‘Think of it in terms of music’, says Arnaldo Bocco.
‘It’s one thing to play from a score, it’s another to improvise. If you find in the course of improvising that the score isn’t so good then the author of that score, if they have a closed mind, is going to feel bad.
‘But if they have an open mind, they are going to think how brilliant it is that by improvising you have created something that no-one would have imagined.’
Bocco is a leading economist and ex-director of the Central Bank, who currently advises the government of Argentina.
His musical metaphor refers to the country’s unorthodox way of dealing with economic problems. Something for which, he says, it is punished by the big beasts of international finance.
First, Argentina declared it was going to default on $95 billion of debt in 2001 – the biggest such event in world history. Then it set about restructuring its debt – without turning to the IMF or adopting its despised austerity measures.
Instead, it stood firm and during the next few years engaged in tough bargaining with the vast majority of bond-holders to swap the defaulted bonds for ones worth around 65 per cent less.
Meanwhile, Argentina invested in the national economy and social infrastructure, boosted employment, and was able to meet its rescheduled debt obligations at a rate that was faster than required. It also benefited from high commodity prices. By 2006 it had paid off all its debt to the IMF.
In 2003 Argentina’s foreign currency debt was 120 per cent of GDP. By 2012 it was just 14 per cent.1 Eager to avoid falling into another 1980s-style debt trap, Argentina has not taken on new debt. Instead, it has been meeting its public spending deficit from domestic savings, a trade surplus, and an accumulation of international reserves.
The speculators attack
But today Argentina is once again entangled in a financial and legal battle of epic and global proportions. The Financial Times describes it as ‘the sovereign debt trial of the century’.
For the past decade a small group of hedge-fund speculators has been trying to extract large sums out of the South American country.The vast majority of creditors – those holding 93 per cent of Argentinean bonds that defaulted in 2001 – had accepted lower value bonds worth 33 cents to the dollar. The government has been reliably paying out on these since 2005. According to financial services firm Morgan Stanley, these creditors have done well out of the restructured securities.
Wealthy speculators hover around countries or companies in trouble, betting on bankruptcy
But a few hardcore speculators – called ‘vulture funds’ – held out and refused to accept the lower-value bonds being offered.
Billionaire hedge fund manager Paul Singer, who owns NML Capital (a subsidiary of Elliot Management), is leading the demand for a $1.3 billion pay-out plus interest. This represents the full 100-cent face value of dollar bonds bought for just 12 cents per bond in the early 2000s.
Much of the debt dates back to the military era of supreme financial mismanagement and is considered ‘odious’. But NML is seriously voracious – late last year it seized an Argentinean naval vessel, the Libertad, in Ghana.
In November 2012, a New York court found in favour of NML et al and ordered Argentina to pay the $1.3 billion immediately. District Judge Thomas Griesa also said it would be illegal for Argentina – and intermediaries such as Bank of New York Mellon – to fulfil the commitment to exchange bondholders until the ‘hold-outs’ had been satisfied. This could force the country back to a major sovereign default, unravelling all its debt-restructuring efforts.
In February, lawyers for Argentina attending the New York Court of Appeals did not blink; they said the government would rather default than meet the unjust demands of the vulture funds.
Vulture funds are pretty much as their nickname suggests. They are wealthy speculators that hover around countries or companies in deep financial trouble, buying up debts at rock- bottom prices and betting on bankruptcy.
They have a track record of using courts to raid some of the poorest countries to get their pound of flesh. In 2007, Donegal International, registered in the Virgin Islands, used a London court to squeeze $15 million out of Zambia for debt which it had bought for just $3 million – it had demanded $55 million. New York fund FG Hemisphere, headed by Peter Grossman, is currently pursuing one of the poorest countries in Africa, DR Congo, for $100 million.2
The Argentinean case is high profile because of the threat it poses to the entire global system of debt restructuring. If the vultures succeed, many others may be vulnerable to attack – countries like Greece, Cyprus, Ireland and Spain, for example, but also companies such as AIG in the US. More power will go to the greediest and least co-operative creditors, thus threatening existing as well as future agreements. And, as the Financial Times observed: ‘Trapping countries in unpayable debt obligations is dangerous.’3
At the end of March Argentina made a new offer to the vultures, involving a mix of cash and bonds that would still give them a fat profit, but not on the scale they are demanding. The vultures, as expected, said no. Now Argentina is likely to appeal to the US Supreme Court.
Meanwhile campaigners, such as the Jubilee Debt Campaign, and others, including the chair of the World Economic Forum, Klaus Schwab, are urgently calling for new international rules to control vulture funds.
‘We are not in crisis’
The battle against the vultures, though alarming, has provided Cristina Kirchner with some PR opportunities – such as the joyous return of the frigate Libertad, when she was able to declare: ‘There are vultures. But I listen to the people.’
The opposition press, dominated by the Clarin group, remained unimpressed. Argentina’s economic policy – which is interventionist rather than laissez faire – has consequences that are deeply unpopular among many middle-class and wealthy Argentineans.
In an attempt to restrict capital flight, currency controls have been imposed, limiting the amount nationals can take or spend outside the country. The exchange rate for the Argentinean peso is being kept, some say, at an artificially high level – producing a flourishing and illegal parallel market in dollars.
The slowdown in economic growth – from eight per cent in 2011 to two per cent in 2012 – is presented as a sign of economic mismanagement. The government points to external reasons for the loss of momentum – such as an economic slowdown and poor harvest in Brazil, Argentina’s main trading partner.
‘We are not in crisis,’ Bocco insists. ‘If you are on a motorway and you suddenly go from 80 to 20 it’s likely that the passengers will ask “why are we going so slowly?”.’
One of the most striking features of the Argentinean approach has been the focus on jobs
But the underlying state of affairs is healthy, he says, and economic growth in Argentina is predicted to rise again in 2013.4
More troublesome is inflation, which hits the poorest hardest. High inflation has been a regular feature of Argentina’s economic history. But there is a massive disparity between the 11-per-cent official rate produced by INDEC, the government’s statistics agency, and the 25-per-cent rate calculated by private consultants and used by unions in wage bargaining. The government is developing a new national index with the help of the IMF – which has said publicly it does not trust the official rate. Meanwhile a deal has been struck with major supermarkets for a temporary price freeze to try to cool down inflation.
One of the most striking features of the Argentinean approach, and one that might be of interest to austerity-torn Europe and North America, has been the focus on jobs.
Ten years ago, Argentina had an unemployment rate of 24 per cent – by 2012 it was around 7.2 per cent.
Argentina responded to the 2008 global financial crisis by investing heavily in production. State banks lent to foreign companies like Fiat and Chrysler to expand their activities in Argentina. The motor industry is today the largest sector of the economy – in spite of the increase in agri-industrial production, especially soya.
The determination to defend jobs has also led Argentina to adopt protectionist trade measures which, together with currency controls, have upset trading partners like Uruguay and Brazil. But, according to Bocco, it’s US companies that are most put out.
Not so green...
Argentina’s development model remains in some ways orthodox and industrial. There’s little real scope for environmental sustainability, green economics or ‘zero growth’ ideology.
‘We have come out of a long crisis. We are creating greater quality of life, health, and so on, and there is a suspicion that the environmental struggle is a bit élitist,’ says Bocco. ‘Work, employment, is a greater priority than environment, which is not really on the agenda,’ (see box below). He corrects himself: ‘Well… it is on the agenda. The government talks about it, says it will protect glaciers, says it is protecting forests. But at the moment of decision, the first thought is for investment and employment. It’s an economy of the 1960s, with the Keynesianism of the Sixties, and I say this with respect.’
Moreover, in spite of the controversial nationalization of the oil company YPF (formerly majority owned by Spanish oil giant Repsol), the government’s agenda could hardly be described as anti-corporate.
Argentina had threatened to freeze the assets of US oil company Chevron, for failing to pay its fine for massive pollution in Ecuador, but is now in deep discussion with the same company over possible exploration at Vaca Muerta which is reckoned to have the world’s third largest reserve of shale gas.
Media criticism of Argentina’s economic policies – which increasingly appears in the international press – does not bother Bocco unduly. ‘I think economic policy is going to be our strongest suit going into the next election,’* he says.
There may be a few enemies – including vultures – along the way.
*mid-term elections are in October 2013.
‘Our government will do nothing to challenge soya or mining interests’
‘There is a real problem with the expansion of soya,’ says Natalia Salvatico of Friends of the Earth Argentina. ‘Nineteen million hectares have been planted – that’s 65 per cent of the cultivable area. Monsanto dominates the industry with its transgenic varieties.
‘Soya not only threatens food sovereignty but also compromises public health. Transgenic cultivation requires agro-toxins. We have shown the presence of agro-chemical toxins in mothers’ milk in Buenos Aires province. We have had kids falling ill. In Corrientes province a child died because they were fumigating too close to rural schools.
‘But our government will do nothing to challenge either soya or mining interests. In 2010, the government passed a law to protect glaciers [which are threatened by current mining activities, numbering 600 in the country]. We are still fighting to get them to apply it. Some provincial governments are simply refusing to because they have economic links with mining interests. The Canadian mining company Barrick Gold is the most notorious. We have launched a campaign against Barrick because it obstructs the functioning of the law. It does open-cast mining and uses poisons such as cyanide that North American mines have not used for 20 years. The government is letting them get away with it by not applying the laws. The excuse is, “we need this investment”. It is said that mining helps the local people out of poverty – but look at Catamarca, it has the most mines and still has the most poverty. Where does the wealth go then?
‘The government talks a lot about sovereignty but it’s allowing transnational corporations to take resources out of the territory. It is said that in the Andes, between Argentina and Chile, there is a third country – Barrick Gold territory. You can’t go there because it’s been given to them. It’s a country that does not follow the laws of either land. We’re not campaigning from a nationalist perspective, but from the point of view of what this is costing the local people of the area.’
- Naomi Brenta, La economica argentina bajo amenaza, Le Monde Diplomatique, Buenos Aires, January 2013.
- Juan Fernandez Vigueras, Un riesgo global, Le Monde Diplomatique, Buenos Aires, January 2013.
- Financial Times editorial, 25 November 2012, ft.com