Colonization by Bankruptcy: The High-stakes Chess Match for Argentina

If Argentina were in a high-stakes chess match, the country’s actions this week would be the equivalent of flipping over all the pieces on the board.

David Dayen, Fiscal Times, August 22, 2014

Argentina is playing hardball with the vulture funds, which have been trying to force it into an involuntary bankruptcy. The vultures are demanding what amounts to a 600% return on bonds bought for pennies on the dollar, defeating a 2005 settlement in which 92% of creditors agreed to accept a 70% haircut on their bonds. A US court has backed the vulture funds; but last week, Argentina sidestepped its jurisdiction by transferring the trustee for payment from Bank of New York Mellon to its own central bank. That play, if approved by the Argentine Congress, will allow the country to continue making payments under its 2005 settlement, avoiding default on the majority of its bonds.

Argentina is already foreclosed from international capital markets, so it doesn’t have much to lose by thwarting the US court system. Similar bold moves by Ecuador and Iceland have left those countries in substantially better shape than Greece, which went along with the agendas of the international financiers.

The upside for Argentina was captured by President Fernandez in a nationwide speech on August 19th. Struggling to hold back tears, according to Bloomberg, she said:

When it comes to the sovereignty of our country and the conviction that we can no longer be extorted and that we can’t become burdened with debt again, we are emerging as Argentines.

. . . If I signed what they’re trying to make me sign, the bomb wouldn’t explode now but rather there would surely be applause, marvelous headlines in the papers. But we would enter into the infernal cycle of debt which we’ve been subject to for so long.

The Endgame: Patagonia in the Crosshairs

The deeper implications of that infernal debt cycle were explored by Argentine political analyst Adrian Salbuchi in an August 12th article titled “Sovereign Debt for Territory: A New Global Elite Swap Strategy.” Where territories were once captured by military might, he maintains that today they are being annexed by debt. The still-evolving plan is to drive destitute nations into an international bankruptcy court whose decisions would have the force of law throughout the world. The court could then do with whole countries what US bankruptcy courts do with businesses: sell off their assets, including their real estate. Sovereign territories could be acquired as the spoils of bankruptcy without a shot being fired.

Global financiers and interlocking megacorporations are increasingly supplanting governments on the international stage. An international bankruptcy court would be one more institution making that takeover legally binding and enforceable. Governments can say no to the strong-arm tactics of the global bankers’ collection agency, the IMF. An international bankruptcy court would allow creditors to force a nation into bankruptcy, where territories could be involuntarily sold off in the same way that assets of bankrupt corporations are.

For Argentina, says Salbuchi, the likely prize is its very rich Patagonia region, long a favorite settlement target for ex-pats. When Argentina suffered a massive default in 2001, the global press, including Time and The New York Times, went so far as to propose that Patagonia be ceded from the country as a defaulted debt payment mechanism.

The New York Times article followed one published in the Buenos Aires financial newspaper El Cronista Comercial called “Debt for Territory,” which described a proposal by a US consultant to then-president Eduardo Duhalde for swapping public debt for government land. It said:

[T]he idea would be to transform our public debt default into direct equity investment in which creditors can become land owners where they can develop  industrial, agricultural and real estate projects. . . . There could be surprising candidates for this idea: during the Alfonsin Administration, the Japanese studied an investment master plan in Argentine land in order to promote emigration.  The proposal was also considered in Israel.

Salbuchi notes that ceding Patagonia from Argentina was first suggested in 1896 by Theodor Herzl, founder of the Zionist movement, as a second settlement for that movement.

Another article published in 2002 was one by IMF deputy manager Anne Krueger titled “Should Countries Like Argentina Be Able to Declare Themselves Bankrupt?” It was posted on the IMF website and proposed some “new and creative ideas” on what to do about Argentina. Krueger said, “the lesson is clear: we need better incentives to bring debtors and creditors together before manageable problems turn into full-blown crises,” adding that the IMF believes “this could be done by learning from corporate bankruptcy regimes like Chapter 11 in the US”.

These ideas were developed in greater detail by Ms. Krueger in an IMF essay titled “A New Approach to Debt Restructuring,” and by Harvard professor Richard N. Cooper in a 2002 article titled “Chapter 11 for Countries” published in Foreign Affairs (“mouthpiece of the powerful New York-Based Elite think-tank, Council on Foreign Relations”). Salbuchi writes:

Here, Cooper very matter-of-factly recommends that “only if the debtor nation cannot restore its financial health are its assets liquidated and the proceeds distributed to its creditors – again under the guidance of a (global) court” (!).

In Argentina’s recent tangle with the vulture funds, Ms. Krueger and the mainstream media have come out in apparent defense of Argentina, recommending restraint by the US court. But according to Salbuchi, this does not represent a change in policy. Rather, the concern is that overly heavy-handed treatment may kill the golden goose:

. . . [I] n today’s delicate post-2008 banking system, a new and less controllable sovereign debt crisis could thwart the global elite’s plans for an “orderly transition towards a new global legal architecture” that will allow orderly liquidation of financially-failed states like Argentina. Especially if such debt were to be collateralized by its national territory (what else is left!?)

Breaking Free from the Sovereign Debt Trap

Salbuchi traces Argentina’s debt crisis back to 1955, when President Juan Domingo Perón was ousted in a very bloody US/UK/mega-bank-sponsored military coup:

Perón was hated for his insistence on not indebting Argentina with the mega-bankers: in 1946 he rejected joining the International Monetary Fund (IMF); in 1953 he fully paid off all of Argentina’s sovereign debt. So, once the mega-bankers got rid of him in 1956, they shoved Argentina into the IMF and created the “Paris Club” to engineer decades-worth of sovereign debt for vanquished Argentina, something they’ve been doing until today.

Many countries have been subjected to similar treatment, as John Perkins documents in his blockbuster exposé Confessions of an Economic Hit Man. When the country cannot pay, the IMF sweeps in with refinancing agreements with strings attached, including selling off public assets and slashing public services in order to divert government revenues into foreign debt service.

Even without pressure from economic hit men, however, governments routinely indebt themselves for much more than they can ever hope to repay. Why do they do it? Salbuchi writes:

Here, Western economists, bankers, traders, Ivy League academics and professors, Nobel laureates and the mainstream media have a quick and monolithic reply: because all nations need“investment and investors” if they wish to build highways, power plants, schools, airports, hospitals, raise armies, service infrastructures and a long list of et ceteras . . . .

But more and more people are starting to ask a fundamental common-sense question: why should governments indebt themselves in hard currencies, decades into the future with global mega-bankers, when they could just as well finance these projects and needs far more safely by issuing the proper amounts of their own local sovereign currency instead?

Neoliberal experts shout back that government-created money devalues the currency, inflates the money supply, and destroys economies. But does it? Or is it the debt service on money created privately by banks, along with other forms of “rent” on capital, that create inflation and destroy economies? As Prof. Michael Hudson points out:

These financial claims on wealth – bonds, mortgages and bank loans – are lent out to become somebody else’s debts in an exponentially expanding process.  . . . [E]conomies have been obliged to pay their debts by cutting back new research, development and new physical reinvestment. This is the essence of IMF austerity plans, in which the currency is “stabilized” by further international borrowing on terms that destabilize the economy at large. Such cutbacks in long-term investment also are the product of corporate raids financed by high-interest junk bonds. The debts created by businesses, consumers and national economies cutting back their long-term direct investment leaves these entities even less able to carry their mounting debt burden.

Spiraling debt also results in price inflation, since businesses have to raise their prices to cover the interest and fees on the debt.

From Sovereign Debt to Monetary Sovereignty

For governments to escape this austerity trap, they need to spend not less but more money on the tangible capital formation that increases physical productivity. But where to get the investment money without getting sucked into the debt vortex? Where can Argentina get funding if the country is shut out of international capital markets?

The common-sense response, as Salbuchi observes, is for governments to issue the money they need directly. But “printing money” raises outcries that can be difficult to overcome politically. An alternative that can have virtually the same effect is for nations to borrow money issued by their own publicly-owned banks. Public banks generate credit just as private banks do; but unlike private lenders, they return interest and profits to the economy. Their mandate is to serve the public, and that is where their profits go. Funding through their own government-issued currencies and publicly-owned banks has been successfully pursued by many countries historically, including Australia, New Zealand, Canada, Germany, China, Russia, Korea and Japan. (For more on this, see The Public Bank Solution.)

Countries do need to be able to buy foreign products that they cannot acquire or produce domestically, and for that they need a form of currency or an international credit line that other nations will accept. But countries are increasingly breaking away from the oil- and weapons-backed US dollar as global reserve currency. To resolve the mutually-destructive currency wars will probably take a new Bretton Woods Accord. But that is another subject for a later article.

____________________________

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. I wish people would stop giving vultures a bad name.

  2. […] Ellen Brown Web of Debt […]

  3. Thanks, Ellen: Colonization by Bankruptcy: The High-Stakes Chess Match for Argentina               Colonization by Bankruptcy: The High-Stakes Chess Match … Ellen Brown: For governments to escape the austerity trap, they need to spend not less but more money on the tangible capital formation that increases physical pr… View on http://www.laprogressiv... Preview by Yahoo       Dick Price LA Progressive Hollywood Progressive

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  4. Note Ms Brown’s defensiveness as regards Greece. Argentina was presented as the poster boy of the virtues of default which Greece was to follow. Now, yet another neocon scam has blown up in their faces! Ecuador is an oil producer. It thus has a valuable resource to sell and can buy off creditors with oil or oil concessions. Iceland didn’t default on its sovereign debt. One or more Icelandic banks defaulted on their private debts and were not bailed out by the government. As a matter of law, those are two totally different situations. In addition, Iceland is tiny (300 000), roughly the same population as St Louis, half that of DC and smaller than the smallest American state. Argentina has 42 million.

  5. […] Colonization by Bankruptcy – The High-stakes Chess Match for Argentina – Ellen Brown […]

  6. […] informações do Web of Debt Blog, por Ellen Brown| Tradução: Vinicius […]

  7. As more countries turn away from bankruptcy court dictates tehir powers should diminish.

  8. Another great essay Ellen. I am new here but have read your articles in CounterPunch and Naked Capitalism. I am four-square behind public banking and sovereign coinage and taxation as a form of control of the money supply rather than as a primary government funding mechanism. But, as a person nearing retirement, I see a need for sovereign debt – that being low risk bonds that can support savers and those on a fixed income. You see, I currently save as much as possible (reducing my demand) due to my sense of risk and uncertainty – and the pitiful level of income available at very low risk (T-bills). I doubt that I am alone. Hence, I would argue that the current system (QE, ZIRP) actually quells demand from the largest wage-earners. That is, rather than being stimulative, the U.S.’s current monetary policy is adverse to economic recovery.

    And I cheer Argentina’s courageous decision to fight the leviathan. My fear, and one likely shared by Ms Fernandez is the use of U.S. military might or covert “death squads” to do what Singer is powerless to do. They’ve done it before.

  9. […] (Ellen Brown) Argentina is playing hardball with the vulture funds, which have been trying to force it into an INVOLUNTARY BANKRUPTCY. The vultures are demanding what amounts to a 600% return on bonds bought for pennies on the dollar, defeating a 2005 settlement in which 92% of creditors agreed to accept a 70% haircut on their bonds. A US court has backed the vulture funds; but last week, Argentina sidestepped its jurisdiction by transferring the trustee for payment from Bank of New York Mellon to its own central bank. That play, if approved by the Argentine Congress, will allow the country to continue making payments under its 2005 settlement, avoiding default on the majority of its bonds. […]

  10. Reblogged this on MancCoin and commented:
    The current capitalist system is a game of musical debt chairs – when the music stops its never a G8 – sorry G7 country

  11. The real problem is when states start to default on payments or can’t meet their debt payments watch as all the state public property gets confiscated. They are coming for Detroits pensions first, then the artwork, and will finish them off by taking the parks and land under city hall itself

  12. 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.

    Equitable and Just – Distribute Pain Of Loss – Protect National Sovereignty 

    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 and loss of national sovereignty. 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.

  13. […] Colonization by Bankruptcy: The High-stakes Chess Match for Argentina | WEB OF DEBT BLOG. […]

  14. The return on “investment” that the Financial Terrorists are demanding is not 600%, but 1600+%!

    This “debt for Patagonia” swap that Adrian Salbuchi is warning about has two major obstacles: (1) the current government of President Cristina Fernández de Kirchner and (2) the people of Patagonia which counts among them many tens of thousands Germans who know the score and the real history of WW2.

    One of the main reasons why these Financial Terrorists like Paul Singer are intensifying their attacks on the current gov’t (by just recently hiring Baby Killer Madeleine “500,000+ Iraqi Children Killed By US Sanctions Are Worth It!” Albright ~ bit.ly/1lfNUAo) is to change the 2015 Presidential elections to effect Menem 2.0 (the former president who opened up Argentina to the IMF and World Bank and all the neolib economic and financial policies of rape and pillage of Argentina that finally resulted in the 2001/2002 financial crash).

    So it is a life and death struggle that is going on in Argentina right now.

  15. […] Brown, författare till Bankerna och skuldnätet, beskriver fordringsägarnas agerande som en form av kolonialism. Hon förespråkar att länder istället för att låna på den internationella finansmarknaden ska […]

  16. […] Source: Asia Times Online Global financiers and corporations are increasingly supplanting governments on the international stage. Case in point: Argentina’s debt struggle. Part of the answer can be found by funding through sovereign currencies and public banks, a recipeRead more… […]

  17. […] Colonization by Bankruptcy: The High-stakes Chess Match for Argentina | WEB OF DEBT BLOG. […]

  18. […] that seems far-fetched, consider what is happening with Argentina, which has been forced into bankruptcy by a US court to satisfy the exaggerated claims of certain […]

  19. […] that seems far-fetched, consider what is happening with Argentina, which has been forced into bankruptcy by a US court to satisfy the exaggerated claims of certain […]

  20. […] that seems far-fetched, consider what is happening with Argentina, which has been forced into bankruptcy by a US court to satisfy the exaggerated claims of certain […]

  21. […] that seems far-fetched, consider what is happening with Argentina, which has been forced into bankruptcy by a US court to satisfy the exaggerated claims of certain […]

  22. […] that seems far-fetched, consider what is happening with Argentina, which has been forced into bankruptcy by a US court to satisfy the exaggerated claims of certain […]

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