before decades of neoliberal and IMF-imposed economic policies drowned it in debt. A severe crisis in 2001 plunged it into the largest sovereign debt default in history. In 2005, it renegotiated its debt with most of its creditors at a 70% “haircut.” But the opportunist “vulture funds,” which had bought Argentine debt at distressed prices, held out for 100 cents on the dollar.

Paul Singer’s Elliott Management has spent over a decade aggressively trying to force Argentina to pay down nearly $1.3 billion in sovereign debt. Elliott would get about $300 million for bonds that Argentina claims it picked up for $48 million. Where most creditors have accepted payment at a 70% loss, Elliott Management would thus get a 600% return.

In June 2014, the US Supreme Court declined to hear an appeal of a New York court’s order blocking payment to the other creditors until the vulture funds had been paid. That action propelled Argentina into default for the second time in this century – and the eighth time since 1827. On August 7, 2014, Argentina asked the International Court of Justice in the Hague to take action against the United States over the dispute.

Who is at fault? The global financial press blames Argentina’s own fiscal mismanagement, but Argentina maintains that it is willing and able to pay its other creditors. The fault lies rather with the vulture funds and the US court system, which insist on an extortionate payout even if it means jeopardizing the international resolution mechanism for insolvent countries. If creditors know that a few holdout vultures can trigger a default, they are unlikely to settle with other insolvent nations in the future.

Blame has also been laid at the feet of the IMF and the international banking system for failing to come up with a fair resolution mechanism for countries that go bankrupt. And at a more fundamental level, blame lies with a global debt-based monetary scheme that forces bankruptcy on some nations as a mathematical necessity. As in a game of musical chairs, some players must default.

Most money today comes into circulation in the form of bank credit or debt. Debt at interest always grows faster than the money supply, since more is always owed back than was created in the original loan. There is never enough money to go around without adding to the debt burden. As economist Michael Hudson points out, the debt overhang grows exponentially until it becomes impossible to repay. The country is then forced to default.

Fiscal Mismanagement or Odious Debt?

 Besides impossibility of performance, there is another defense Argentina could raise in international court – that of “odious debt.” Also known as illegitimate debt, this legal theory holds that national debt incurred by a regime for purposes that do not serve the best interests of the nation should not be enforceable.

The defense has been used successfully by a number of countries, including Ecuador in December 2008, when President Rafael Correa declared that its debt had been contracted by corrupt and despotic prior regimes. The odious-debt defense allowed Ecuador to reduce the sum owed by 70%.

In a compelling article in Global Research in November 2006, Adrian Salbuchi made a similar case for Argentina. He traced the country’s problems back to 1976, when its foreign debt was just under US$6 billion and represented only a small portion of the country’s GDP. In that year:

An illegal and de facto military-civilian regime ousted the constitutionally elected government of president María Isabel Martínez de Perón [and] named as economy minister, José Martinez de Hoz, who had close ties with, and the respect of, powerful international private banking interests. With the Junta’s full backing, he systematically implemented a series of highly destructive, speculative, illegitimate – even illegal – economic and financial policies and legislation, which increased Public Debt almost eightfold to US$ 46 billion in a few short years. This intimately tied-in to the interests of major international banking and oil circles which, at that time, needed to urgently re-cycle huge volumes of “Petrodollars” generated by the 1973 and 1979 Oil Crises. Those capital in-flows were not invested in industrial production or infrastructure, but rather were used to fuel speculation in local financial markets by local and international banks and traders who were able to take advantage of very high local interest rates in Argentine Pesos tied to stable and unrealistic medium-term US Dollar exchange rates.

Salbuchi detailed Argentina’s fall from there into what became a $200 billion debt trap. Large tranches of this debt, he maintained, were “odious debt” and should not have to be paid:

Making the Argentine State – i.e., the people of Argentina – weather the full brunt of this storm is tantamount to financial genocide and terrorism. . . . The people of Argentina are presently undergoing severe hardship with over 50% of the population submerged in poverty . . . . Basic universal law gives the Argentine people the right to legitimately defend their interests against the various multinational and supranational players which, abusing the huge power that they wield, directly and/or indirectly imposed complex actions and strategies leading to the Public Debt problem.

Of President Nestor Kirchner’s surprise 2006 payment of the full $10 billion owed to the IMF, Salbuchi wrote cynically:

 This key institution was instrumental in promoting and auditing the macroeconomic policies of the Argentine Government for decades. . . . Many analysts consider that . . . the IMF was to Argentina what Arthur Andersen was to Enron, the difference being that Andersen was dissolved and closed down, whilst the IMF continues preaching its misconceived doctrines and exerts leverage. . . . [T]he IMF’s primary purpose is to exert political pressure on indebted governments, acting as a veritable coercing agency on behalf of major international banks.

Sovereign Bankruptcy and the “Global Economic Reset”

Needless to say, the IMF was not closed down. Rather, it has gone on to become the international regulator of sovereign debt, which has reached crisis levels globally. Total debt, public and private, has grown by over 40% since 2007, to $100 trillion. The US national debt alone has grown from $10 trillion in 2008 to over $17.6 trillion today.

At the World Economic Forum in Davos in January 2014, IMF Managing Director Christine Lagarde spoke of the need for a global economic “reset.”  National debts have to be “reset” or “readjusted” periodically so that creditors can keep collecting on their exponentially growing interest claims, in a global financial scheme based on credit created privately by banks and lent at interest. More interest-bearing debt must continually be incurred, until debt overwhelms the system and it again needs to be reset to keep the usury game going.

Sovereign debt (or national) in particular needs periodic “resets,” because unlike for individuals and corporations, there is no legal mechanism for countries to go bankrupt. Individuals and corporations have assets that can be liquidated by a bankruptcy court and distributed equitably to creditors. But countries cannot be liquidated and sold off – except by IMF-style “structural readjustment,” which can force the sale of national assets at fire sale prices.

A Sovereign Debt Restructuring Mechanism ( SDRM) was proposed by the IMF in the early 2000s, but it was quickly killed by Wall Street and the U.S. Treasury. The IMF is working on a new version of the SDRM, but critics say it could be more destabilizing than the earlier version.

Meanwhile, the IMF has backed collective action clauses (CACs) designed to allow a country to negotiate with most of its creditors in a way that generally brings all of them into the net. But CACs can be challenged, and that is what happened in the case of the latest Argentine bankruptcy. According to Harvard Professor Jeffrey Frankel:

[T]he US court rulings’ indulgence of a parochial instinct to enforce written contracts will undermine the possibility of negotiated restructuring in future debt crises.

We are back, he says, to square one.

Better than redesigning the sovereign bankruptcy mechanism might be to redesign the global monetary scheme in a way that avoids the continual need for a bankruptcy mechanism.  A government does not need to borrow its money supply from private banks that create it as credit on their books. A sovereign government can issue its own currency, debt-free. But that interesting topic must wait for a follow-up article. Stay tuned.

__________________

Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her 200+ blog articles are at EllenBrown.com.

 

35 Responses

  1. From the article above : “A sovereign government can issue its own currency, debt-free. But that interesting topic must wait for a follow-up article.”

    Are politicians digging in the earth for precious metals ? Ha ! Sorry, but I don’t know any governments that create debt-free currency. It’s currency creation based on promises, which is debt.

    Ellen, I think you may have meant “interest free”, rather than “debt-free” ? Might that be the case???

    • I’m sure she means “debt-free.” This recent article by David Graeber sheds some light on it: http://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity. A government can spend money into the economy that it creates and no one goes into debt. It’s been done. Read Ellen Brown’s books and articles.

  2. Countries borrow because neither industrialization nor industrial enterprises are able to pay their own way or meet their own expenses. Because Argentina does not originate the needed credit internally it must borrow from overseas lenders on Wall Street & City of London.

    Argentina’s real problem is its desperate, repeated lunges at becoming ‘modern’ and industrialized. No Argentine has examined whether it is possible or even desirable for the country to become like the (bankrupt) industrialized West. Keep in mind, the West and its imitators are just as bankrupt as Argentina and for the same reason; the non-productivity of industrial, at-scale enterprises.

    “The defense (vs. odious debt) has been used successfully by a number of countries, including Ecuador in December 2008, when President Rafael Correa declared that its debt had been contracted by corrupt and despotic prior regimes. The odious-debt defense allowed Ecuador to reduce the sum owed by 70%.”

    Ecuador jumped out of the frying pan into another frying pan by borrowing even larger amounts (of dollars) from China, to whom it is now a vassal state.

    The essential nature of industrialization is the absolute-existential requirement for debt subsidy. No debt = no industry. If all debts were somehow forgiven or wished away overnight, equal or greater amounts would need to be borrowed the very next day so that the lights might remain on.

    • Steve from wherever you are. You are spouting bullshit learned from the Presstittue Lamestream Media, left and rigth. You really need to do some real self-education before you post another word:

      [audio src="http://www.escapetopatagonia.com/TheU.S.WarAgainstYugoslavia.mp3" /]
      The correct link to my article on Argentina’s “default debt” is here:
      http://www.escapetopatagonia.com/TheSupremeTerrorist.pdf

    • A real Virginian would know that there was life before IMF, and there will be one long after it is gone. USA created its own credit to build its own economy, but others cannot. You are mixing up a great deal — by claiming that Argentina’s folly is its obession with industrialization and trying to immitate big boys. How is Ecuador a vasal state? Ecuador is no longer in the clutches of interest-seking useless elite that lives, generation after generation of somebody else’s work. China WORKS for its money, and respects and understands others that would like to do the same. There are business deals that profit both countries, and financing is not — like for the money sucking IMF banks, the purpose in itself. Banking and financing should be a service, like water and sewer, not an opportunity for scum to exploit the work of billions on this earth. The problem is — earth has not learned yet how to eliminate the parasitical system. Wars only serve to redistrubute who will be the new parasite on the body of planet earth.

      • Excellent points, Bianca. The parasitic ruling class (latest manifestation as financiers) have been exploiting the rest of humanity since the beginning of the Bronze Age – about 5,000 years ago.
        It is NOT a coincidence that this is when mass warfare arose.

  3. Unfortunately, I understand that Argentina has pegged its peso to the US dollar. If it had its own fiat money, it could pay off the debt.

    • The peso was decoupled from the dollar in 2002. The process was traumatic, but it enabled Argentina to reboot its economy during subsequent years.

      • Thanks, I hadn’t seen that

  4. Ellen,

    Convert Loss To Universal Tax Credit

    What if IMF bad debts, had a different type of Reset such that through a vote of both IMF Directors and the Country of Default, a IMF Tax Certificate was issued to replace dollar-for-dollar the bad debt. This “IMF Tax Certificate” could then be used by its holder to offset Federal Taxes Owed in any IMF Member Country and $2 for every $1 of converted loss in the Subject default Country.

    Surely it would not encourage over-borrowing by Countries any more than the corrupt system of finance now in place.

    Love your work Ellen.

    • Thanks. We definitely need a different sort of reset! Food for thought.

      • Such a hypothetical “IMF TAX CERTIFICATE” would function somewhat similarly to Corporate Loss Carryover. It’s value to a Taxpayer would encourage further investment as opposed to drying-up investment. Similarly, it’s value to the integrity of the member governments, would be to distribute and mitigate pain of loss by encouraging either new capital investment, or taxable income. Because these Certificates would carry highest tax offset benefits in the very country in financial trouble, it is likely a secondary market feature would quickly develop for a resale market to bundle the entire mess, at great cash discount, probably reaching 10¢ on the $1, and used as tax-heaven corporate shelter right in the country where the original loan capital was attempting to theoretically do some good. Through using the IMF Tax Certificates, the participating IMF borrowers would avoid…or perhaps I should say mitigate…. one of the great perceived evils of IMF: Outside forced subjugation of sovereign countries to banking hegemony. It’s maybe not the perfect answer, but it prevents the IMF bond holders from lengthly rounds settlement procedures, while encouraging new investment in the troubled borrower nation owing the original debt…sort of a win-win-win scenario for (1) keeping IMF honest, (2) the people working in the troubled borrower-country and (3) the Bond Holder. Various computer simulations are needed to see how it might play out.

  5. Reblogged this on Spartan of Truth.

  6. Never forget that Argentina is the trap that US neocons tried to get Greece to fall into. Argentina was the poster boy of successful default! Yet another neocon scam blows up in their faces!

  7. […] This article was originally posted on Web of Debt Blog […]

  8. […] Cry for Argentina: Fiscal Mismanagement, Odious Debt or Pillage? – Ellen Brown […]

  9. […] Source WebOfDebt  August 12 […]

  10. […] by Ellen Brown EllenBrown.com […]

  11. […] Cry for Argentina: Fiscal Mismanagement, Odious Debt or Pillage? | WEB OF DEBT BLOG. […]

  12. […] READ MORE HERE […]

  13. Interest collectors are vampires who need a stake through their guts as they have never had a heart.

  14. […] Brown, originally published by Web of Debt blog  | […]

  15. Ellen Brown, thanks for your efforts to call out these Vulture Financial Terrorists. But you got at least one key fact completely wrong. And it’s a crucial fact.

    Paul “I Am a Financial Terrorist” Singer has NOT spent over a DECADE trying to extort Argentina: he bought almost all of his $48 million Argentina debt that he is trying to “make whole” by demanding 1608% return “or else” in 2008!

    Here’s the rest of the story:

    http://www.escapetopatagonia.omc/TheSupremeTerrorist.pdf

  16. BTW, what’s happening to Argentina currently is eCON Hitman 3.0. 1.0 was what John Perkins’ wrote in his book “Economic Hitman”. 2.0 is what happened to Yugoslavia and to Ukraine now: wholesale destruction of a country into absolute subjugation or “third worldization” as Michael Parenti called it.
    One of the greatest and funniest (if that is even possible) talks about the true nature and real history of the Gangster State called the United States of Death, Disease and Destruction:
    [audio src="http://www.escapetopatagonia.com/TheU.S.WarAgainstYugoslavia.mp3" /]

  17. […] 12 08 – ellenbrown.com – Cry for Argentina: Fiscal Mismanagement, Odious Debt or Pillage? […]

  18. […] 12 08 – ellenbrown.com – Cry for Argentina: Fiscal Mismanagement, Odious Debt or Pillage? […]

  19. […] FONTETradotto e riadattato da Fractions of Reality […]

  20. […] FONTE Tradotto e riadattato da Fractions of Reality […]

  21. Dear Ellen.
    Hi!! I’m Adrian Salbuchi from Argentina.
    Thank you so much for quoting one of my articles on Argentina’s Foreign Debt published in Global Research. I have been writing quite a bit about this (especially on RT-Russia Today) because – yet again – Argentina will be used as a Guinea Pig experiment to impose World Government “rules and conditions” that will later be replicated elsewhere. On the issue of Sovereign Debt, please read these articles just published on RT’s website:
    http://rt.com/op-edge/179772-sovereign-debt-for-territory/
    In it you will find links to two previous articles of mine referring to the “Shylock Model” and explaining how the Gaza & Israel Crisis relates to Argentina’s coming “Debt for Territory” scam:
    http://rt.com/op-edge/177764-israel-palestine-tragedy-argentina/
    If you wish to contact me directly, here’s my E-mail: arsalbuchi@gmail.com. I can supply much material (in English) on Argentina’s decades-long engineered Sovereign Debt miasma…
    Warm regards,
    Adrian Salbuchi
    Founder, Second Republica Project
    (Buenos Aires)

    • Thanks Adrian, those are powerful and disturbing articles! The article I cited of yours I actually found printed out in my file from 2006. I can see I’ll have to write more on this. I’ll email you.
      Best wishes,
      Ellen

  22. I have learned so much from these two outstanding professionals. I wish Adrian Salbuchi or Ellen would write an article specifically on Central Banks being the real control powers especially in South American countries. That is where I’m from.

  23. […] sovereign governments cannot file for bankruptcy protection like individuals and corporations, and banksters continue to block any suitable sovereign default resolution mechanism, perhaps Argentina should look to the BRICS […]

  24. Latest development: The Financial Terrorists aka Paul Singer el al. have hired Baby Killer Madeleine “500,,000+ Iraqi Children Killed By US Sanctions Are Worth It!” Albright to do her magic against Argentina bit.ly/1lfNUAo

  25. […] — source ellenbrown.com […]

  26. […] Ellen Brown* uses Argentina’s current bankruptcy predicament to ask the big question. Should our money be debt- based? She says: “Better than redesigning the sovereign bankruptcy mechanism might be to redesign the global monetary scheme in a way that avoids the continual need for a bankruptcy mechanism. A government does not need to borrow its money supply from private banks that create it as credit on their books. A sovereign government can issue its own currency, debt-free”. [Cliff Note: We remind our readers once again that President John F. Kennedy tried to issue money that was not a debt to anyone. That idea was killed.] .. Brown goes on to explain the problem she sees: “Most money today comes into circulation in the form of bank credit or debt. Debt at interest always grows faster than the money supply, since more is always owed back than was created in the original loan. There is never enough money to go around without adding to the debt burden. As economist Michael Hudson points out, the debt overhang grows exponentially until it becomes impossible to repay. The country is then forced to default.” Brown believes that instead of highlighting the need for an international arbitration mechanism like the Hague for taking on national bankruptcy cases, it would be better to change the global monetary system to a more sustainable system, thereby avoiding the need for countries to go bankrupt .. Brown recommends governments not borrow from private banks, but create their own money. [Cliff Note: Gee, we wish we had thought of that] LINK HERE to the essay […]

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