Being a creditor is a thankless task. People want your money but hate to pay you back. The worst offenders are governments, whose leaders constantly promise their peoples a free lunch, dinner, and more. When foreign nations cheat creditors, they put their own peoples at risk.
Argentina is a typical offender. One of the world's richest nations at the end of World War II, the South American country embraced political authoritarianism and economic populism. The result has been disaster. In the most recent Economic Freedom of the World rating Argentina came in at 137 of the 152 nations rated. Its economic performance has suffered accordingly.
The country’s worst measure is rule of law. Which is reflected in its treatment of international creditors—and steadfast resistance to U.S. court rulings ordering Buenos Aires to pay its debts.
In 2001 Argentina defaulted on nearly $100 billion in debt. The Argentine people essentially had a wild party and woke up with a hangover. Naturally, their first reaction was to stiff the fools who had extended credit. Owners of roughly 93 percent of the debt gave in and restructured their paper, accepting huge write-offs.
But a few creditors, including NML Capital and Aurelius Capital Management, refused to concede. (Some bought deeply discounted debt from owners who had given up any hope of being paid back.) These creditors reasonably argued that Argentina should abide by its contract, which required it to obey U.S. court rulings and treat bondholders equally.
Naturally, Argentina’s government cried foul, complaining about the violation to its sovereignty—after it enthusiastically sought (and spent!) the foreigners’ money. The very politicians who wrecked the Argentine economy called the hedge funds “vultures”; in 2005 the Argentine parliament even voted against paying the defaulted bonds.
Although Argentine politicians can dispense with the rule of law in their home country, they cannot so easily ignore legal rules overseas. With the bonds issued under New York law, disgruntled creditors won more than 100 court judgments ordering Buenos Aires to pay up.
NML Capital alone has won decisions for more than $1.6 billion and has pursued Argentine assets around the world, including the ARA Libertad, a three-masted schooner used to train naval cadets, which visited Ghana last year. Buenos Aires was able to use the Law of the Sea Treaty to free the vessel but Argentina knows that it faces the embarrassing threat of asset seizures around the globe.
Perhaps most significant judicial ruling was last year’s federal district court judgment, NML Capital Ltd. v. Republic of Argentina in New York—upheld on appeal in February—which prohibits Argentina from paying holders of restructured debt without paying off those holding original bonds. In August the Argentine government unveiled a plan for exchanging restructured bonds which Judge Thomas Griese called “an apparent attempt to evade” his orders.
Buenos Aires sought a rehearing before the Circuit Court as well as review by the Supreme Court. But in early October the high court refused to grant of a writ of certiorari to take the case. Last week NML and Aurelius filed a motion in the appellate court requesting that it lift its stay of Judge Griese’s ruling, allowing enforcement against Argentina.
The International Monetary Fund, which for decades has subsidized spendthrift governments, considered filing a legal brief before the Supreme Court on behalf of Argentina. However, the organization, formally dedicated to strengthening international markets, was roundly criticized for taking the position that irresponsible states should be able to more easily shed their debts and backed down under criticism.
The Fund’s vote of confidence was particularly odd given the organization’s own experience with Buenos Aires. Argentina has rejected IMF oversight of its finances since 2006. Earlier this year the Fund even censured Buenos Aires for not providing accurate economic data, including growth and inflation rates. The Fund obviously has no influence, but at least the courts can hold the Argentine government to its legal promises.
Particularly misguided is support for Buenos Aires from those purporting to speak on behalf of the poor at home and abroad. For instance, after the Supreme Court said no to review the Jubilee USA Network issued a critical press release. “The faith community is saddened by the high court’s decision” declared Executive Director Eric LeCompte: “We’re praying upon another review the U.S. Supreme Court will take it.” The organization even maintains a website on the case. Said LeCompte: “These hedge funds may have mountains of money, but they are morally bankrupt.”
Merely having “mountains of money” does not make one “morally bankrupt,” of course. And the only reason NML and others bought defaulted debt in pursuit of profit is because Buenos Aires defaulted on its legal—and moral—obligations. No one forced the Argentine government to borrow money. No one forced the Argentine government to waste the money that it borrowed. And no one forced the Argentine government to default.
Even now Argentina is not a poor country. Moreover, it is poorer than it should be because of government policy. Decades of irresponsible “populist” policies, designed to win votes rather than uplift the poor, by famed dictator Juan Peron and those following in his name have ruined the economy. Argentina’s economic problems originate in government offices in Buenos Aires, not hedge fund offices in New York.
Indeed, politicians in Buenos Aires have consistently waged war against the rule of law. They are the true vultures. Although Juan Peron is long gone, his disrespect for legal procedure, government restraint, and constitutional rule lives on under the Peronista democracy. This makes the position of the Jubilee USA Network and similar groups particularly perverse. One can argue about proper standards for international debt restructuring. But the rule of law is the best and, indeed, usually the only effective protection for the poor.
Those who are wealthy and influential do well in any system, including President Cristina Fernandez de Kirchner’s Argentina. Redistributionist economic policies don’t mean no one prospers. Rather, such policies ensure that only the well-connected prosper. Connected to Kirchner, her party, and other political allies. Not to human rights and anti-poverty groups, whether Jubilee USA or other.
Buenos Aires' lawlessness puts everyone else at risk. Six years ago the Kirchner government forced private retirement funds to redirect more investment inside Argentina—investment made riskier because of the government's irresponsible policies. A year later Buenos Aires confiscated nearly $30 billion in private retirement assets to raise cash. After all, because of its previous default the government could not easily raise money in private capital markets.
The only consistent protection against rapacious politicians is the rule of law. In most Third World countries governments can loot and plunder without limit. Constitutional and legal rules set Western industrialized nations apart. Obviously the legal process doesn't always work well or fairly in the latter, and greedy politicians still find innumerable ways to reward the powerful and connected. But as Judge Griese proved in ruling for private creditors, with independent courts vulture politicians don't always win.
The New York legal battle is esoteric—but matters for all of us. Enforcing legal rules is important for Americans. It is even more important for those living in poorer nations. Despite so much amiss in Washington, the Argentine debt case reminds us that the rule of law remains alive in the U.S.