The victory handed to speculators by the United States Supreme Court over one of the world’s larger countries provides a lesson in where power actually lies. It is not in a government building.
Two June 16 decisions by the U.S. Supreme Court elevates the “right” of hedge-fund speculators to massive windfall profits above all other human considerations. That ruling is consistent with rulings handed down by the secret tribunals used to arbitrate disputes between corporations and national governments that arise under “free trade” agreements that elevate “investors’ rights” above environmental and labor laws.
Between these Supreme Court decisions, most of the attention has focused on the ruling that federal courts in the U.S. can order sovereign countries to hand over information on their assets to speculators. In other words, the U.S. legal system has formally declared it has jurisdiction over other countries. Arrogant as that ruling is, the more dramatic development was the court refusing to hear an appeal of lower-court rulings directing Argentina to pay $1.3 billion to holdout speculators that refused to accept terms agreed to by a large majority of bond holders.
Simply put, the U.S. legal system not only declares U.S. law applies around the world, but that it will be applied to benefit the most aggressively greedy.
Much of the commentary on this case has attempted to reduce it to a simple morality tale of a debtor being obligated to pay back its creditors. The lead speculator in this affair, hedge-funder Paul Singer, who is trying to be paid the full value of bonds on which he paid pennies on the dollar, has tried to paint it that way.
Reality, of course, is far more complex. So first it is useful to understand the odious nature of Argentina’s debt.
Military junta uses dirty war to impose austerity
Prior to the 1976 military seizure of power, Argentina was an industrialized country with active union and left-wing movements, a sizable middle class and large tracts of arable land. But the Argentine economic elite and the multinational corporations that operated there wanted Argentina turned into a low-wage haven. Only extreme violence would be able to achieve that goal.
Upon seizing power, the military handed over economic policy to a well-connected industrialist, José Alfredo Martínez de Hoz, who ruthlessly implemented a severe neoliberal program of shock therapy, backed by a savage campaign of torture, “disappearances” and killings waged by the military and two allied fascist groups. The CGT union federation was abolished, strikes outlawed, prices raised, wages tightly controlled and social programs cut. As a result, real wages fell by 50 percent within a year. Because of the collapse of internal consumption caused by this austerity, ten percent of Argentina’s workforce was laid off in 1976 alone.
Tariffs were reduced deeply, leaving the country wide open to imports and foreign speculation, causing considerable local industry to shut. High interest rates led to more foreign speculation and an overvalued currency, further hurting national production. Against this backdrop, the dirty war was intensified — initially targeting leftists, the régime quickly began to eliminate students, lawyers, journalists and trade unionists.
This was the régime of which David Rockefeller, whose loans helped finance it, famously said, “I have the impression that Argentina has a regime which understands the private enterprise system.” Further economic contraction occurred, and for the last five years of the military junta, 1978 to 1983, Argentina’s foreign debt increased to US$43 billion from $8 billion, while the share of wages in national income fell to 22 percent from 43 percent.
Civilian control and formal democracy was re-established following the collapse of the junta, but the debt did not go away.
A civilian president, Carlos Menem, imposed an austerity program in the early 1990s in conjunction with selling off state enterprises at below-market prices. This fire sale yielded $23 billion, but the proceeds went to pay foreign debt mostly accumulated by the military dictatorship — after completing these sales, Argentina’s foreign debt had actually grown. The newly privatized companies then imposed massive layoffs and raised consumer prices.
By 1997, about 85 percent of Argentines were unable to meet their basic needs with their income. During this period, Argentina’s debt steadily mounted, leading to a scheme under which the debt would be refinanced. A brief pause in the payment schedule was granted in exchange for higher interest payments — Argentina’s debt increased under the deal, but the investment bank that arranged this restructuring racked up a fee of $100 million, the latest in a series of financial maneuvers that shipped a billion dollars to investment banks in ten years.
It all finally imploded at the end of 2001, when the government froze bank accounts and the country experienced so much unrest that it had five presidents in two weeks. The last of these presidents, Néstor Kirchner, suspended debt payments. Had Argentina resumed scheduled payments in 2005, interest payment alone on the debt would have consumed 35 percent of total government spending. Kirchner announced that Argentina intended to pay only 25 percent of what was owed and any group that refused negotiations would get nothing; in the end, Argentina paid 30 percent to bondholders who agreed to talk.
Vulture capitalist seeks extortionist gains
Approximately 93 percent of bondholders agreed to accept 30 percent of the face value — 30 percent is better than zero. Argentina has repaid these on a steady schedule and Argentine law forbids giving the holdouts a better deal. Some of the bonds held by the original holdouts were bought by NML Capital, a subsidiary of Paul Singer’s Elliot Capital Management, and another hedge fund, Aurelius Capital Management. These were the two whose lawsuits reached the U.S. Supreme Court.
Including interest, the holdouts would walk off with $1.5 billion if paid in full. NML Capital, Argentine President Cristina Fernández said, would see a gain of 1,600 percent for bonds it bought for $48.7 million. “I don’t even think that in organized crime there is a return rate of 1,608 per cent in such a short time,” she said in a national address following the U.S. Supreme Court decisions, in which she said Argentina would not “submit to such extortion.”
Mr. Singer, the type of character for which the term “vulture capitalist” was coined, certainly has been persistent in attempting to collect the full face value of bonds for which he paid a small fraction of that value. In November 2012, he had an Argentine naval ship impounded in Ghana after earlier plotting to seize the presidential plane and artworks that were to have been shown at a Frankfurt book fair.
Among other exploits, he has demanded $400 million from the Republic of the Congo for bonds he bought for less than $10 million and compelled the government of Peru to pay him a 400 percent profit on the debt of two Peruvian banks he bought four years earlier. His specialty is buying debt at a small fraction of the face value and demanding full payment, regardless of the cost to others, and has become a billionaire through doing so.
In the imperialist crosshairs
A series of one-sided rulings in a federal trial court, upheld by the U.S. Court of Appeals for the Second Circuit, favored the hedge funds over Argentina. When the appeals reached the Supreme Court, the bond holders who agreed to accept 30 percent (a “haircut” in financial parlance) backed Argentina, fearing that there would be no money for them should Argentina be forced to pay off the holdouts at full face value. The U.S. government also sided with Argentina, fearing a precedent that could be used to enable it to be sued.
The Foreign Sovereign Immunities Act of 1976 is supposed to bar lawsuits in U.S. courts against non-U.S. governments, but a 7-1 bipartisan majority of the Supreme Court decided that the law is malleable when not convenient. The Argentine bonds were sold with a provision that New York law would be used to settle disputes related to them, which gave U.S. courts the excuse needed to extend U.S. law to Argentina.
Under New York law, investors must be treated equally. That provision could have been interpreted to mean the holdouts would get the same 30 percent payment in installments — which the Argentine government would have agreed to had they been willing to negotiate — but instead it was used as an opportunity to give more rights to speculators.
The practical effect of these rulings is that “investors” — hedge funds with the well-earned sobriquet of “vultures” — have been elevated above a national government. This is perfectly consistent with the decisions handed down by secret tribunals like the World Bank-affiliated International Centre for Settlement of Investment Disputes when “investors” sue governments under “free-trade” agreements such as the North American Free Trade Agreement.
The hedge funds can leverage the U.S. legal system to enforce their will over Argentina in this case because the U.S. financial system is used to make payments to the bondholders who negotiated the 30 percent agreement with the South American country. Argentina could only continue to make those payments, while simultaneously refusing to pay anything to the holdouts, by doing so completely outside the U.S. financial system, which is possible but very difficult due to the system’s global reach. Moreover, those payees within the reach of the U.S. legal system would be susceptible to being sued by the holdouts.
Argentina has consistently said it has does not have the money to pay the holdouts and continue to meet its continuing obligations to the bondholders it has been paying, another reason for those bondholders to side with Argentina against the holdouts. The next payment is due June 30 — on that date, Argentina would be in defiance of the U.S. Supreme Court should it not pay the full face value of the holdouts’ bonds. But if it does so, or simply agrees to pay more than 30 percent, the holdouts would likely demand to re-negotiate to get the same deal.
Immediate conflict doesn’t negate larger interests
What to do? One possibility is to up the ante. That is the recommendation of Argentina’s counsel at the New York corporate law firm Cleary Gottlieb Steen & Hamilton in a memorandum dated May 2, 2014:
“[T]he best option for the Republic could be to permit the Supreme Court to force a default and then immediately restructure all of the external bonds so that the payment mechanism and the other related elements are outside of the reach of American courts. Argentina wants to continue paying its restructured debt. The Courts, nevertheless, have placed it in a terrible position.”
Courts do not act in a vacuum, but ultimately express the interests of the most powerful industrialists and financiers similar to any other component of a government in the capitalist system. It is certainly true that those interests are in conflict in this matter. Such a conflict is not unusual. The victory for one particular set of speculators here, however, serves to tighten the screws of austerity by further codifying the dominance of the most ruthless capitalists within the capitalist legal system.
Should the end result of this case be that all parties agree to a payment level higher than 30 percent, would the speculators on the losing side be crestfallen? Regardless of the outcome, the precedent set here provides additional leverage for speculators in future financial deals. Not even the opinion of the U.S. government, the ultimate protector of corporate interests through its intelligence and military apparatuses and “free trade” agreements, was allowed to interfere with a bid to further tighten corporate power. That is what was at stake here, not the short-term interests of this or that speculator.
For Argentina, or any other subaltern country, to rid itself of odious debt and re-orient itself toward the greater good of its citizenry rather than the profiteering of speculators, will require entirely new structures in a different economic system.