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Argentina Debt Default – again

Some exciting events about to happen in a couple hours with Argentina’s debt (at least for finance and intelligence geeks) which may actually filter to the general news.

If you’ve read Confessions of an Economic Hit Man you’ll know some of the history.   In the 1950’s, Kermit Roosevelt (grandson of Teddy) overthrew the democratically-elected government of Iran, putting the Shah in place with only very little bloodshed and no military intervention, just by spending millions of dollars for a coup.   Powers That Be realized that this was a very good way to change a government to be friendly to G7 business interests, without the threat of war with Russia.

Problem was that Roosevelt was a CIA employee, a government agent, and if he were caught it would present problems and embarrassment for the US.   So the decision was made to use CIA and NSA to recruit potential ‘economic hit men’ and send them to work for private consulting companies, engineering firms, construction companies, so that there would be no evident connection with the G7 governments.

Their function was to convince the political and financial leadership of underdeveloped countries to accept enormous development loans from institutions like the World Bank and USAID.   So where did this enormous money ultimately go?   Directly to huge corporations and the pockets of a few wealthy families who control the planet’s natural resources.   Perkins says,
Their tools included fraudulent financial reports, rigged elections, payoffs, and extortion.   They play a game as old as empire, but one that has taken on new and terrifying dimensions during this time of globalization.

Saddled with debts they couldn’t hope to pay, those second-world countries were forced by political pressure from the G7 on many issues.   Developing nations (primarily in South America) were effectively neutralized politically, had their wealth gaps run wider and economies damaged in the long run.

The IMF kept lending money to Argentina and extending its payment schedules without evidence that it could ever be repaid.   Massive tax evasion and money laundering brought a flight of capital from the country to offshore banks by the country’s elite.

For Argentina, a nation rich in natural resources, the chickens came home to roost in 1998. (soon after –and due to– the Brazilian national financial crisis, a major trading partner)   Because of debt service and the squeeze on exports, the IMF forced them to massively cut spending and increase taxes, in round after round.

So they entered their Great Depression with widespread unemployment, riots, the fall of the government several times, a default on the country’s foreign debt, and the end of the peso’s fixed exchange rate to the US dollar.   The economy shrank by 20 percent from 1998 to 2002, and over 50 percent of Argentines became poor and 25 percent, indigent;   seven out of ten Argentine children were poor at the depth in 2002.   Lovely.   They had to take out loans to make debt service on loans, over and over again.   By 2000 alternative currencies to the peso actually emerged because of loss of confidence.

In 2001 Minister of Economy Cavallo offered international creditors a swap of bonds due in 2010, for higher interest longer-term ones.   More austerity cuts, and payment of government employees with IOUs instead of money (lol), led to strikes and civil disorder.   By December there was a run on the banks and finally default on the international debt, of $132 billion by now.   They stopped pegging the peso with the dollar, and in days it lost most of its value, with inflation at 80%;   businesses closed or went bankrupt, imported products went away, and salaries were unchanged from before the crisis, although domestic debts (mortgages) were inflated practically out of existence.

In 2005 most of the international debt (76%) was restructured with creditors agreeing to accept 25-35% of the original face value.   But, about 7% of the remaining debt was sold on the open market, to US hedge funds who pounced on it for a small fraction of face value.

Argentina in 2010 was able to restructure their debt with most creditors again, except that held by the hedge funds (which ordinary Argentinians know as “fondos buitres” — ‘vulture funds’), which were demanding full face value for the debt they’d purchased for a small fraction.   Argentina took the hedge funds to court, trying to force a ‘cram-down’, asking the court to order hedge funds to accept what other creditors had, but they lost.   They appealed to the US Supreme Court, which they thought would give more time, but the Court declined to review the case.   So on June 30 this year, Argentina defaulted on their bond payment to these hedge funds, although they do have a 30 day grace period.

Which brings us to today.   Argentina does have the money now to pay off the hedge funds’ $1.3 billion.   The problem with that is it will likely cause the other bondholders, who had accepted massive reductions in their principal of 75%+, to demand much more if not full reinstatement of their $145 billion face value, which Argentina doesn’t have a hope to pay interest on.   BUT, if Argentina defaults on the hedge fund debt, it would trigger an ‘acceleration provision’ which brings -all- their debt due and payable tomorrow!   Impossible and impossible.

Argentina hours away from default

So I know this is long, but what happened here?   The G7 wanted the resources of second-world nations, so they deploy ‘economic hit men’ to induce the second-world nation to accept loans for development such as roads, dams, infrastructure, etc.   Who does that development?   G7 companies and the elite of the second-world, who each skim a huge percentage which never does actual work.   Nevertheless the debt is owed and is now leverage for the G7 to virtually control the second-world country.

Next goal is to force the second-world to privatize utilities, healthcare, energy, and so on…   and guess who gets those private contracts?   But, G7’s don’t want to kill the cow what’s giving the milk and blood though, so they agree to reduce the debt, at least for now.   However there are a few radicals (hedge funds) who aren’t going by the script and could upset the apple-cart.   The US doesn’t control the hedge funds and can’t make them do anything — in fact it’s practically the other way around!

So what happens in the next few days should be interesting.
(maybe to no one but me…)

My guess is that Argentina will pay off the pernicious hedge funds, and take their chances that their remaining creditors won’t choose to destroy them.

~~   Update – 31 July   07:35   ~~

I was wrong.   They went ahead and defaulted!   Cool!

Argentina blames US for debt default

Last night they made a last-ditch offer to the hedge funds, but were refused.   As Argentina isn’t willing to pay the hedge funds full freight, they went into default last night.   An earlier court ruling ordered that if they don’t pay the hedge funds, they can’t use the US financial system to pay any other of their creditors payments due either!   So they’ve paid nothing.

Argentina is already shut out of further borrowing internationally, because of their payment record, so there won’t be any more borrowing.   They do have income from exports, and the economy is better than it had been.   They cared much less about default than I thought they would, maybe because they’d done it several times before and the world didn’t end.

So the ball’s in the creditors’ court.   They can accelerate maturity, making the full $145 billion due immediately, but they couldn’t collect unless they make Argentina the 51st state.   They can press for collection of the interest payments by attaching Argentinian assets globally (if there are any of significance), and attempting to seize them.   Or they can try and negotiate a compromise.

These hedge funds are always going to be the cyst in the ointment, so the only solution I can see is marginalizing them somehow.   But financial companies are at the core of what makes this country tick, so that won’t be easy.   US courts have already joined all creditors to equivalency for the purposes of payment, so a solution from the US is probably impossible   —   unless majority creditors buy out the hedge funds for full freight.

Maybe if Argentina took this to a full trial at The Hague International Court, to establish the role of the US and these ‘economic hit men’;   although that would also establish the complicity of Argentina’s own elite class, which would be unacceptable.

Make some popcorn and pay attention people, because this is the position we’ll be in with China holding our unpayable debt in a couple years.

~~   Update – 1 August   08:04   ~~

I’m reading now that the majority creditors are furious with the hedge funds, given that the US court ruling ordered that if payment is not made to the hedge funds, payment cannot be made to the majority.   So whereas Argentina had actually made their $539 million payment in June timely and so say they are not in default, it’s been locked up since no agreement with the hedge funds.

JP Morgan and other majority creditors have a court hearing in New York this morning at 11:00am, and it’s said that they want severance from the hedge funds so majority and minority creditors are no longer linked.   This would leave the hedges out in the cold…   and JP Morgan has far more throw-weight than they do.   I also read that JP Morgan has reached agreement with the hedge funds to buy out their bonds.   While these seem conflicting, this may be a two-pronged strategy.   If they can sever the hedge funds, the funds may never be paid anything anymore.

Why?   Because Argentina has been locked out of international borrowing since their default in 2001.   They don’t have a whole lot to lose by repudiating all their debts altogether, mainly risking their foreign exchange holdings.   This though would also force them into Venezuela’s and Russia’s sphere, which US intelligence certainly doesn’t want (especially at this moment, with Ukraine and all), so enormous pressure is sure to be on the judge at today’s hearing.   Maybe the hedges will be the sacrificial lamb.

~~   Update:   20 August, 2015   ~~

Not much has happened lately, but Argentina is feeling pressure as a US court may find the nation in contempt for not paying the ‘holdout’ hedge funds.   All kinds of things are threatening to go haywire, but here are the main issues:

Argentina is now about to pass legislation which would allow transfer of the trusteeship of bondholders from the Bank of NY Mellon, to state-run Banco de la NaciĆ³n.   Why?   Because the US court has ordered that even though Argentina has actually made their interest payment to majority bondholders, BoNYM is forbidden from posting the money unless ‘holdouts’ are also paid.

Changing trusteeship requires that a majority of bondholders must agree, which may not be a very high hurdle given that they’re just basically going to want their money and don’t care about the hedges…   unless the US court prohibits this for some reason, going out of its way to protect the hedge funds.   It’ll be interesting to see whether the hedges have this much clout with the court, compared with majority bondholders.   This just got alot more expensive for the hedges.

If the trusteeship transfer happens though, Argentina will still be in default with the hedges and can’t return to capital markets, which they’ve been shut out of for over ten years.   And there’s the possibility that the US court will find Argentina in contempt if they instigate the transfer…   but then the majority bondholders could also technically be in contempt, lol.

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