Sovereign debt, crises and default have been regular features of the Argentine economy for years – but the latest debt crisis, involving the government and the so-called “vulture funds”, has thrown up new questions about the state’s capacity versus the ethics of capitalism.
Vulture funds are private creditors who deliberately took up cut-price Argentine bonds after the 2002 collapse, then refused to renegotiate their terms in 2005 and 2010 when the country entered a process of debt restructuring – all with the aim of eventually litigating against default and reaping exorbitant profits.
Accordingly, these creditors had been demanding the full value of the debt on which they had originally speculated. At the end of July this year, in the latest twist in its fiscal saga, Argentina was declared to be in default for the second time in 12 years.
Defaults are always economically damaging and politically destabilising, particularly in a context of inflation and growing political and social malaise. But the irony this year is that, unlike December 2001, today’s markets seem relatively untroubled by the event – and that rather than putting the government on the ropes, the current financial crisis is apparently shoring up the dominance of the Kirchnerist project.
The bad old days
The background to all this is Argentina’s financial crisis of 2001-2002, precipitated by what was then the biggest sovereign debt default in history.
Argentina was at a critical juncture; its public debt as a percentage of GDP reached 166%, the nation was facing abrupt pauperisation, road blocks, and factory takeovers; its leaders were struggling to preserve social cohesion. Two months after Argentina defaulted, the value of the peso dropped by more than a third.
Cross-class demands for more inclusive and responsive democracy screamed “¡Que se vayan todos!” (“Out with all of them”), expressing the enormous gap that had opened up between government and society.
As the country’s whole political economic order collapsed, presidents came and went in quick succession – until a temporary parliament-led government under the Peronist former leader of Congress, Eduardo Duhalde, assumed some degree of institutional command. That administration eventually gave way to the elected government of Nestor Kirchner in May 2003.
Fixing it up
The challenges facing the new government were huge. A judicious devaluation of the peso in January 2002, however, led to a considerable expansion of exports, especially agro/industrial ones, greatly boosting state revenues. Systematic renegotiations of the terms of privatised companies and nationalisations followed suit. Negotiations also began with creditors of 152 different bonds series, issued under several jurisdictions.
In 2005 and 2010, a deal brought the country’s default to a successful close, with 93% of creditors accepting new bonds worth 30 cents on the dollar. The remaining 7% of “hold-out” creditors rejected the offer, demanding payment in full. The government also sought independence from the IMF, cancelling off the debt and creating an image of a sovereign state, with greater room for manoeuvre than was possible in the previous decades.
A more confident and better-resourced government was often accompanied by controversial forms of social and political incorporation. Like Menem in the 1990s, the administrations of Nestor Kirchner, followed by Cristina Fernandez de Kirchner, concentrated heavily on reinforcing executive authority, took timely yet bold initiatives and advanced controversial forms of government interventionism.
This strategy paid off by doing something to alleviate widespread poverty, inequality and exclusion. But whatever the social gains, the cost has been economic stress, distributional pressures and badly weakened political institutions.
Betting the farm
The political strength of the government has been tested to the extreme by two main forces: farmers and vulture funds.
In 2008, during a state decision to increase agro-export taxes to reflect fluctuating commodity prices, landowners and farm-based groups organised lock-outs, road blocks and the destruction of crops bound for market, until the export tax was settled.
To this day, conservative and reactionary rural factions play a massive and direct role in shaping policy, even while supporting the political opposition. In a flailing economy that has failed to diversify its industrial base and is highly dependent on the primary sector, this is not a minor concern.
Argentina is now stuck with recession, high inflation and, over the past year, the pressure of an unstable peso and the black market for dollars. All this, combined with the gloomy global environment, leaves the country increasingly dependent on foreign capital to maintain growth, employment and price stability.
Under pressure
Factions outside the government have increasingly joined forces in the renewed legal battle being waged on behalf of the vulture funds – and litigation from hold-out creditors, which has persisted for more than a decade, now carries the weight of the US Supreme Court, which in July upheld a decision ruling that Argentina is legally obliged to repay its American hold-out creditors in full.
This took a Kafkaesque turn when the Argentine government deposited the bondholders’ payment into US-based financial intermediaries, only to be blocked by US district judge, Thomas Griesa, alleging that payments could not be processed at all unless settled directly with the vulture funds. As a result, Argentina defaulted.
Legally, Judge Griesa’s sentence is widely believed to be impracticable: agreement with vultures means last-to-come-in creditors get the best deal, which would send Argentina into an economic tailspin based on an contorted interpretation of the legal principle of pari passu (equal treatment of creditors).
So, full payment: politically unlikely and economically impossible. The government will need to weigh Argentine laws and citizens versus US laws and investors – a fiendish balancing act for a government that has invested all its political capital in opposing the vultures at all costs.
Paradox
The case against the vulture funds has had a huge impact on the economic agenda not just in Argentina, but also internationally: in early September, the United Nations General Assembly began work to establish a new international convention regulating the restructuring of sovereign debt.
Meanwhile, the political fallout of the crisis at home has paradoxically been largely to the benefit of term-limited president Cristina Kirchner, reasserting her centrality in politics just as she was losing her clout in the run-up to the 2015 elections.
The struggle against the hold-out creditors is being played out electorally through social mobilisation. This is just what happened in the 2008 conflict with the farmers; Cristina Kirchner’s strategy was to appeal to the urban working class. She pointed out farmers’ relative prosperity and stoked fears that popular social programmes would have to be eliminated if they got their way – even publicly calling them “greedy” and “coup-plotters”.
The Kirchner administration is now once again back on its old mettle, appealing to citizens with the slogan “Patria o Buitres” (“homeland or vultures”), a binary definition that suits her barnstorming rhetoric and mocks casino capitalism and those who support it. Her political opposition is back on the defensive – and her government perhaps reinvigorated – even as she grapples with the thorniest crisis of her tenure.