US District Court Judge Puts Argentina On Brink Of Credit Default

A US District Court Judge in New York has ordered Argentina to pay more than $1.3billion to vulture funds that held out and refused to do a deal when Argentina restructured its debt in 2001. She also decided that Argentina should immediately pay the whole amount into an escrow fund pending any appeal, and that Argentina isn’t allowed to pay any of its other bond holders until it does so – which means it now faces default on around $3.billion in payments to creditors who did take part in the restructing – and that in turn would mean default on over $20 billion in national debt.

The Argentinian president has previously said she’ll not pay a single dollar to the vultures and I’ve some sympathy with that – after all, they should’ve gone along with the restructuring instead of being predatory capitalist douchebags. But what the hell is with the escow part of the judge’s decision? I mean, what’s Argentina going to do – move address in the middle of the night and not tell anyone?

You know you’re an Empire when a single local judge can so severely affect the lives of millions in another country a whole continent away. You know you’re a douchebag Empire when judges can place the selfishness of a few corporate robbers ahead of the interests of 42 million people who happen not to be American.

25 comments to US District Court Judge Puts Argentina On Brink Of Credit Default

  • chalo

    Those greedy bastards are morons if they think Argentina isn’t willing to tell them to go fuck themselves.

    Keep your commitments to the ones who keep their commitments to you. It’s a principle that works on any level. Those who cooperated already should be repaid. Those who told Argentina to go fuck themselves, well….

  • Well, whether you call them “vulture funds” or “kindly lenders,” the fact is that they lent money which Argentina agreed to repay. Argentina declined to repay, whether due to lack of funds or not, and the lender said they wanted their money. If you lent $100 to your neighbor and wanted it back even though he refused to pay it, would that make you evil? Is someone evil merely because they lend money at all, or are they evil only if they expect the debtor to repay the loan?

    Is a lender obligated to accept less than the full amount when the borrower falls on hard times? Does he become evil if he declines to do so? Why do the borrower’s problems get visited on the lender? If the borrower is unable to pay you go to court and the judge decides what is to be done.

    chalo: what committment did the lender renege on that should justify Argentina’s refusal to repay the loan? It agreed to lend them money and then lent them the money. Then did what? What were they supposed to do after lending the money that they did not do? Are you a “greedy bastard” for wanting to be repaid the full amount you lent?

    I can see your second point, the ones that agreed to take less should get what they agreed to and the ones that held out for full payment took their chances and if there is no money left, then that’s their tough luck. But what the judge is saying is that the debt is not erased. It may never be paid, and that is the lender’s tough luck, but I haven’t seen any real reason given as to why it should be erased. Payment is a different matter, of course.

    I really don’t get today’s liberal indiscriminate hatred of business. At another venue a writer was talking about “obscene profits,” and when I pointed out that the company was only operating at a 3.4% profit margin the response was that he didn’t care about margins, they were making billions in profit and it was obscene. I guess it would be nice if we had nothing but small “mom and pop” operations which operated on a personal basis, knew all their customers personally and did not charge for products or services and forgave loans when they knew the customer could not pay, but I don’t think our population level would support that.

    • It’s simple enough, Jayhawk – my basic unit of denomination is the person rather than the dollar. Dollars don’t have lives, or children, or any core place in a utilitarian moral calculus – dollars are nothing other than an abacus for certain purposes. Therefore my interest is in the lives of 42 million people – many of whom will have had no idea what was done in their name and no chance to agree or disagree even if they did know. Forty two million people who will suffer recession, hardship, poverty, starvation, civil unrest and maybe even death trump $1.3 billion dollars which cannot suffer any of those things every time in my calculus.

      I assume, following your logic that puts the dollar in moral primacy, that you opposed both the banker’s bailout and the motor industry’s, that both should have been allowed to go bankrupt. That you also oppose any bailout of Greece, Portugal, Spain and Italy and are just fine with the human cost of that. That the consequent worldwide recession following the collapse of the eurozone and the worldwide suffering it will cause – including possibly to yourself, will also be fine because dollar debts must be paid no matter what the human cost.

      I wonder whether you’ll extend your own logic to its conclusion though, and demand that your children repay to you every cent invested in them during their childhoods, with interest, once they become adults. They too will have had no say and no real concept of what was done in their names but debts must be paid…

      • I get it, people are more valuable than corporations. No question about that. I have no argument with that, but it begs the question. Why is it evil to expect money that was loaned to be repaid?

        I don’t put the dollar in moral primacy, I put honest exchange, a mutual agreement between honest parties. I will do A in return for you doing B. If do A and you decide not to do B, then why I am the evil party, even though I did my part and you did not do your part? How does that make any sense? Because you are a person and my dollars don’t count because I am only a business?

        The lender did not cause the travails that befell Argentina, the Agentinian government did that. Or God did that, with natural disasters. The lender did not cause the inability to repay, so why should the lender decide that he should not be repaid, and why is the lender the evil party? Why isn’t the government that squandered the money the evil party? Why isn’t the God who caused the natural disasters the evil party?

        If we don’t keep the agreements that we make in business, we cannot do business. We can never do anything other than hand-to-hand trades because we can never trust the other party to do what he says he will do.

        I have no real problem with government bailouts of industries when those bailouts are made in the form of loans and the loans are expected to be repaid or when they are in exchange for government ownership in the companies and that ownership can be sold for profit, which is how the bailouts were made. Don’t read my mind Steve, or put words in my mouth.

        Why should my children not repay what I spent raising them? Simple, because there was never any agreement that they should do so. I spent that money with no committment from them that they would do anything. It’s not about obligation, moral or otherwise, it’s simply about agreements being made and kept. If we don’t keep agreements that we make we have no economy, we have chaos.

        The people that lent money to Argentina did so with an agreement from Argentina that it would repay the money. And it was not lent to the people of Argentina, it was lent to the government of Argentina. If the people of Argentina don’t want to give the money to their government, if they don’t want to be punished for the actions taken by their government, well, that is their affair. They should come up with a method to not give their money to their government.

        • JustPlainDave

          There’s no inherent evil in expecting money loaned to be repaid. There is inherent evil in using power asymmetry to compel money to be repaid in ways that cause undue hardship and suffering, particularly when entirely reasonable alternatives exist. There is also inherent evil in members of a financial system such as this prizing their individual transactions to such an extent that they put the good functioning and long-term viability of the system at risk for their own gain (the “fuck you, I got mine” school of thought that has come to be so prevalent amongst the financial technical class). It is particularly contemptible that they have conned others into letting them “borrow” power that isn’t rightfully their own in an attempt to compel all of this.

          You are explicitly setting up a situation where the guy with all the money gets all the power. To be successful over the long term, loan relationships should not be like this. In order for the market to be efficient (i.e., for a given lender and debtor to find one another easily and for the price points on loans to be set appropriately) there has to be a balancing of risk between the lender and the debtor – their relative power cannot be too out of whack.

          I’m very much in agreement with the notion that we need to keep our agreements in business – this has in fact underwritten my family’s success in business for as many generations as we have been in this country. That said: a) when we’re talking about sovereign finance it isn’t purely business – and the players all know this going in and, if even remotely intelligent, allow for it, and b) we have an extensive set of institutions for managing the fact that sometimes folks in business do not keep their agreements. Not least among these is the institution of bankruptcy – this explicitly accepts that sometimes circumstances do get so bad that debts don’t get repaid and that in order for the larger financial system to function effectively, sometimes the lender has to eat a loss. We don’t have comparable institutions in international statecraft because there is no higher form of coercive authority – states are sovereign and their actions are not bound by external forces beyond what other states are willing to do to bind them.

          In the absence of an externally backed institution for state bankruptcy, all the players know that if things get bad their options fundamentally boil down to being flexible on the terms of repayment of debt instruments like this – that’s the smart, appropriate play that is most “win-win” for the transaction and for the system as a whole. These vulture funds explicitly turn their back on this and externalize the risk and cost onto everyone else they can so they can get the most Benjamins for themselves. The heck with that. If it was the suffering of my people they were stacking up against their desire for a bigger place in the Hamptons, I would have absolutely no qualms about shooting them repeatedly in the head for Queen and country.

    • quax

      Investing in bonds means risking default in turn for a higher rate of return. Argentina already defaulted, it can default again.

      These funds are gambling high, I expect them to lose in the end.

      • Good point. Default is always an option. In this case they were, in response to the lender’s plea for payment, asking the court to set the agreement aside. My argument is that there is no reasonable case to be made why lender should not seek legal action for payment, nor why the court should not uphold the obligation to keep the agreement. The court said “an agrement was made and it should be kept,” as it was obliged to do.

        Let Argentina default, and then let the lender try to enforce the judgement. Good luck with that. If the lender tries to use force I am most certainly not going to support that. I will, in fact speak out vigorously against it.

        People keep taking my arguement beyond that which I make and talking about moral postitons, “power asymmetry to compel money to be repaid” and all sorts of things. My position is much more simple than that. An agreement was made, and if one side kept it so should the other. Period, end of argument.

        If the failure is due to death or other physical impossibility, then so be it, but there is no reason for the party who kept the agreement to voluntarily agree to be short changed in the deal, nor should any court decide that such a thing should happen as a matter of law.

        If the law begins letting people out of agreements for no other reason than that keeping the agreement would cause hardhship then it would soon become impossible to make agreements.

        • JustPlainDave

          As I understand things, this is not an instance of one side keeping their agreement and the other not. The lender “side” that made the agreement is no longer a party to the transaction. They sold the debt to the vulture funds at a heavily discounted price and the vultures are trying to redeem the debt at as high a price they can through the use of power tactics.

          If it’s an absolute that debts should be fully repaid according to the terms of the original loan, why then did they pay a discounted price for the debt when Argentina and the original lender were under pressure? Clearly they accept the notion that repayment is flexible – they were willing to take advantage of that flexibility as purchaser – that they are unwilling to accept flexibility now speaks not of their moral fortitude, but rather of their perception that they have the upper hand.

          • I’m not sure that really changes my position much if at all. Argentina received money in return for an agreement to return the money. They benefited from that money and now want to be excused from repayment. If they want to default and suffer the consequences of that default, then by all means let them do so. I will applaud them and help them recover. But let them pay the price of their action.

            They want to have the debt set aside so that they can default without having to have the consequences of that default. Why? Because it would cause hardship? Well, that’s their problem, not the lender’s.

            They want to have their cake and eat it too. They want to be debt free without having to either pay the debt or suffer the problems that go with being a defaulter. Why should a court, or a lender, give them that present?

            They’ve defaulted before and recovered, let them do it again. They keep doing it an maybe no one will be willing to lend them money again, but they might be better off for that in the long run.

          • JustPlainDave

            @Jayhawk, what makes you think they are not suffering the problems that go with being a defaulter? They are paying significantly higher prices for new debt and are living with the unpleasant reality of having the IMF in their business. That’s the price of defaulting and they have paid it. The vultures are trying to do an end run around that for their own narrow benefit.

            You say that they have defaulted and recovered and that they should do it again. My understanding is that this debt dates from exactly the same period as that they defaulted on. Why should we say that these debt holders should be treated any differently from the others? Because they have the ear of a pliant court of a powerful nation? Me, I’m gonna go with being pretty nervous about the unintended consequences of that one.

    • chalo

      The commitment is to operate in good faith. Good faith as a lender means acknowledging that you are taking a risk (which is what entitles you to collect interest), and that if your borrower goes bankrupt, you’ll settle for what you can recover. If you don’t accept the risk, don’t lend. If you assessed the risk incorrectly, and the borrower wasn’t trying to mislead you, that’s your problem.

      There’s a reason some religions ban usury. It’s not honest work, and it leads to needless conflicts.

      If I lent $100 to a neighbor, I wouldn’t be charging interest– it’s not in my nature. And I surely wouldn’t lend out a hundred bucks I could not afford to let go for good.

      I work for a business that conforms to your description of a hypothetical mom ‘n pop shop. Hardly a day goes by when I don’t do something for someone who needs it without charging him or her anything. When someone forgets his wallet or is otherwise unable to make good on work already performed, we let him make it up later.

      It’s called goodwill, and it has been a very sound business strategy for our service shop. I think more businesses should try it. Whether it would work out for them is probably a measure of whether they are in the business of honest work.

      • Lots of problems with that argument. What is “good faith” about asking a court to declare that you do not owe the money that you agreed to repay? Bankruptcy would require nonpayment, but Argentina did not declare bankruptcy. If they had, the court would have made decisions on reduced payments. Risk is about borrower skipping out on payment and inability to collect, but not about the lender choosing not to accept payment.

        What entitles you to collect interest is to obtain a return on your investment, because a loan is an investment of your money. Higher interest is about risk. I don’t know what the interest rate is for the Argentina loans, but even the higher interest is not about the voluntarily changing loans into gifts.

        • JustPlainDave

          Who does Argentina declare bankruptcy to? What’s the institution with jurisdiction?

          • The fact that there is no one for them to declare to does not alter the fact that they did not do so.

          • JustPlainDave

            @Jayhawk They did not do so because there’s no equivalent institution. Bankruptcy is a civil institution, backed by national governments, within financial systems for the remedy of non-state debt. States don’t play by those rules. Such is inherent in sovereignty. Saying they didn’t declare bankruptcy is like saying they didn’t declare “kumquats”.

          • The point is there was no mechanism to discharge the debt. The statement was in response to someone saying that a lender is required to accept less when bankruptcy occurs, and I pointed out that such a process had not occurred. The fact that it was not possible for it to occur does no invalidate my statement that it did not occur, nor does it validate the point I was refuting, which was that there was a mechanism requiring acceptance of reduced payment.

            Any more hairs you want to split?

          • JustPlainDave

            You come out with statements like “The fact that it was not possible for it to occur does no invalidate my statement that it did not occur, nor does it validate the point I was refuting” and I’m the guy splitting hairs? I know that probably sounded clearer from where you’re sitting, but from where I’m sitting that sounds like some pretty fine hair splitting.

            I’m frankly having a tough time figuring out what you think you’re refuting here. Every mention of bankruptcy other than your own has specifically driven at the point that the institution doesn’t exist for states, which means we’re in apparent agreement that the process didn’t occur and that there was no formal mechanism requiring acceptance of reduced repayment. My point, and I think at least some others would agree with this, is that the absence of such a mechanism / institution / legal framework causes challenges in that there is no objective, externally defined standard or authority to determine when it becomes unreasonable for a debtholder to continue to attempt to collect on a debt. In these situations, near as I can tell, what we are left with is state sovereignty and customary practice, which frankly seem to run quite contrary to what these vulture funds are trying to do.

    • JustPlainDave

      It seems to me that the challenge here derives from the fact that there is no process equivalent to bankruptcy where a debt can be deemed discharged, even if not repaid in full. These vulture funds have taken advantage of that ambiguity to gamble that they can get a pliant external force to collect on their behalf.

      Me, I think the externalization of these costs should be rejected and these guys told that if they want to pressure a foreign sovereign nation they should be prepared to act as states do – with the implements of statecraft. The Argentines are clearly nicer than I am, because frankly if it was me in the big chair these guys were pressuring, I’d be reminding them that states can take things a lot further than they can – wonderful things like sanctioning anyone who does business with them, nationalize any reachable assets, and even punching their ticket should they fail to recognize the power disparity.

      Just because increasing the cost of debt doesn’t have as immediately visible a set of impacts as a terror attack does not mean they aren’t potentially as damaging – one should not be surprised if states see it that way.

      • The Argentines are clearly nicer than I am, because frankly if it was me in the big chair these guys were pressuring, I’d be reminding them that states can take things a lot further than they can – wonderful things like sanctioning anyone who does business with them, nationalize any reachable assets, and even punching their ticket should they fail to recognize the power disparity.

        Loved it! If I ever find myself running a small country, JPD, you’ll be my first choice for FM.

        • Let me see if I got this right…, I am a small country named “Scott R.”…, you LOAN money. You don’t INVEST it…, you LOAN it to me. I (Scott R.) say, “So sorry, hard times, people will hurt if I repay.”

          And Steve and JPD are saying, “Tough luck for you…, should have known better…, bad INVESTMENT.”

          I am not so sure that an INVESTMENT is equatable to a LOAN. Somebody is responsible for repaying a LOAN. Nobody is responsible for repaying a bad INVESTMENT.

          The courts decision comes down to if this was a LOAN…, or…, and INVESTMENT.

          Sorry guys…, I am of the belief that LOANS should be repaid and should be backed by collateral and subject to collection…, INVESTMENTS are something entirely different.

          Are you guys really saying that Greece, Spain, Italy Ireland, Portugal…, should just be given carte blanche to say, “So sorry…” to all their creditors…, and walk out Scott R. Free?

          • These are bonds, not just ordinary loans like you may make to your neighbour – the holders have the option to sell them at market rate to someone else and walk away.

            However, yes, I do believe indeed that these countries should be able to say “so sorry” to all their creditors – just like Iceland did. They don’t get to walk away scott free, because that has its own consequences. Still, I firmly believe that millions of people are always more important than millions of dollars. You don’t?

            On a lesser but still important note: “The court’s decision”? A USA district court, but Argentina is not in the USA.

          • JustPlainDave

            In this context, the only meaningful distinction between “loan” and “investment” is which end of the transaction one is on. Everyone involved knows this isn’t like a car loan where they can send the repo guy in if it all goes south.

            In the end, the only surety the lender has is the debtor’s concern for reputation and their future ability to obtain loans (and actual investment within their territory). These is actually quite a serious concern and no country does what Argentina did except under extreme duress.

            No one should want this and everyone involved on all sides of the transactions should be willing to go to extensive lengths to avoid it (and frankly, I think that countries that refuse to pay debts should be held in contempt – in the same way that I have refused to do business with a former bankrupt). That said, there’s clearly a need for the system to allow it – countries do, for various reasons, get themselves this far underwater and there needs to be some way for getting them above water again. The alternative is essentially holding entire nations in debt peonage and there are some real profound downsides to that, from a practical standpoint even if one doesn’t share the same moral viewpoint.

            All that said, it’s important to remember that there’s a distinction between the importance of countries paying their debts and what these guys are doing. They’re essentially saying that whatever accommodations and arrangements that everyone else in the system has come to are less important than them and they’re using the perceived power of the US courts to shout that from a bully pulpit. Frankly that’s a bad idea. It’s bad for the courts, it’s bad for US interests and it’s bad for Americans generally – the only guys that benefit are the ones that hold the paper and you can bet they won’t be the one’s paying the butcher’s bill.

  • adrena

    Argentina rebuffs US court over debt ruling

    Aljazeera, November 23

    Economy ministry says it will appeal US court ruling ordering Argentina to pay defaulted bonds in full.

    Argentina will appeal a US judge’s ruling ordering it to pay $1.33bn to investment funds holding bonds that the country defaulted on in 2001, the economy ministry has said.

    “We will file an appeal Monday before the court,” Hernan Lorenzino, the economy minister, said at a news conference on Thursday.

    “We do not think it is right or legitimate to pay vulture funds,” he said.

    […]

    Lorenzino said Argentina would fight the order to pay all the way to the US Supreme Court if necessary.

    At the same time, he attacked Judge Griesa’s ruling as “judicial colonialism.”

    “It goes above the laws and sovereignty of Argentina and affects the international financial system,” he said.

    More at the link

  • I have been responding to the original post and comments, but should have researched the issue more deeply. The real issue is a bit different than what has been presented here.

    When Argentina defaulted in 2002 it left bondholders holding worthless bonds. Some 93% of those bondholders agreed to accept “paper” in exchange for the worthless bonds at a deep discount, but the others held out and are pursuing full payment in international courts. This ruling is about the “holdouts.” The court ruled that Argentina was paying off one class of bondholder, with the paper, and discriminating against the “holdouts.” It ordered that Argentina put money into escrow to cover payment to the “holdouts” against the time that settlement is reached with them.

    So, based on the court order, one class has surety in the form of “paper,” and the other in the form of escrowed money against some time in the future when Argentina can make good on all of the defaulted bonds. Nobody is getting any money right now, nor is anyone actually seeking any to any greater degree than they have been doing so since 2002.

    Coming up with the $1.3 billion may cause Argentina to default on some bonds maturing in the next few months, but it isn’t going to cause the mass starvation of women and children, so I think the “people as currency” argument may not apply here. Given the outcome of Iceland’s “go pound sand” response a few years back, I’m not sure the “power asymmetry to compel money to be repaid” argument applies either. Finally, I’m not sure than my “agreemenst which are made should be kept” is really applicable either.

    I think the “economists are idiots” is the only argument that really works.

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