Economists sign petition asking Congress to contain fallout from Argentina debt ruling

by on July 31, 2014 at 3:51 pm in Current Affairs, Economics, Law, Uncategorized | Permalink

The notice is here, signers include Bob Solow and Dani Rodrik.  I agree with their arguments, and you will find my slightly different but still consistent earlier critique here.  Here is one bit from the press release:

“It’s a widely shared opinion among economists that the court’s attempt to force Argentina into a default that nobody – not the debtor nor more than 90 percent of creditors – wants, is wrong and damaging,” said Mark Weisbrot, economist and Co-Director of the Center for Economic and Policy Research, who helped circulate the letter.

Matt Levine has a good post on the situation here.

charlie July 31, 2014 at 3:54 pm

So, let me understand:

A clause written in Latin, that nobody understands, and that a federal judge applying NY state law (novel NY state law at that) is causing a sovering country to declare bankruptcy.

And that is bad.

And yet a badly drafted law that forgot to include a key phrase is also bad? or good?

Andrew' July 31, 2014 at 4:04 pm

Correct.

Bill July 31, 2014 at 7:12 pm

Pari passu is a well understood term, particularly in the bond market.

Even more common than res ipsa loquitor.

andrew' July 31, 2014 at 7:19 pm

But it looks like it was used to opposite effect in the case of Greece.

Bill July 31, 2014 at 7:21 pm

Elaborate.

Peter Schaeffer July 31, 2014 at 9:06 pm

Every contract lawyer who has worked on financing’s (of any kind) has heard and used ‘pari passu’ a zillion times

By the way, the petition is certainly not lacking in humor…

“Those who invested in Argentine bonds were compensated with high interest rates, to mitigate the risk of default. There are inherent risks when investing in sovereign bonds, but the court’s ruling creates a moral hazard, by allowing investors to obtain full repayment, no matter how risky the initial investment.”

Does anyone think, that any group of investors, is going to get full repayment? Does even a single holdout believe this?

However, the letter does contain some real issues

“The recent developments will also directly impact the United States and its status as a financial center of the world economy. While much of the developing world’s debt is issued under the jurisdiction of New York law and utilizing New York-based financial institutions, the court’s ruling will make it more likely for sovereign governments to seek alternate locations to issue debt. Britain and Belgium, for example, have already passed legislation aimed at preventing this type of behavior from “holdout” creditors. ”

That sounds like a real, bread-and-butter issue.

nonzenze July 31, 2014 at 10:31 pm

Those who invested were also compensated in the form of a binding contractual agreement by Argentina to pay back all creditors equally.

That is an important element of the deal, without which they would not have agreed.

charlie August 1, 2014 at 10:22 am

Which is why Citibank is now offering to buy out Singer.

Remember, shoot the hostage.

enoriverbend August 1, 2014 at 1:08 pm

“the court’s ruling will make it more likely for sovereign governments to seek alternate locations to issue debt”

I am not sure why this won’t be automatically self-adjusting.

Say for example the next Argentine bond issue (stop laughing) is written such that any dispute about the terms is adjudicated in an Argentine court. Who among you would think that the interest rate for such bonds would be the same as for a similar bond governed under US court rulings? If the interest rate is the same, who among you would think that the bond issue will be fully subscribed?

So, sure, governments who want to reserve the right not to pay bondholders may want to avoid the US courts. I am certain there will be some countervailing financial repercussions to deciding that.

brad August 1, 2014 at 1:21 pm

If a debtor nation has sufficient negotiating power to select a favorable jurisdiction it’ll pick a local forum. They pick NY because that’s what investors want and they’d have to pay a higher coupon to issue anywhere else. If they are worried about this specific issue they can put in a CAC.

nonzenze July 31, 2014 at 10:29 pm

The judge is not applying any novel law; he’s applying the terms of the contract that Argentina itself entered to wit, that they will not pay any creditors unless they pay all creditors.

andrew' August 1, 2014 at 4:00 am

But equally does not mean in full.

Govco August 1, 2014 at 9:47 am

That, and these petitioners don’t know what the word “nobody” means.

J July 31, 2014 at 4:18 pm

I’m really not qualified to comment on all the legal technicalities here, but I find this whole situation very annoying.

When you agree to lend money to a sovereign one of the risks you face is that the sovereign can default and you’re not allowed to go seize their stuff the way you could with a private borrower. To maintain some semblance of credibility the sovereign will usually agree to some sort of exchange or restructuring in lieu of just paying out 0 cents on the dollar, but if you get defaulted on, tough shoot as far as I’m concerned. What was the point of even defaulting if you need to pay them later on? The idea that the exchange bonds are pari passu with the holdout bonds just seems totally contrary to the circumstances in which the bonds were issued. The holdouts not getting paid was the WHOLE POINT of issuing the exchange bonds.

Simone Simonini July 31, 2014 at 4:26 pm

If you want to have the option of defaulting on your bonds without consequence, don’t issue them under NY law.

dearieme July 31, 2014 at 6:10 pm

Precisely.

Anyway why should anyone pay any attention to the views of a bunch of economists as to what the law of the land is? It’s for the NY courts to decide.

Michael July 31, 2014 at 6:43 pm

Why should a sovereign nation acknowledge the jurisdiction of NY state?

Mike July 31, 2014 at 7:07 pm

It gets them better interest rates to issue them under NY law. If they wanted to do whatever was politically convenient, they could have issued them under Argentine law, but investors would have assumed that meant they planned to stiff creditors. By writing into the contract that NY had jurisdiction, investors could believe the contract would get enforced.

J July 31, 2014 at 7:11 pm

OK so let’s follow this through then. Should a sovereign under NYS law never be allowed to default without being expelled from those capital markets forever? That seems overly restrictive, and NYS would be wise to not make that official policy if it wants to encourage sovereigns to issue under NYS law, and I doubt you guys actually think that that’s good policy. And yet, if any sovereign in default is prohibited from making payments on restructured, exchanged, and future issued debt until it has made the holdouts whole, then that’s effectively what you’ve done. A sovereign defaulter is now shut out of NY forever.

Now maybe you say, no no no this doesn’t prevent all sovereigns from defaulting, this is just about the pari passu clause, in which case I have to ask, does this whole thing really hinge on the fact that the indenture says “pari passu?” So this whole situation would have been solved if the indenture specified “pari passu on future debt but not on holdout debt or if this becomes holdout debt?” Then it just seems incredibly silly to force an entire nation into bankruptcy over such a hairsplitting point, considering that nobody would have thought pari passu would be taken to apply in that way when it was written.

If somebody knows more about the legal details than me, I’d be really curious to hear what you think. But I have to say when I talk to people about this I get a really heavy mood affiliation vibe, and people’s opinions on this are highly correlated with their opinion on Argentina, socialism, the banks, hedge funds, finance, etc.

NathanP July 31, 2014 at 7:28 pm

Definitely with you on the mood affiliation vibe, but it’s hard to ignore the consistently horrific economic polices of Argentina over the course of the last half century for many people not to be in automatic opposition of their case.

Oakchair July 31, 2014 at 9:34 pm

Argentina has one of the highest GDP’s per capita in Latin America. If their economic policies have been so horrific what do we call the rest of Latin Americas policies?

J July 31, 2014 at 9:55 pm

Agreed about Argentina’s bad economic policy (somebody, I forget who, once said that there are four kinds of countries in the world: developed countries, undeveloped countries, Japan, and Argentina). But still, everybody knows Argentina’s history and that ought to be baked into the interest rate on the bonds. So while I understand that it makes us want to say “screw the Argentine gov’t, they keep messing up their public finances and now they’re paying for it!” I think they’re a sovereign that gets to default just like every other sovereign.

derek July 31, 2014 at 10:54 pm

Insane?

NathanP July 31, 2014 at 11:07 pm

@Oakchair: Well it once had THE highest GDP per capita in South America, so what’s your point? Few other Latin American nations have the natural resources, agriculture and large labor force that Argentina has. It’s not controversial to say there has been severe mismanagement in the Argentine government dating back to Perón.

CD July 31, 2014 at 11:23 pm

And it’s *because* of the policy record that lenders should factor in repayment risk in the first place.

Insolvent sovereigns have been doing debt workouts with creditors for a very long time. This is how the world works. This is a ruling that stops a workout from proceeding.

carlospln August 1, 2014 at 1:37 am

wtf is ‘mood affilliation’ & where is it defined?

What you (& others who post here) seem to be invoking is cognitive bias http://en.wikipedia.org/wiki/Cognitive_bias

So why invent something else to describe it when a perfectly good descriptor exists?

dan1111 August 1, 2014 at 5:23 am

@carlospln, search this blog for “mood affiliation”. I think it is different from “cognitive bias”, but maybe that is my mood affiliation and cognitive bias.

Maximum Liberty July 31, 2014 at 7:32 pm

Choice of law, pari passu clauses, and remedial provisions are often signals to the buyer that the seller intends to honor its commitments. If the courts allow sellers to later avoid the effect that sends the signal, then future buyers and sellers generally lose the value of having the signal.

I favor collective action clauses in bonds, partly because they better handle the reality of the possibility of default. These bonds prevented that, and Argentina traded on the signal it was sending in order to get better access to financial markets.

I am hoping someone comes up with a clever way to force the holdouts to the table that does not diminish he signaling value of the form of the bond. The theory I heard is that the pari passu clause times out at some point that is only something like six months away. If so, then maybe Argentina defaults for six months, then comes current with the new bondholders (paying a higher rate during the interim) and never pays the holdouts. If they announced ahead of time that this was their plan, and had some way to show that it was stockpiling the cash to fulfill it, I think the market would accept it.

Max L.

Rusty Synapses July 31, 2014 at 7:56 pm

As I understand it, it’s not the pari passu clause that times out, it’s the clause in the renegotiated debt that says if you voluntarily enter into a better deal with the holdouts, we get that deal (the “ROFU” clause) (which makes settling or paying in full with holdouts REALLY expensive because then all of the bondholders get it. (It sounds like there are at least two ways around that anyway, besides waiting it out (i) take position paying holdouts full amount is not voluntary (since court ruling) or (ii) have different entity (bank association) buy holdouts bonds at full value (or settlement). Also, some of the creditors have already agreed to waive benefit of that clause.

y81 July 31, 2014 at 8:47 pm

I say, let the free market decide. Let there be some jurisdictions that enforce contracts as written, and others that march to the tune of some defunct economists. And let each issuer choose to issue in the jurisdiction that it thinks is its best interest.

Come to think of it, that’s kind of the system we have. I think the problem is that Prof. Cowen and his friends have a system of thought so perfect, it only works if everyone in the world is forced to adopt it; otherwise we get that destructive thing called competition.

J July 31, 2014 at 10:00 pm

I think you have major path dependency problems with a proposal like that. NYC isn’t going anywhere short of a pretty large shock, so you can’t just count on NY state to have good laws/courts in this regard. Similarly California has exclusive access to desirable west coast real estate and “gets” to be one of the most poorly governed states in the Union. Just as it helps to have the Feds come in sometimes to bust up organized crime, sometimes it helps for the federal government to override a state government.

nonzenze July 31, 2014 at 10:37 pm

What if a sovereign is willing to enter into an agreement that says (something to the effect of): “If I default on this debt then I agree to be expelled from the capital markets and never to seek financing from NYS again”?

It’s not an easy to reconcile the right of now-Argentina to enter into contracts versus the rights of future-Argentina to repudiate them.

David Wright August 1, 2014 at 5:36 am

There is really no special NY law being enforced here. The NY court is just enforcing the language in the bond contract. Unlike the vast majority of sovereign bond contracts written today (including the new Argentinian bonds), the original Argentinian bond contracts did not have a collective action clause, i.e. a clause that forces holdouts to accept new terms once a given supermajority of the other creditors do so. That fact means the holdout bonds are just as valid or invalid as the new bonds, so the pari passu clause means that the old and new bonds must either both be paid or neither. That is really precisely what pari passu clauses are there to do: ensure that a debtor cannot choose to pay some creditors and not others. (Based, for example, on whether they are the original purchasers, or vultures who acquired them for only pennies on the dollar. So all the defenders of Argentina who keep pointing out this legally irrelevant but supposedly morally relevant distinction are really highlighting precisely that Argentina is, in fact, trying to get out of pari passu.)

Because today all sovereign bond contracts contain the collective action clause that the old Argentinian bonds are lacking, this dispute has no impact on the viability of NY as a jurisdiction for sovereign bond contracts in the future. This is all just an effect of one-off poor contract writing.

nonzenze July 31, 2014 at 10:33 pm

Right, and because of that previous views, Argentina could not find any lenders under its own terms. They were only able to agree to financing by agreeing that they would be barred by the laws of NY from paying out restructured bonds.

AlanH August 1, 2014 at 12:07 am

J, your description of sovereign lending, what it does or doesn’t allow, seems to have missed the entire innovation which the Rothschilds brought to us hundreds of years ago. Princes routinely defaulted on their debt, and the lender had no recourse. The Rothschilds created the internationalization of sovereign debt. Their methods proved a welcome antidote to the frivolity of princes at unpredictable times. We should not throw away this benefit. It even benefits sensible princes.

Cowboydroid July 31, 2014 at 4:22 pm

So, these so-called economists essentially believe that contracts are wrong and damaging?

The judge simply had to read and uphold the contract. Argentina defaulted because they didn’t want to pay, not because they couldn’t. Allowing a government to violate its own contracts can certainly not be a “good” thing. The court’s ruling asserts that politicians may not ignore contracts at their convenience.

This isn’t going to affect the US or the rest of the world much anyway, since Argentina is isolated from global credit markets. Poor countries suffer the most, as this makes it more difficult for them to access capital since they can’t offer credible legal protection to their creditors.

mulp July 31, 2014 at 7:19 pm

Actually, they can’t pay, is the point. The $100B in debt was settled for $15B ONLY IF ALL DEBT IS PAID AT 15%. Paying one bond at 100% requires the entire $100B to be paid at $100B. A payment toward the $15B was due, but the judge ordered at 100% payment be made first which would convert the partial payment of $15B to become a $100B total payment. No way can Argentine pay the balance on $100B now or in the foreseeable future.

nonzenze July 31, 2014 at 10:38 pm

Then they need to either default on the entire $100B or they need to come to an intermediate /voluntary/ arrangement with all the bondholders.

The point of the contract was that they cannot divide them up like this …

CD July 31, 2014 at 11:26 pm

They *came* to an agreement with the creditors representing over 90% of the bonds. The ruling stops them carrying that agreement out.

nonzenze August 1, 2014 at 12:23 pm

They can carry that agreement out, so long as they honor the original unmodified agreement with the remaining 10%. Those 90% of bondholders have no right to force the agreement on others.

AlanH August 1, 2014 at 12:13 am

They certainly could pay. But more to the point, Argentina has paid, many times over, the amount that they owe. They simply paid it to domestic political favorites rather than their creditors. The 90% were irresponsible to accept a deal both unfair to them and, as they knew, certain to lead to a full payout to the holdouts. The power of the institutions among the 90% could certainly have brought the 10% to heel. The 90% simply didn’t bother to obtain that result at the appropriate time.

Rusty Synapses July 31, 2014 at 4:37 pm

Put me in the camp of “you agreed to NY law because you wanted a better interest rate and people know you’re a deadbeat” – and now you’re whining because that has consequences (which is why you chose it in the first place to attract investors). Go back to issuing bonds under local law, and find a new crop of suckers. Amazingly, I’m sure you will.

The Anti-Gnostic July 31, 2014 at 5:19 pm

And you can always find economists who’ll bend over backwards for you, hang upside down in the sling, not even make you wear a condom…

The Devil's Dictionary July 31, 2014 at 6:33 pm

Absolutely.

Courts do not cause sovereigns to default. Bad governments do.

Roberto S. July 31, 2014 at 7:15 pm

But governments can never be bad if they are spending. Stimulus!

Oakchair July 31, 2014 at 9:43 pm

Argentina currently isn’t in a demand caused economic slump meaning stimulus/spending wont really help (unless that spending goes towards projects with greater economic returns then other projects). Stimulus is only effective in demand caused economic slumps. So come back when you know the basics of what you’re talking about before spewing stupid shit that make you look like an ignorant dolt.

Willitts July 31, 2014 at 10:07 pm

Come back when you know the difference between “than” and “then,” and also wipe the spittle off your chin.

rick July 31, 2014 at 10:44 pm

megalol @ “unless that spending goes towards projects with greater economic returns then other projects” it’s like listening to a five year old trying to regurgitate a Krugman column

The Other Jim July 31, 2014 at 8:09 pm

Exactly this. It’s a no-brainer.

But because it’s Argentina (poor) vs. the US (rich), you will always find chin-stroking elitists who say that, by definition, Argentina must be in the right.

See also, Gaza.

Oakchair July 31, 2014 at 9:50 pm

Argentina is right if you’re from Argentina, because its position on this matter makes people from Argentina better off. On the other hand the hedge fund that brought this case to the courts bought Argentina debt for “pennies” because everyone assumed that Argenintina wouldn’t pay the full amount for the debt. So if you these people made a gamble… I guess gamblers are in the right a lot of the time when they take their cause to court to get what they “perceive” to be their winnings.
In Gaza the number of Israeli citizen deaths are 0 the number of Palestinian citizen deaths are over 800. The number of Israeli hospitals and schools destroyed 0 the number of Palestinian hospitals and schools destroyed is 3. But I guess Israel is in the right to kill hundreds of innocent people and bomb schools and hospitals because…

Willitts July 31, 2014 at 10:08 pm

…they have better aim.

rick July 31, 2014 at 10:49 pm

oh wow i didn’t realize this guy is just word salad crazy

Alistair August 1, 2014 at 12:10 am

…because obviously the inverse of kill ratio determines moral virtue and deontological ethics has nothing to do with it.

Jeez.

andrew' July 31, 2014 at 4:40 pm

It is weirder than people seem to be recognizing. A clause designed to protect creditors against a minority is being used b a minority to screw the majority. That is not to say that flawed laws shouldn’t be enforced but the enforcement seems a bit arbitrary.

Cowboydroid July 31, 2014 at 5:11 pm

The bondholders are the one being screwed by a government that simply wants to steal their money by violating its contract.

But hey, theft is the entire business model of government, so I guess we shouldn’t really be surprised.

j r July 31, 2014 at 5:19 pm

Defaulting on a bond is not theft. That is precisely what makes it a bond. There is a chance of default, which is why the the investor gets a premium.

Ricardo July 31, 2014 at 5:22 pm

If not “theft,” then would you agree with “fraud”?

j r July 31, 2014 at 5:32 pm

Why would I agree with fraud?

The expected value of a bond (ie its price) incorporates the likelihood of default. That is the way bonds work.

Dan Weber July 31, 2014 at 6:06 pm

The expected cost of a bond incorporates the likelihood of having your feet held to the fire by legal entities.

We all regret Argentina’s deliberate decision to subject itself to New York law, yet that is what it did.

Ricardo July 31, 2014 at 6:13 pm

I agree that it isn’t theft, because bonds are non-recourse, and (as you say) this is reflected in the price.

However, if the issuer makes a material omission — e.g., that the issuer has no intention of paying you your principal — then that seems like fraud to me.

For purposes of this discussion, I would say that “had no intention of paying you” or “had every intention of paying you, but knew, or should have known, that funds would not be available to do so” are the same thing, but you might disagree.

j r July 31, 2014 at 6:51 pm

Look, I’m not trying to defend Argentina, but these vulture investors are not even the original purchasers of this debt. You can’t buy up distressed debt and then claim to have been defrauded.

If anyone has been defrauded, it’s the holders of Argentina’s current debt.

mulp July 31, 2014 at 7:28 pm

The lenders failed to do due diligence because they were earning fees selling bonds that were likely to default to customers desperate for higher interest rates because banks were paying very very low interest on completely secured debt. The NY bankers had no reason to be honest with anyone because they weren’t earning fees by lending their own money, they were probably lending your money hidden in your portfolio someplace where your taking an 85% loss was offset by other gains.

andrew' July 31, 2014 at 7:32 pm

I am not even convinced this is the correct interpretation of pari passu. This result is the opposite of the “intent” of the law.

I know their is no literal intent, but the purpose of the law was not to make sure nobody got paid or to enrich shorts.

Argentina wants to treat all creditors equally but the holdouts are using their disagreement as a legal glitch. They may have screwed themselves by paying the holdouts nothing instead of the pro rata payments. But paying them in full would violate park passu.

CD July 31, 2014 at 11:30 pm

+1 jr. People need to learn what bonds are, and do a little reading on the history of sovereign debt.

The Other Jim July 31, 2014 at 8:12 pm

Obviously it’s theft. Default is when you can’t pay.

Theft is when you have many other things you would prefer to do besides pay, so you don’t pay.

nonzenze July 31, 2014 at 10:40 pm

Defaulting on a bond is always possible, but what these bonds explicitly promised is that Argentina would not screw over some bondholders and not others with a restructuring plan.

Rusty Synapses July 31, 2014 at 8:02 pm

I don’t think this is right – the pari passu clause protects the bonds, but it’s not clear in advance that it would be a “minority” or “majority” that is protected. What they really should have in the bonds (which at least some debt deals often have, at least in the very different debt context that I’m familiar with) is a clause that says “the majority of principal (of these bonds) can renegotiate/amend and then everyone is bound” – if they had that, the holdouts would be bound, under NY law. Next time, they can put that in…

Dave Barnes July 31, 2014 at 4:46 pm

I say screw Cristina Fernández de Kirchner. And, not in the literal sense.

Rich Berger July 31, 2014 at 5:06 pm

Where is Jon Gruber’s name? This seems like his cause.

Jan July 31, 2014 at 5:52 pm

Fire Obama!

Dan Lavatan July 31, 2014 at 5:09 pm

The debtor does want to default, otherwise they would have paid their debts. The whole point of not being in default is 100% of creditors need to be paid on time.

Nathan W July 31, 2014 at 6:01 pm

An alternative explanation is that they are unable to make the payments.

mulp July 31, 2014 at 8:32 pm

Paying the hedge fund as the court orders would increase the debt payments due by a factor of six because paying one at 100% invalidates the agreement to settle for 15% and requires all to be paid 100%, ballooning $15B due to $100B due.

Argentina can’t pay the balance of the $100B due so not defaulting on the hedge fund debt was the only way to avoid defaulting on $100B – the default is only on the schedule payment toward the $15B.

AlanH August 1, 2014 at 12:22 am

That is not what the judge said. Had Argentina paid the holdouts under the contract and also paid the 90% under their terms of agreement, the matter would have been over with.

Nathan W July 31, 2014 at 6:01 pm

Seems like a somewhat provocative decision, imo.

Maximum Liberty July 31, 2014 at 6:33 pm

The quoted sentence says, “nobody – not the debtor nor more than 90 percent of creditors ….” Up to 10% of creditors is the strangest definition of “nobody” that I have ever seen.

Perhaps he meant “only nobodies,” in the sense of people who are insufficiently influential. One would think that nobodies are exactly the people whom the rule of law ought to protect against the depredations of the somebodies.

Similarly, if the opinion is only “widely shared” among economists, then presumably there are economists who do not share the opinion. (Otherwise it would be a universal opinion.) So maybe dissenting economists are also nobodies. Marginal Revolutionaries take heed.

Max L.

andrew' July 31, 2014 at 6:59 pm

The 10% may not want the default even though they are forcing it.

If they do it is because they bought larger short positions than their long.

Maximum Liberty July 31, 2014 at 7:16 pm

Maybe, but if so, h should have said, “nobody — neither the debtor nor the creditors.” (As a bonus, this would also fix his unidiomatic use of “not … nor” instead of “neither … nor.”)

Max L.

ladderff July 31, 2014 at 7:22 pm

Max,
Well put.

NathanP July 31, 2014 at 7:11 pm

Would have never guessed Robert Solow would have co-signed this petition.

Bill July 31, 2014 at 7:14 pm

Can anyone identify any letter by economists that ever change the expected of action?

Bill July 31, 2014 at 7:22 pm

course of action

Jon July 31, 2014 at 8:27 pm

The framing that Argentina is being forced to default is false. Argentina is capable of making the bond payment due. They simply do not want to make it.

It is one thing for these economists to decry the effects of default. It is quite another for them to buttress Argentina’s false frame. Shame on them–would they still be doing it if this had been a rightwing government?

mulp July 31, 2014 at 8:36 pm

Paying one bond at 100% requires all bonds to be repaid at 100%, so to say that they can pay $15B means they can pay $100B is not consistent.

Anon. July 31, 2014 at 10:17 pm

Where are you getting the 100b figure from? It’s literally an order of magnitude off (and yes, I include all the repayments including the non-holdouts).

rick July 31, 2014 at 9:37 pm

Someone draw up a Venn diagram of people who think the mean reckless creditors are being irresponsible because Argentina “can’t” pay its debts and the people who thought it was reckless and irresponsible for Congress to bat an eye at raising the debt ceiling to infinity because hey we can always print money, right?

AlanH August 1, 2014 at 12:29 am

Not to mention that the same economists generally seem to think the “financial repression” of low and middle income savers is fine, so long as short-term money is cheap for the banks….so that they can lend it long, take a cut, and sell the loans.

Rich Berger July 31, 2014 at 9:42 pm

Let’s suppose that the universities/organizations that employ these economists decide to unilaterally amend their contracts to reduce their salaries. No problemo, eh?

Willitts August 1, 2014 at 3:33 am

Hmmm, an enticing proposition, but not quite apt. Universities answer to a sovereign, and Argentina just bitches about how rich countries keep infringe their sovereignty.

CMOT August 1, 2014 at 12:01 am

You only think this is about Argentina. It’s actually about Puerto Rico, and its too bad you’ll have already forgotten that by this time next week. When we’ll have to do the whole thing over again ….

Willitts August 1, 2014 at 3:35 am

Puerto Rico answers to a sovereign. Argentina does not, except of course when it willfully surrenders itself to the State of New York.

Massot Enrique August 1, 2014 at 3:46 am

Many here repeat the cliche that Argentina is a rogue country that does not like to pay its debts. However, since its catastrophic default of 2001-2002, the country successfully negotiated a debt reduction with 92.4 per cent of its creditors and has regularly paid them ever since. The country paid off its debt with the IMF in 2006. More recently, the country renegotiated its debt with the Paris Club, and reached a compensation agreement with expropriated Repsol.
Since Nestor Kirchner assumed the presidency in 2003, the country negotiated tough, based on the principle “let us live ’cause the dead can’t pay.” In the following years, the country grew at unprecedented levels and improved the standard of living of the poorest. Today, the foreign debt represents about 40 per cent of the GDP. At the end of 2001, it was 166 per cent. Argentina grows, the children of the poor go to school, consumption and local production improves, and the country pays its dues.
The holdouts, aptly called vultures, were the only remaining unresolved issue. Argentina fought in the courts, and when it lost, said it would pay–in agreement with its laws and without jeopardizing its domestic economy. Again, the dead can’t pay!
However, the ruling of Judge Thomas Griesa, in its stubborn haste to help the vultures get 100 per cent of the face value of their bonds while blocking payment to the exchange bondholders, has created a situation where all lose. Argentina can’t just pay the vultures without risking lawsuits from the 92.4 per cent of creditors who would rightfully claim equal treatment, which would then create a real default situation.
In any event,reason will need to prevail. Griesa’s ruling has too many downsides for the world’s financial system, and a way around it needs to be found. The positive outcomes of the whole process are, the vultures’ game is better known to the public around the world; and the N.Y. judiciary has also become a celebrity. Future debt restructuring process will take that reality into account. And don’t forget the BRICS and their $100-billion development bank that has the potential to end the monopoly of power in place since the end of WW2.

Michael G. Heller August 1, 2014 at 4:41 am

I’m sorry, Massot, hard as it might be to accept, Argentina is not a poster child, it is a basket case. This week it’s easy to dress-up Argentina’s umpteenth debt crisis default in technical niceties which make it look as though Argentina has been placed in an impossible position. That is hogwash. Marxist-Keynesian pig-headed nationalist isolationism has prevented Argentina from solving the ‘vulture’ problem in the past 5-12 years.

The reality is that Argentina has repeatedly placed itself in the position of bancarrota (bankruptcy) every half-decade since the mid-20th century.

What Latin America needs is a fresh centre-right regional leadership, smarter than previous ones, more aware of the institutional reform imperative. Of course there should be no return to the hard-right leaderships of yesteryear which, with few exceptions (e.g. the Chicago Boys), were largely incompetent bureaucratic-authoritarian governments which (please remember) arose directly in reaction and response to the very real threat posed by marxist and maoist movements rampant throughout the region in the 1970s. It is precisely the idiocy of the left in power now which could provoke extreme reactions again in the future.

I always quote Argentina’s 19th century liberal intellectual and statesman, Juan Bautista Alberdi, who even then was aware of the persistent attitude and interest which blocked all long-run paths to prosperity. Alberdi observed that the causes of the economic crisis of 1876 seemed to be the same as those of the crises which preceded it at intervals of about ten years since independence, in 1840, 1852, 1860, 1865 and 1870. Although all were banking and debt crises, Alberdi argued they were “not economic but rather political and social”. Argentina seemed not to learn from its errors. Its people lacked the classical liberal ethics of work, thrift, saving and commerce without which emerging economies cannot sustain progress. Argentines did not realise that lasting wealth creation also meant sacrifices. Borrowed money was wildly misused. Credit, especially when it originated from overseas, rapidly disappeared on luxuries and political patronage. Periodic prosperity was illusory.

Each crisis, wrote Alberdi, was “sudden generalised impoverishment produced by the frenzy of sudden enrichment”. Misuse of credit was “the abuse of a noble effort” and reflected all that was wrong with Argentine political and economic life. This was a modern view of crises. Alberdi wrote: “It is well known that all crises explode at end of a period of prosperity. That is not the reality, but rather the way it appears to be… What was taken for prosperity was profligacy, the squandering of capital investments in bad businesses and vain possessions.”

You don’t need to be a genius like Alberdi to recognise the pattern today. Argentina returned to crisis after 50 years of stable liberal-economy growth. Multi-class political alliances, social mobility, and a decade of reformist technocracy and financial discipline during the ‘Concordancia’ in the 1930s ensured the benefits of Argentina’s globalisation could be felt until as late as WW2, in spite of the world depression, and in spite of domestic political troubles and a growing antipathy towards growth-promoting exporters and foreign business interests. After 1945, however, a populism-crisis-correction pattern set in. With the election of Juan Peron as president, Argentina began its ‘long decline’.

The Kirchners and the clowns and scoundrels of the ‘Mercosur Left’ are descendants of Peron and all subsequent Latin American socialisms … bar one … the Chilean Socialists. Their great achievement, which unfortunately the present government in Chile may not now be so capable of repeating, was, like Tony Blair’s new socialists in the UK, to explicitly adopt and cultivate the obvious virtues and successes of Thatcher-era neoliberalism. Notwithstanding the occasional short-lived neoliberal rhetorical flourishes, for example in Mexico, the Chilean success story remains unique in Latin America.

When I was a university teacher and economic adviser to the presidential candidate José Octavio Bordón in Argentina in the mid-1990s I tried in vain to explain to people on the left that East Asia’s industrial activism, which they then worshiped like a secular god, could not be replicated in Argentina because the institutional dysfunctions and inefficiencies were too great. The way forward was the route proposed by the centre-right, which itself was impossibly constrained by its unwillingness or inability to do root-and-branch institutional reform. It struck me then, as before and since, that the primary task was ideological.

Somehow or another, beginning in elementary school, intelligent Latin Americans, the intelligentsia and litterateurs (there are more of them in Latin America than perhaps any other region of the world), must decouple Latin America from its marriage to leftwing ideology.

There is an alternative, it should be said. The ‘classical liberal’ smart thought-leaders of late-19th century Argentina were such a modern, promising, lively, and adaptive generation compared with their twentieth and twenty-first century leftwing counterparts. Latin America’s emergence from red-faced embarrassment in the shadows will depend on picking up again from where those inspiring 19th century ideologists like Alberdi left off. Argentine’s should learn to be proud of Alberdi, who exposed all the double standards of Argentina’s habit of dramatic debt posturing.

Moreno Klaus August 1, 2014 at 7:09 am

Countries like Argentina and Brazil have a much higher level of inequality than US. (An imoral level of inequality I would say). Therefore, it is not difficult for a populist of any kind to gain power. They will spend, spend,spend until the country gets bust. The voltures, know that of course and just try to extract whatever resources they can…. To say that “change” will come by electing a right-wing government instead of a left-wing government sounds a bit…naive to say the least….

Michael G. Heller August 1, 2014 at 8:07 am

Whatever you say Tyler.

Steven Kopits August 1, 2014 at 11:03 am

“…and reached a compensation agreement with expropriated Repsol…”

The Argentine government just stole a company not two years ago! And you’re extoling them as some model of virtue?

Go Kings, Go! August 1, 2014 at 10:32 pm

And they can’t finish against Manuel Neuer

Mark August 1, 2014 at 4:49 pm

The main reason debt is 40% of GDP is no one will lend Argentina any money. It’s hardly a sign of their self- discipline.

Axa August 4, 2014 at 4:05 am

It already happened the same thing to Peru, still waiting for the downsides for the world’s financial system.

Thomas Phelan August 1, 2014 at 7:17 am

I am an American who spent 5-years in Argentina building vineyards.

However, putting that aside I think a story about economists says it best.

There were three luminary economists climbing a formidable mountain when the 3rd day was beset by a horrific
snow storm. The three hunkered down and the next morning took out their map and studied it carefully. After
some time one of the economists said: “Okay, according our map .. we are on the mountain over there.”

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Cross country moving which is also known as interstate moving
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Ricardo August 1, 2014 at 8:19 am

Bangkok taxis are clearly affected by mood affiliation, which is why there is a great little noodle stand just off the main road by the boxing arena. Ask for the special Mongolian menu but then reject it and order the borsht.

Yancey Ward August 1, 2014 at 12:40 pm

A novel definition of “force”.

Eric Rasmusen August 1, 2014 at 3:02 pm

It’s odd to see Prof. Cowen saying that nations and bigtime investors are so irrational that if they write “pari passu” into a contract it should be ignored, because they’ll both be worse off. If you think that, I guess you think the judges who decide these cases should just throw out the entire contract and do what they think is fair. That would kill investment in the Third World completely, instead of just partly.

Just Curious August 1, 2014 at 4:19 pm

Here’s a quote from the economists’ letter:

“The plaintiffs in the case purchased Argentine bonds on the secondary market after default, often for less than 20 cents on the dollar. While these actors could have accepted the restructuring and still made a very large profit, they instead have fought a decade-long legal battle, seeking exorbitant profits in excess of 1,000 percent and creating financial uncertainty along the way.”

If you buy bonds at 20 cents on the dollar and seek to receive 100 cents on the dollar, I would think that your maximum profit potential would be a 400 percent return. Where does the “1,000 percent” profit come from?

Go Kings, Go! August 1, 2014 at 10:38 pm

From their model. Why do you hate science?

(also, why aren’t their legal costs capitalized in that calc?)

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Post- exchange interest.

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