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Between a rock and a hard place
Andrés Gaudin
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In a controversial ruling, US justice favors vulture funds and pushes Argentina to the edge of a new default.

Argentina wants to pay its creditors, but an elderly district court judge from the New York metropolitan area is preventing it from doing so. With the same timeliness it has been doing so for 10 years, in June Argentina deposited in the Bank of New York Mellon the US$ 539 million it owed citizens all around the world who purchased bonds from their external debt, but the judge ordered the bank to retain these funds and not transfer them into the accounts of their real owners. Judge Thomas Griesa, still active despite being 84 years old, was backed by the U.S. Supreme Court, and both decided that the South American country is in default, meaning it is incapable of facing its external commitments.

According to the International Monetary Fund (IMF), Griesa and the U.S. Supreme Court decided to put “at risk all of the debt restructuring plans throughout the world.” This could be the first time in history that a country wants to pay its debts but cannot do so because the justice system of another country does not allow it to. Eugenio Zaffaroni, a professor and a member of Argentina’s Supreme Court, spoke ruthlessly of Griesa and told the Argentine newspaper Tiempo that “he seems to be an omnipotent figure when in reality he is a poor judge of a district court, with a blind legal vision.”

This story began in December 2001. After a decade of wild neoliberalism, Argentina exploded both politically and economically. Following a week that left about thirty people dead on the streets of Buenos Aires and that saw five presidents in 10 days, the State declared itself in default and, along with the loss of external credit, lost complete credibility. Finally, in 2003, Néstor Kirchner (2003-2007) became president and in 2004 called together all the global creditors to join a debt restructuring plan. Argentina committed to paying all of those debt bondholders who agreed to receive only 25 percent of the amount owed to them. The 92.4 percent of the creditors accepted. Part of the remaining 7.6 percent of bonds that did not enter the restructuring plan was purchased in 2008 by five of the companies known as “vulture funds.” They purchased the bonds at less than 30 percent of their value and, immediately, demanded 100 percent of the value plus interest.

Unpayable amount
Judge Griesa ruled in favor of the vulture funds and determined they deserve to recover their money. The U.S. Supreme Court rejected Argentina’s appeal to review Griesa’s decision and supported the ruling of the Manhattan judge. All in all, Argentina would have to pay the vulture funds $1.3 billion that would automatically become $15 billion because that payment must be made to all of the 7.6 percent of bondholders not involved in the restructuring plan. That amount is unpayable; it represents 52 percent of the country’s total reserves and equals 20 percent of its exports. But that’s not all. If Argentina pays those $1.3 billion, a clause within the agreement signed with the 92.4 percent of bondholders who agreed to restructure would be triggered. The clause establishes that these bondholders have the right to be compensated if any better offer is given to the 7.6 percent who did not join in the 2004 agreement. In that case, the debt would amount to $500 billion, almost 17 time Argentina’s international reserves. Argentina would not be able to pay and would be bankrupt.

Argentina’s Minister of Economy, Axel Kiciloff, repeats every day that “we want to pay,” and accuses Judge Griesa and the U.S. Supreme Court of being part of this trial and acting in “complete bad faith.” He insists that Argentina “is not willing to do absolutely everything and pay under any condition, but [is willing to pay] under the same principles that guided the 2004 restructuring, that is with the principle of growing to be able to pay, because the dead don’t pay.”

For Kiciloff, Griesa’s ruling is unprecedented and unbelievable, “unprecedented because the judge attempts to block a debtor from complying with its obligations and unbelievable because Griesa rules on instruments whose validity were never objected by the U.S. Securities Exchange Commission and because what he is freezing are funds that Argentina no longer owns but are [owned by] third parties.”

Obama’s inaction
During this entire process, Argentina has received the support of institutions, the media and personalities from around the world, from the IMF, the Organization of American States, the Union of South American Nations, the Economic Commission for Latin America and the Caribbean, the United Nations Conference on Trade and Development as well as The Financial Times, The Guardian and The New York Times, even Joseph Stiglitz (Nobel Prize for Economics 2001), Anne Krueger (former IMF Managing Director) and Mark Weisbrot (Co-Director of the Center for Economic and Policy Research and President of Just Foreign Policy in Washington).

Perhaps Weisbrot best summarized everyone’s opinion: “In the United States, and most other countries, there are bankruptcy laws designed to allow for companies and individuals facing unpayable debt to make a new start. There is no such legal mechanism for countries, so these restructuring agreements are an important way of resolving problems of unpayable sovereign debt. Now, if we continue on this path draw by this judge, his ruling will have a destabilizing effect on international financial markets,” he said.

However, the strongest support came from the British newspaper The Guardian. There, Greg Palast, an investigator specialized in vulture funds, accused US President Barack Obama of “not doing what he should.” As he explained, Obama can use the Constitution’s “Separation of Powers Clause”, allowing a president to tell a judge, without violating republican principles that he is interfering with foreign policy.

Palast notes that in 2003 former US President George W. Bush (2001-2008) invoked this clause to block actions against the Republic of the Congo by the same vulture fund that attacks Argentina today.

“Under the principle known as ‘comity’, Obama only need inform US federal judge Thomas Griesa that [his ruling on Argentina] interferes with the president´s sole authority to conduct foreign policy,” pointed Palast. Based on this, the Argentine government maintained that “Obama is directly responsible for the world financial imbalance caused by Griesa’s ruling.” —
Latinamerica Press.


US judge prevents Argentina pay their debt to bondholders. (Photo:
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