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2620 words

Playing with the wealth of nations

6 October 2014

A recent UN vote laid the groundwork for resolving sovereign-debt disputes impartially, reports Joel Keep in Buenos Aires. So why did Australia vote against it?

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Negative sum game: Argentinian president Cristina Fernández de Kirchner speaks during a UN Security Council summit in New York on 24 September. Saul Loeb/AFP Photo

Negative sum game: Argentinian president Cristina Fernández de Kirchner speaks during a UN Security Council summit in New York on 24 September. Saul Loeb/AFP Photo


Late September’s UN Security Council meeting in New York set the stage for Coalition military action in the Middle East, with Western leaders responding to an uncertain geopolitical environment in Iraq and Syria while keeping an eye on the ongoing conflict in Ukraine. But for the Argentine delegation, another intractable crisis was taking precedence. President Cristina Fernández de Kirchner, hoping to bring her two-term mandate to a respectable close, had not the Islamic State or the Russian military in mind, but rather an obscure hedge fund manager based in New York.

Paul Singer’s NML Capital Management has been locked in a dispute with the government in Buenos Aires for years now over the rights to US$1.3 billion in distressed Argentine debt, which it bought after the country’s catastrophic financial collapse of 2001. The events of that year are still fresh in the minds of people here, and have shaped Argentine politics ever since. Kirchner and her widely admired husband Néstor, who served as president before her, have made it a central mission of government to return the country to its former glory, or at least economic respectability.

The debt issue has become a rallying cry for Kirchner’s Peronist Front for Victory party. It has also helped fuel the emotive campaigns of the administration’s street-level youth movement, La Campora, which has staged rallies denouncing the hedge funds to cheering crowds and called for the president to change the constitution and serve a third term.

For the embittered Argentine administration, NML has come to symbolise all that is unfair in the world of international finance. Singer, one of the largest campaign donors to Republicans in the United States, also has close ties to former Clinton officials, and has made a career out of speculating on third world debt. In 2000, NML won a US$56 million judgement after suing for returns on distressed Peruvian bonds purchased for speculative purposes, which US courts had initially declared illegal. A similar speculative operation in Congo-Brazzaville earned NML US$127 million.

The issue looked like being resolved in the Argentine government’s favour in the months leading up to a final US Supreme Court judgement on the Argentina case. US officials had made promising comments on how an adverse ruling would negatively affect the financial order; NML seemed isolated; and Argentina had resolved all outstanding debt with the Paris Club of donor nations and compensated the former Spanish majority owners of state oil giant YPF following its renationalisation.

But federal US judge Thomas Griesa felt otherwise. As July drew to a close, Argentina was cast into default for the second time in thirteen years. An entire country was rendered technically bankrupt overnight.

The Kirchner administration made it plain that the ruling would not elicit a payment. In a press conference held after the deadline for an out-of-court deal expired, economy minister Axel Kicillof addressed Argentines watching the drama unfold from back home. “We’re not going to sign an agreement that jeopardises the future of all Argentines,” he said. “Tomorrow will just be another day and the world will keep turning.”

Singer didn’t take the statement well. NML’s bitter PR campaign, which had dug up dirt on the Kirchner administration – and there is much to find – continued attacking the administration from all angles. Lobbyists with ties to the Clintonite establishment have been enlisted in the fight, including former secretary of state Madeleine Albright.

Singer has also fought a relentless litigation campaign to discover Argentine assets abroad, at one point seizing an Argentine naval vessel docked in Ghana, though it was allowed to return home by court order, attracting a rapturous reception in Buenos Aires harbour.

For her part, Kirchner sees more than US$1.3 billion at stake. In recent remarks, she made her view of NML’s strategy plain. “Isn’t it obvious?” Kirchner asked law-makers. “They want our entire bond restructure process to collapse, so that we will take on new debt, so they can prey on us all over again.”

That assessment may not be entirely inaccurate. Some 93 per cent of Argentina’s creditors have already accepted restructure agreements, which were reached in 2005 and 2010, but NML and a few others held out.

The Kirchner administration has grown infuriated as Argentina – once a thriving middle-income country with prospects akin to Australia’s – becomes further and further isolated. Locked in default and unable to access Western capital markets as a result, the country is now experiencing inflation rates among the highest in the world and crime is on the rise. Last month, dissident unions shut down the capital by calling the second nationwide general strike this year.

Government economists say that paying NML the US$1.3 billion for the sake of a peaceful resolution is not an option. Doing so, the say, would trigger the innocuous-sounding but potentially explosive Rights Upon Future Offers, or RUFO, clause. RUFO would nullify the other restructure agreements, and expose Argentina to an avalanche of new claims that could amount to over US$120 billion.

Other highly indebted countries have watched in dismay as the likelihood that Washington would intervene – once considered a real possibility, and the potential path to a reasonable agreement – has receded. Now, the vulnerable economies of what is called the Global South have taken matters into their own hands. Bolivia has recently proposed establishing a framework to resolve sovereign-debt disputes using a statutory mechanism at the United Nations, rather than New York State law.

The proposal was embraced by the G-77, with indebted countries hailing it as a new leveller in the playing field of international finance. The United States, the European Union, Japan and Australia voted against it.


“This Bolivian proposal is the first step in establishing norms for resolving these things,” a South American diplomat told me after the vote. “No one wants to end up like Argentina.”

In essence, the proposed framework establishes neutral UN ground for bringing battles like Argentina’s to a close. For many countries in the G-77, this could prevent disputes from triggering future cycles of onerous debt accrual, and the crippling burden for taxpayers that comes with them. Argentine and Bolivian officials say that the new system would shield economies from the kind of speculative attacks that emerging markets are vulnerable to in times of crisis, like the one that struck Thailand in 1997.

The proposal has also found support in the financial sector – where lenders want to end the kind of speculation NML engages in – and among former World Bank officials with experience in Argentina. “This is not a zero-sum game; it is a negative sum game,” former World Bank chief economist Joseph Stiglitz wrote in the New York Times. “The losses to the rest of the world will, in any case, far exceed whatever gains accrue to the vultures.”

This isn’t enough to convince creditor nations to vote in favour of the proposal, however. Japan, Britain and the United States are host to some of Argentina’s major creditors past and present, and conclusions about their motivations for voting against the proposal are not hard to draw.

But Australia is a minor creditor nation, so the link is nowhere near as clear. To understand Canberra’s position, Southeast Asia is the place to look.

“Indonesia and the Philippines are locked in a spiral of odious debt,” Brynnie Goodwill of Jubilee Australia says. The organisation has been lobbying Canberra for years to reform its aid program and the way it deals with the debts it lays claim to. “Since the 1980s, Indonesian debt owed to Canberra has hovered around one to one-and-a-half billion dollars.”

In the case of both Indonesia and the Philippines, debt was accrued under the rule of dictatorships that Australia dealt with during the Cold War. Much of the aid that went to the regimes of President Suharto in Jakarta and Ferdinand Marcos in Manila was spent on the machinery of repression, or whisked away to foreign bank accounts. The tab was left with the publics of those countries, and is with them still.

“That money, which could have been invested in things like sanitation, education and hospitals, has instead been sucked into the debt cycle,” Goodwill says. “What hasn’t been taken by those regimes, or spent on arms, is still owed to Canberra.”

Debt-forgiveness campaigners such as Jubilee assert that such economic and geopolitical history means the money owed to Canberra falls within the category of “odious debt.” Local taxpayers are now forced to help the state with its repayments – even though they never saw the benefits of loans. “It’s a system that serves no one,” Goodwill says. “Including lenders, and the financial system at large.”

In Argentina, Kirchner’s officials say that a UN venue for debt resolutions would arrive at a similar conclusion regarding much third world debt. Many countries under dictatorship took on loans from Northern economies during the Cold War, with former client states of Moscow taking on Soviet loans and other non-aligned countries taking on loans from oil-rich Gulf states flush with petrodollars.

Debt campaigners say that Canberra is making a serious error in not backing the vote, and that doing so does not serve the national interest. “This probably has more to do with geopolitical alignments than a careful consideration of what is best for Australia,” Goodwill says, referring to the company Australia’s vote puts it in.

A Department of Foreign Affairs spokesperson told me that Canberra would be maintaining a commitment to the current structures in place for resolving debt disputes. “We appreciate the need for a sovereign debt restructuring framework that does not undermine this goal or the economic well-being of national governments, businesses and individuals in affected countries,” said the official. “That is why we are working through existing forums, like the Heavily Indebted Poor Countries Initiative, Multilateral Debt Relief Initiative, Paris Club, World Bank and IMF to build consensus on managing these issues.”

Back in New York, in the days following the UN vote, Judge Griesa declared Argentina in contempt of court.


On the domestic front, Argentine legislators have moved to establish a bicameral commission to identify the legal origins of the country’s debt. They have an idea of where it will lead them.

In April 1982, local lawyer Alejandro Olmos filed a lawsuit arguing that the military juntas that ruled Argentina during 1976–83 were responsible for accruing much of the debt that now falls in NML’s sights. After several court actions, a ruling was finally given by Argentine federal judge Jorge Ballesteros on 14 July 2000. Ballesteros established that the bulk of the debt generated by that military–civilian de facto regime was illegitimate and illegal.

The debt in question was later recycled under the Brady Debt Restructuring Plan, overseen by the disastrous administration of Carlos Menem. The debt was restructured again through the “mega-swaps” (“la megacanje”) operation carried out before the 2001 collapse, in which Argentina would declare the largest single bankruptcy in history at the time.

The swap was the brainchild of former finance minister Domingo Cavallo, who is currently facing trial over improperly benefiting from the megacanje deal made with local and Western banks. The economy minister who originally took on the debt, Chicago School affiliate Martinez de Hoz – known here as “the junta’s money man” – was convicted of human rights abuses in 1988, for which he was later pardoned. When the 2001 crisis hit, de Hoz was a household name again when the bank for which he worked helped customers illegally wire US$30 billion out of the country as the economy collapsed.

The Kirchner administration traces its ideological lineage to the leftist resistance that fought the junta, and it sees the Menem years as a continuation of a fundamentally unjust economic program it is destined to rectify. Chief among their historical adversaries are de Hoz and Cavallo. And among the final opponents in that long battle is NML.

After the Bolivian proposal, Argentina successfully sponsored a resolution at the UN Human Rights Council condemning the operations of speculators in the Global South at large. Speaking to the UN human rights body in Geneva, Argentine foreign minister Héctor Timerman linked the victims of Argentina’s Cold War junta to those who are “deprived of essential services and economic resources” as a result of speculative attacks on the national economy. “My government represents those victims,” Timmerman said. “We have come to denounce [the fact that] the vulture funds are the inheritors of that military dictatorship and those who represent their interests.”

Economists who have worked on Argentina for years say this type of exasperation is the hallmark of a government that has gone to great lengths to return to capital markets, but has been prevented from doing so despite honouring all other debts. “The only outstanding issue is the predatory behaviour of these vulture funds,” former World Bank official Michael Cohen told me. “Buenos Aires pre-paid all debt to the Bank years ago, and everything is on track with the IMF regarding Argentina.”

Those close to the administration say a sense of dread is permeating government ranks as the president’s mandate draws to a close. The country desperately needs to halt the precipitous collapse in foreign reserves, which have plunged in recent months as inflation rises and dollars get sucked into energy imports. The underground foreign exchange market is trading at almost double the official rate, and dissident unions are threatening to upset a peaceful transfer of power with more general strikes.

“This relentless profit motive of these hedge funds is preventing the normal functioning of a national economy,” said Cohen. “They are playing with the wealth of a nation.”

The failure of US officials to intervene on Argentina’s behalf after the Supreme Court ruling was taken as a betrayal of faith, insiders say. State Department figures had indicated that compensating Spanish energy giant Repsol after renationalising YPF would reap diplomatic rewards. But when the time came, the returns were nowhere to be seen.

The geopolitical consequences were subtle but immediate: not long after the US Supreme Court ruling, Chinese president Xi Jinping arrived in Buenos Aires with his Central Bank chief in tow. Legislation was expeditiously passed by Argentine lawmakers granting immunity to the assets of foreign sovereign wealth funds. Not long after, a US$11 billion currency swap between the two countries was announced. The swap will kickstart Argentina’s move from a basis of US dollar foreign reserves to a currency basket, the dominant note of which is to be the yuan. It will no doubt come with strings attached.

The deal was yet another South American example of Beijing stepping in where Washington has failed, and a sign of the dangerous foreign policy game the Kirchner administration has been willing to play while it remains starved of the credit it needs to keep the economy running.

“This isn’t good for anyone,” a US political analyst based in Buenos Aires told me. “We could have wiped the slate clean in July via the Justice Department or the Executive, but we didn’t take the chance.” •

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