Posted: March 07, 2005

Greed comes before prejudice!

Bloomberg's news service (March 3) - Argentina Ends Restructuring, Swaps $62.2 Bln Bonds - reported that "Argentina completed the biggest debt restructuring in history, persuading holders of $62.2 billion of defaulted bonds to swap for new securities worth as little as 25 cents on the dollar." Evidently, 76 percent of bondholders accepted the government's offer, after it had defaulted on it debt obligations during the 2001 crisis. Argentina was the "biggest emerging-market issuer of international debt in the 1990s". The restructuring plan will see the Argentine government issue "$35 billion of new bonds. Its total debt will fall to $125 billion, or 72 percent of gross domestic product, from $190 billion at end- 2004 ... "

When the problems began in late 2001, the Argentinian Government allowed the currency to depreciate by around 2/3 against the USD (from par) and then reneged on all contracts that had valued the currency (peso) at par with the USD. In Many View Argentina's Comeback With Skepticism, Washington Post journalist Paul Blustein reports (March 4) that "In late 2001, during bloody riots, the Argentine government defaulted on about $100 billion in debt. The default was the biggest by any nation in history, and it plunged the economy into chaos, with millions falling into poverty and unemployment reaching nearly one-quarter of the workforce. Many Argentines are still struggling to recover from the fallout. Now, however, Argentina is recovering, and it is seeking to reenter the global financial system after having cast itself out. The implications go well beyond Argentina's borders to the international system's basic workings."

Many investors are claiming that the Argentinian Government should pay more under the debt restructuring. They are scared that the example set by the Argentina - to disregard the IMF and the major creditors might be contagious. Bloomberg quotes one fund manager: "This restructuring creates a dangerous precedent ... It'll encourage governments who are in difficulties to renege on their debt." Bluestein writes that "many in the financial community are upset over the ease with which Argentina is breaking loose from the constraints that usually hobble bankrupt countries." He quotes a research firm CreditSights Ltd who wrote to their investor clients "Debt repudiation with no consequences . . . appears to be the perfect crime that Argentina is about to perpetrate with its debt exchange." Many of the international financiers and investors are upset by the "the take-it-or-leave-it terms" (as per Bluestein) that the Argentine Government has offered them. Bluestein sees the issue clearly. "Thrown into question in the process are some hoary financial principles. Countries that treat foreign creditors so shabbily are supposed to be doomed to stagnation for years, because investors and lenders presumably will shun nations that show little respect for property rights."

This is the standard neo-liberal line that is used to coerce debtor nations into compliance with the needs of 'first-world' capital largely defined through the aegis of the IMF. But the Argentinian case is dangerous for this paradigm because they defied the major players including the IMF and within 3 years the Argentine economy is booming. Bluestein notes: "It is not just that Argentina recorded annual growth of 8.8 percent for the past two years. More significant, companies are investing. According to government figures, business spending on structures, plant and equipment is close to all-time highs as a percentage of national output. The investors include foreign-based multinational companies such as Volkswagen. Eight months ago, the German automaker decided to spend $200 million on producing a new vehicle model and expanding capacity at its transmission plant in the industrial city of Cordoba."

Some creditors have attempted to seize Argentine assets abroad but most of them (embassies etc) are protected from legal attack by international conventions. So with the prospect of nothing being recouped the vast majority of investors have agreed to the restructuring.

The Government has clearly called the bluff of the international investment market. It even introduced legislation recently which prevents any further payments being made under the debt restructuring. Bluestein quotes economy minister Lavagna: "We were very happy for this law to be passed ... When I hear people say, 'Argentina will be isolated' ... I have to say the evidence is different."

It is clear that many foreign firms are expanding in Argentina in addition to strong investment from Argentine interests. Bluestein quotes the country's biggest real estate developer: "there has never been a better time to invest in Argentina ... [as for foreign banks, after shunning Argentina for a while] ... now the banks are coming to us ... It's been tough. We will have restrictions ... But in terms of access to capital, what defines access? Greed. When opportunities look profitable, access to capital will be easy." This is a lesson all countries should learn. International capitalism, ultimately does not really take 'political' decisions - it just pursues return.

One would not want to give a glowing impression of life in Argentina. There is shocking unemployment, homelessness and poverty as a result of the crisis. Real wages haev falled and imports have become very expensive. But the lower forex parity has helped attract foreign manufacturers like VW. But they have introduced a basic Job Guarantee-style program and this has helped. Much more is needed by way of public service employment.

But the lesson is emerging and should be a very powerful one for progressive economists to lever with. Once countries realise that they have power as the monopoly issuer of their own currency and can create better conditions by ignoring the IMF, the stranglehold this organisation and the international financiers that depend on the authority of the IMF being imposed on vulnerable countries, will be over. The sort of devastation that the IMF has imposed on public service provision and employment and working conditions on countries forced to undergo Structural Adjustment Programs will be a thing of the past.

Argentina's defiance has lessons for Australia. Many critics of the Job Guarantee argue that the international financial markets would wreak havoc on the Australian economy if it was introduced here. Sorry, this is just a neo-liberal myth. My view is that the international investment community would soon realise that rather than being a threat to their activities, the introduction of a Job Guarantee would provide them with an even better investment climate on which to chase return. It is time that progressive economists dropped believing the neo-liberal myths and instead realised that in capitalism 'greed comes before prejudice'.

Blog entry posted by bill