Being a creditor is a thankless task. The worst offenders are governments, whose leaders constantly promise their peoples a free lunch, dinner, and more.
Argentina is a typical offender. One of the world’s richest nations at the end of World War II, the South American country embraced political authoritarianism and economic populism. In the most recent Economic Freedom of the World rating Argentina came in at 137 of the 152 nations rated.
The country’s worst measure is rule of law. Which is reflected in its treatment of international creditors—and steadfast resistance to U.S. court rulings ordering Buenos Aires to pay its debts.
In 2001 Argentina defaulted on nearly $100 billion in debt. The Argentine people essentially had a wild party and woke up with a hangover. Their first reaction was to stiff the fools who had extended credit. Owners of roughly 93 percent of the debt gave in and restructured their paper, accepting huge write-offs.
But a few creditors, including NML Capital and Aurelius Capital Management, refused to concede. (Some bought deeply discounted debt from owners who had given up any hope of being paid back.) These creditors argued that Argentina should abide by its contract, which required it to obey U.S. court rulings.
Naturally, Argentina’s government cried foul, complaining about the violation to its sovereignty—after it enthusiastically sought (and spent!) the foreigners’ money. The very politicians who wrecked the Argentine economy called the hedge funds “vultures.”
Although Argentine politicians can dispense with the rule of law in their home country, they cannot so easily ignore legal rules overseas. With the bonds issued under New York law, disgruntled creditors won more than 100 court judgments ordering Buenos Aires to pay up.
Perhaps most significant judicial ruling was last year’s federal district court judgment, NML Capital Ltd. v. Republic of Argentina in New York—upheld on appeal in February—which prohibits Argentina from paying holders of restructured debt without paying off those holding original bonds. In August the Argentine government unveiled a plan for exchanging restructured bonds which Judge Thomas Griese called “an apparent attempt to evade” his orders.
Buenos Aires sought review by the Supreme Court. But in early October the high court refused to grant of a writ of certiorari to take the case. Last week NML and Aurelius filed a motion in the appellate court requesting that it lift its stay of Judge Griese’s ruling, allowing enforcement against Argentina.
Misguided is support for Buenos Aires, particularly from those purporting to speak on behalf of the poor at home and abroad. For instance, after the Supreme Court said no to review the Jubilee USA Network issued a critical press release. “The faith community is saddened by the high court’s decision” declared Executive Director Eric LeCompte: “We’re praying upon another review the U.S. Supreme Court will take it.”
However, no one forced the Argentine government to borrow money. No one forced the Argentine government to waste the money that it borrowed. And no one forced the Argentine government to default.
Even now Argentina is not a poor country. Moreover, it is poorer than it should be because of government policy. Argentina’s economic problems originate in government offices in Buenos Aires, not hedge fund offices in New York.
Indeed, politicians in Buenos Aires are the true vultures. One can argue about proper standards for international debt restructuring. But the rule of law is the best and, indeed, usually the only effective protection for the poor.
Those who are wealthy and influential do well in any system, including President Cristina Fernandez de Kirchner’s Argentina. Redistributionist economic policies ensure that only the well-connected prosper. Connected to Kirchner, her party, and other political allies.
Buenos Aires’ lawlessness puts everyone else at risk. Five years ago the Kirchner government confiscated nearly $30 billion in private retirement assets to raise cash. Because of its previous default the government could not easily raise money in private capital markets.
The only consistent protection against rapacious politicians is the rule of law. In most Third World countries governments loot and plunder without limit. Constitutional and legal rules set Western industrialized nations apart. Obviously the legal process doesn’t always work well, but as Judge Griese proved in ruling for private creditors, with independent courts vulture politicians don’t always win.
The New York legal battle is esoteric—but matters for all of us. Despite so much amiss in Washington, the Argentine debt case reminds us that the rule of law remains alive in the U.S.