One of the differences between the United States and most other developed countries is that the Congress can have a foreign policy of its own, and one that does not necessarily coincide with the objectives of the executive branch.
This is generally a good thing, since it allows the citizenry to have influence that it does not have in most European countries, and to limit some of the damage that the executive branch is often doing around the world. It was the U.S. Congress that, under pressure from the anti-war movement, eventually cut funding for the Vietnam War; and in the 1980s a well-organized, mostly religious-based movement pressured Congress to cut off funding for Ronald Reagan’s brutal insurgency in Nicaragua.
Occasionally, however, individual members of Congress – representing special interests — can be an annoyance when the executive is trying to maintain or repair relations with other countries. Such is the case with U.S.-Argentine relations, which fell to a low point during the Bush years, and which President Obama would like to improve.
Now comes Eric Massa, a freshman Democratic Representative from Corning in the state of New York, introducing legislation on May 20 that would seek to punish Argentina by, among other things, denying the country access to U.S. capital markets.
Some background: in December of 2001 the government of Argentina defaulted on about $81 billion (plus interest) of its sovereign debt, as a result of a general economic collapse that followed a deep recession. In 2005 about 75% percent of the defaulted bondholders reached an agreement with the government that paid about 30 cents on the dollar. The remainder, with some $19.4 billion, held out with the hope of getting more later.
The “holdouts” have a lobby group in Washington, the “American Task Force Argentina (ATFA).” It is headed by former Clinton administration officials, who are trying to use the U.S. Congress to put pressure on Argentina. The lobbyists include “vulture” fund investors (see below), who buy up defaulted debt at a small fraction of face value and then use lawsuits and other pressure tactics to fight for the face value of the bonds.
If there is an injustice in Argentina’s default, it is that the International Monetary Fund (IMF) – which had as much responsibility as anyone in the world for the deep recession that pushed half of Argentina’s population below the poverty line – ended up collecting on its loans in full. But that is another, longer story.
The fact is that Argentina’s default was an unavoidable part of an economic collapse. It was also a necessary precondition for the country’s economic recovery, which began just three months after the government stopped payment on its public debt. In just under seven years Argentina’s real GDP has grown by 66 percent, about the best performance in the hemisphere, pulling more than 11 million people out of poverty and reversing much of the damage that was done under IMF tutelage in the prior decade.
Argentina’s debt before the default was simply unpayable. In the United States and most other countries, we have bankruptcy laws that enable a debtor to get out from unpayable debts and start afresh. In the world of sovereign debt, there is as yet no comparable mechanism other than default.
Of course, it is quite possible that the Argentine government will reach a settlement with the “holdout” bondholders, and there has been some movement in that direction in the last year or so. A settlement would restore Argentina’s access to international credit markets.
Ironically, the harassment from Eric Massa and ATFA makes it less likely that such a settlement would be reached, because the “vulture funds” that they represent are playing a different game. They want their pound of flesh: i.e., they are gunning for the face value of the bonds and are willing to throw any of the more realistic creditors (among the holdouts) under the bus to get as much as they can. The vultures are therefore undermining other creditors, including current bondholders whose investment is not in jeopardy, but would increase in value if Argentina had full access to international credit markets.
Who are the constituents that Eric Massa and ATFA represent? A look at fifteen bondholders that hold more than $25 million each in claims against Argentina shows that nine of them have addresses in the Cayman Islands. One of these is NML Capital Ltd., a vulture fund affiliate of the hedge fund firm Elliot Associates (a member of ATFA), run by founder Paul Singer. According to Bloomberg News, NML Capital bought at least $182 million of Argentine debt for 15-30 cents on the dollar. Singer has taken a gamble that paid off in Peru in 2000, he made a 400 percent profit from the Peruvian government through lawsuits and harassment.
The vultures will not get very far with Argentina, where not only the government but the political opposition and the Argentine people overwhelmingly are determined not to surrender to them. But they can make a settlement with the other creditors more difficult and also hope to throw obstacles on the road to better U.S.-Argentine relations.
That appears to be the main potential of Massa’s bill in Congress, and of course the ATFA lobby group’s efforts: to create the false impression that the “holdouts’” debt is an impediment to improved U.S.-Argentine relations. This is certainly not true for the Obama administration. But the opposition media in Argentina can exaggerate the seriousness of this Congressional effort (which has almost no chance of becoming law) to try and undermine President Cristina Kirchner’s government. It’s all smoke and mirrors: an elaborate, well-funded international public relations effort.
MARK WEISBROT is an economist and co-director of the Center for Economic and Policy Research.
This column was originally published by The Guardian.