After 15 years of court battles, injunctions, smear campaigns, lobbying, and other interventions, the vulture funds have finally won a tentative agreement with the new Argentine government. Vulture funds — the name preceded this particular dispute — are so called because they buy up defaulted debt for a very small fraction of its face value, then sue (and use other tactics) to collect an exorbitant return. In the case of Argentina, the chief vulture, American billionaire and major Republican campaign donor Paul Singer, will get an estimated 370 percent return; another vulture fund in the settlement did even better, with a return of 950 percent.
The agreement is tentative because President Mauricio Macri of Argentina still has to get the nation’s Congress, in which he does not have a majority, to change some laws in order to finalize the deal. And he will also have to reach agreement with some remaining “holdout” creditors. And now the vulture funds are appealing the judge’s order that would allowed Argentina to issue new debt, presumably in an effort to extract even more concessions. But assuming it all works out, though, there are some important lessons to be learned from this long war over sovereign debt.
Argentina arguably had no alternative but to default in 2002, but the government also did the right thing by standing up to the IMF and its international creditors until it reached a deal (in 2003 and 2005) that would allow the economy to recover. International lenders — in this case a creditors’ cartel headed by the IMF — often succeed in getting a settlement that keeps the country trapped in recession, depression, or very low growth with an unsustainable debt burden; as well as numerous conditions (cuts to social spending, public pensions, public employment) that harm the majority of the debtor country’s citizens. Some of the worst recent examples of these abuses can be seen in countries like Greece and Jamaica, and will likely include Puerto Rico if there is a debt restructuring there.
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By taking a hard line with its foreign creditors, Argentina reached an agreement with 93 percent of them that allowed the country to do very well over the ensuing 14 years. Instead of a prolonged depression as in Greece, or limping along from one crisis to the next, Argentina began an extraordinarily robust recovery just three months after its default and enjoyed very high growth — more than 90 percent in real GDP from 2002–2015. (There is some dispute over the exact number but it does not change the story.) This enabled Argentina to reduce poverty by about 70 percent and extreme poverty by 80 percent, in the decade 2003–2013.
So, even though the country would later run into economic trouble — in the world recession of 2009, but also in the last four years — there is no doubt that it pursued very successful economic policies, which it would not have been able to implement under a less favorable agreement with its creditors. Now, about the slowdown of the past four years, in which the economy has grown by about 1.1 percent annually: Part of the problem was that Argentina could not borrow on international markets, due to its inability to settle with thevulture funds. For Argentina’ detractors, this proves that the default and subsequent tough negotiation were wrong. But clearly that is not the case; the alternative offered by the IMF and the creditors was vastly worse.
The problem is really the vulture funds, and also the foreign policy goals of certain actors within the United States, who were against the prior government of Argentina. Here is Judge Thomas Griesa, of the Federal District court for the Southern District of New York, to whom the New York Times devoted a news article describing his incompetence: “Put simply, President Macri’s election changed everything.” This is from Griesa’s decision of February 19, explaining why he decided to conditionally lift the injunction he had imposed against Argentina in 2014, which the Financial Times editorial board generously described as “eccentric rulings,” and which prevented Argentina from making its debt payments. In other words, he much preferred the new, right-wing, pro-Washington government, as opposed to the prior, left government that he helped get rid of. Griesa’s unprecedented decision to take 93 percent of Argentina’s creditors hostage on behalf of the vulture funds was obviously political at the time. Now he has admitted it, to the chagrin of our legal system.
Argentina had appealed Griesa’s injunction to the US Supreme Court, and the governments of France, Brazil and Mexico, and the Nobel Prize-winning economist Joseph Stiglitz filed briefs on its behalf. Interestingly, the IMF announced that it, too, would file a brief on behalf of Argentina. This was not because the IMF loved the Argentine government, but because Griesa’s decision was considered a threat to the stability of the international financial system. But the US Treasury forced the IMF into an embarrassing retreat, most likely due to pressure from the vulture lobby and some anti-Argentina members of Congress, in particular from Florida, who could threaten to hold up legislation that the Fund needed.
The US government also stopped blocking loans to Argentina at the World Bank and the Inter-American Development Bank, just after Macri was elected. Macri himself also has an interesting history with the US State Department: In conversations with US officials leaked by WikiLeaks, Macri chastised them for being “too soft” on the Argentine government and encouraging its “abusive treatment” of the US.
The main lesson from this whole episode is the importance of national economic sovereignty for middle-income countries like Argentina. This is what allowed Argentina to recover from disastrous economic policies implemented under IMF tutelage; and it was the infringement on this sovereignty by US courts and other actors that made it difficult for Argentina to resolve the economic problems of the past few years. We will see how this new, less sovereign government fares going forward, now that it has settled with the vultures.