- Created: Wednesday, 06 August 2014 10:11
- Written by Alvaro Michaels
Fight Racism! Fight Imperialism! 240 August/September 2014
Central to the export of capital by imperialism is the imposition of debt on weaker states. Debt interest payments have to be enforced if the rich are to prosper and a domestic middle class be paid off. After Argentina’s default on its $100bn debt in 2001, including $81bn of international debt, its ruling class has tried to weaken the hold the EU and US’s financial elite have on the country. Default was Argentina’s only option in the face of a 2001 state debt of 160% of GDP, a 10% fall in GDP from 1998, unemployment around 25% and over half the population in poverty. However the ruling class needs access to foreign capital. Some accommodation to its creditors is essential. Alvaro Michaels reports.
Argentinean negotiations with global money lenders were long and difficult but by 2010, its debts to the IMF, the World Bank and regional bankers were renegotiated. The old debt had fallen to about 27% of its face value at the time, so 92.4% of creditors accepted replacements in the form of new, less valuable bonds coupled with promises tied to the country’s future growth. The new bonds had longer terms and lower rates of interest. However imperialism did not lose its grip, for since 2003 over $190bn ‘debt service’ (interest) has been paid to the money lenders. By comparison Argentina’s current external debt remains at just under $138bn and its foreign currency reserves are only $30bn.
Keeping up the squeeze
The economic and financial crisis of the US and EU from 2008 led them to intensify their plunder of all smaller states. From 2009 until today the Argentinean peso has been forced down from around four pesos to the US dollar to 12.94, partly as a result of persistent demands by groups of US speculators that all their 2001 debts be repaid at full face value. So, imports cost more, and exports earn fewer US dollars, sharply hitting the Argentinean working class.
Hedge fund investors have tried to force full repayment of the original investments, plus outstanding interest. Gramercy Funds Management (a $3.9bn hedge fund claiming $400m from Argentina) and Elliot Management Corp (a $23.3bn fund claiming $2.5bn from Argentina) refused to recognise the debt renegotiations. Gramercy simply bought parcels of the new discounted bonds accepted by other creditors and later sold them back to Argentina at a profit. Elliot Management Corporation holds only 0.45% of that $100bn defaulted in 2001. It has failed in several attempts to get its hands on sovereign accounts, in New York, London and Paris since 2003. In 2012 an Elliott subsidiary, NML Capital, arranged for the seizure in Ghana of the ARA Libertad, a $10m, 3,700-ton Argentinean naval vessel with a crew of over 200, which it intended to confiscate in accordance with US court judgments awarding it over $1.6bn in Argentinean assets. In March 2014 it filed a lawsuit in a further attempt to seize Argentinean investments in SpaceX.
US Federal Court as enforcer
In November 2012 Federal Judge Thomas Griesa ruled that Argentina must pay $1.33bn of the original defaulted bond value (including interest) to NML Capital and Aurelius Capital Management. He forbade Argentina to pay interest on the 2005 and 2010 bonds, ie to 92.4% of bondholders who had accepted the restructuring, without paying these vulture funds. The Bank of New York Mellon, holding $539m of Argentinean funds, was stopped from paying the interest.
The vulture funds that secured the ruling purchased the original bonds at low prices in order to litigate and profit. NML paid $48.7m in 2008, for original bonds in default and Griesa’s ruling, if effected, would bring them $832m, or a gain of 1,608% in six years. If Argentina did pay the two funds, the full value of all the original bonds and interest would become due to all the current holders, over $120bn, forcing a second default on Argentina. Argentina appealed, but in June 2014 the US Supreme Court let Griesa’s judgment stand.
Since this may set a precedent for the smallest creditor to block any future restructuring of a sovereign debt launched in the US, other states obviously object. The governments of Mexico, Brazil, France and Uruguay have expressed concern. The G77, CELAC and the G24, as well as 106 British MPs, have joined in with objections. Holders of these Argentinean ‘Eurobonds’ requested exemption from the ‘unusual’ judgment. On 21 July, Argentina asked Griesa to put the decision on hold. On 22 July he refused, ordering the parties to meet ‘continuously…until a settlement is reached’.
Down to the wire
If a deal to pay the outstanding interest to new bond holders is not cut by 30 July – as we go to press – Argentina will be in default. If a technical default occurs, the markets will continue their attack on Argentina. Another group of banks might try to buy the outstanding old bonds from the two vulture funds, then seek better terms themselves, and get interest flowing again. However a default will encourage imperialist rivals to turn to venues other than the US to issue the debts to poorer countries, protecting their own financiers, and shutting New York banks out of a lucrative market.