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Sunday, March 31, 2013

NML v. Argentina, Post 3

Completely unsurprisingly, when four weeks afforded by the Second Circuit's March 1 order  in NML Capital, Ltd. v. Republic of Argentina, ran out, Argentina failed to provide a substantive response to the court's directive that it specify:

(1) how and when it proposes to make current those debt obligations on the
original bonds that have gone unpaid over the last 11 years;

(2) the rate at which it proposes to repay debt obligations on the original bonds going forward; and

(3) what assurances, if any, it can provide that the official government action
necessary to implement its proposal will be taken, and the timetable for such

Instead, Argentina repeated the offer to perform the exchange from which the plaintiff, among others, held out several years ago, along with a few pages of rationalization for doing so, which implicitly means the answer to the Second Circuit is:

(1) no thank you;
(2) none;
(3) not applicable, given (1) & (2).

Presumably, the Second Circuit, which separately last week denied Argentina's request for rehearing en banc, will now deliver the smackdown that Argentina deserves for disrespecting the U.S. legal system so thoroughly.  Argentina will probably file a cert petition, but the issue here is really just one of state law contractual interpretation and doesn't belong in the Supreme Court at all.

I can't imagine how anyone expected anything else from Argentina.  When its senior government officials attended the oral argument at which its counsel took a hardline position, it was obvious that Argentina was perfectly happy to default on the exchange bonds as well.  Under the Kirchner and Fernandez governments,  Argentina has made taking other people's money a core policy.  Here is a summary of their policies prepared by Simon Black, who blogs at Sovereign Man:

Just since 2010, President Cristina Fernandez has–
  • Nationalized private pensions, plundering the retirement savings of her people.
  • Increased tax rates across the board– income, VAT, import duties, etc. as well as imposed a new wealth tax.
  • Inflated Argentina’s money supply, printing currency with wanton abandon; M2 money supply has increased 215% in the past three years.
  • Driven the value and purchasing power of the currency down by 50%. Street-level inflation is now 30%+ per year.
  • Made a mockery of official statistics, comically understating the level of Argentine inflation and unemployment. She even began punishing economists for publishing private estimates of inflation that didn’t jive with the government figures.
  • Taken over control of one industry after another, most notably the nationalization of Spanish oil firm YPF’s Argentine assets.
  • Imposed export controls of agriculture products from beef to grains, forcing growers to sell at artificially lower domestic prices.
  • Imposed capital controls, reducing her citizens’ capability to dump their poorly performing currency and hold gold, dollars, euros, or anything else.
  • Imposed a two month ‘price freeze’ on items in the supermarket, and encouraged retail consumers to rat out any grocer that doesn’t abide by the government order.
  • Imposed controls over the media, most recently ordered an advertising ban in Argentine newspapers (weakening their financial position).
If anything, a court ruling that leads to default is a political windfall for Fernandez: first, her government gets to hold on to the money they would otherwise have paid the exchange bondholders, money they obviously need given their repeated confiscations of other people's money;  second, at home, she can position herself as standing up to the wealthy and the powerful by not backing down one inch; while, third, to investors elsewhere in the world, Argentina can blame the court for the default and claim that they were the reasonable party, and seek to distinguish this incident from its historical practice of unilaterally defaulting. So from her government's perspective, the hardline position has always been the one that made sense politically.

Like several other chief executives throughout South America, Fernandez practices "chavismo-lite", following in the steps of Hugo Chavez by taking private property as necessary to fund government spending, particularly on programs that elicit support from lower-income voters, who turn out to keep the leader in power.  It's undeniable that this drives up annual GDP, but only because GDP is just an estimate of annual transactions in goods and  services, and ignores completely whether anything of lasting value has been created.  (An insight surprisingly printed in the Times yesterday quoting Alistair Thornton, a China economist, speaking about the environmental devastation wrought by China's GDP growth: “Digging a hole and filling it back in again gives you G.D.P. growth. It doesn’t give you economic value. A lot of the activity in China over the last few years has been digging holes to fill them back in again — anything from bailing out failing solar companies to ignoring the ‘externalities’ of economic growth.” Did the editors recognize this as a jab at Paul Krugman, the man who advocates digging up ditches and filling them again?)

The same is true of Argentina and Venezuela's superficial GDP growth.  It's come by confiscating private property, which, for there to be sustainable economic activity, has instead to be protected. As Margaret Thacher famously said, “The problem with socialism is that you eventually run out of other people's money.”  Sooner or later, Argentina and Venezuela will.  And what better way to end a post about Argentina than with a quote from the woman who defeated them in the Falklands?