In October 2012, a Cayman Islands-based fund, NML Capital Limited, controlled by Elliot Management (EM) won a court order in Ghana to seize the Argentine teaching ship Libertad . The fund claimed that Argentina owed it $350 million, and offered to let the ship leave if Argentina’s government put up a $20 million bond to be forfeited. EM´s CEO is Paul Elliot Singer, who specializes in piling up insolvent country debt. Singer is a major donor to the Republican Party.
If the court order goes into effect, Argentina would be prevented from discriminating between restructured bondholders and holdouts, thus potentially preventing the next payment due in December and leading to a technical default. Everyone who had accepted restructuring would be entitled to better terms if the funds’ demands are met. If the EM demands are accepted, the ruling will be a tipping point in the financial order.
Greece`s creditors are very much of the same kind. That means that their motivations and preferences are to a surprising level similar as well. If anything, the time elapsed and the geographical distance between these cases make even clearer how creditors are similarly contributing to the unfolding of these crises. In the Argentine case, those creditors were foreign banks, the IMF, and thousands of debt bond holders. In the Greek case, they are against foreign banks, the IMF, the European Central Bank and institutional investors such as mutual and hedge funds.
In 2001 Argentina was left to fend for itself when the administration of G.W. Bush, anxious to leave its mark on global finance, let markets (and creditors) take care of themselves. In 2012, by contrast, Greece cannot be cordoned off so easily. European governments and the IMF have high and growing stakes in the country. Naming Ms. Lagarde as new director has if anything confirmed the bet to keep the IMF relevant by remaking it into the assistant of Europe’s regional financial gendarme (ECB and Germany, mostly) while lobbying non-Europeans for funds to enlarge its lending capacity. We have indeed come a long way in just a decade, as the IMF moved on from promoter of financial deregulation in the developing world to protector of creditors inside the industrialized one.
In both cases, foreign banks and other bondholders have been the true central actors-refusing to admit the true value of their holdings, no longer inflated via currency overvaluation or overpriced assets. This acknowledgement would mean cuts to their holdings, simply to bring them back in line with reality.
Looking back at the Argentine case, the behavior of the private creditors indeed accurately predicts the Greek case: banks are appealing to their national governments, hedge funds priming their litigation lawyers, and other bond holders praying for the second coming of an the Argentine (or Greek now) Task Force to save them. And the outcome is largely just as predictable: creditor banks’ governments, funds’ lawyers and assorted Task Forces find friendly jurisdictions to fight against cuts in debt prices until they just about give up. In the aftermath, only the vulture funds remain, enlisting lawyers to pick through the debts’ corpses.
It’s worth considering, however, that when creditors and their agents pushed crisis-stricken Argentina in 2001 to fully dollarize its economy in order to totally ensure it would pay it back, the result was the exact opposite: Buenos Aires first defaulted on its debt, and then devalued its currency. That unforeseen sequence of moves was the origin for the dramatic stand-off between foreign creditors, the IMF and Argentina regarding its default and its confrontation with the suddenly de-dollarized foreign investors.
Today, Greece’s creditors are in fact pushing their debtor along very similar lines: demanding more and more assurances it will service a debt load piling out of all proportion. The unexpected may occur once again, with Athens deciding first to leave the Eurozone and then default on all its debts with such vengeance that the creditors’ losses will be so much worse than if governments had been wise enough to treat Greece more reasonably .
It was thanks to the greediness of creditors during the 2000s that the Argentine government successfully forced its own renegotiation terms on foreign creditors and public-utility investors, making both take unprecedented cuts in the value of their holdings and incomes. Such harsh push- back guaranteed for Argentina a bête noire reputation in global financial markets but also gave it impressive policy space to reignite growth, drastically reducing poverty and unemployment from the abysmal records of the 1990s .
The clearest lesson to draw from these cases: international creditors will always push as far they can. The debtors may be afraid of the costs of default only until the cost of fear becomes intolerable.
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