Dr. Susmit Kumar, Ph.D.


Table of Contents


(A)          Introduction


(B)          Mr. Viral Acharya’s Eight Paragraphs on Argentina’s Central Bank Crisis


(C)          Pre-1998 Argentina’s Economy


(D)          1998-2002 Argentine Great Recession


(E)           Kirchners’ Era – from Recovery to Prosperity (2003-15)

(F)           Post-Kirchner Era (2015-) – Another Failed Market-oriented Economy

(G)          Details of Vulture Investors’ Case in a New York (US) Court


(A)          Introduction:


            During the 1990s, foreign investors and also the IMF funded the failed free-market policies of the then rulers in Argentina, which resulted in the Great Depression in Argentina during 1998-2002. It forced Argentina to default on its $132 billion external debt in 2001. At the height of the crisis in 2001, four Argentinian presidents took oaths and resigned in just ten days. After winning the presidential elections in 2003, the left leaning Nestor Kirchner guided the country to robust recovery. After him, his wife Cristina Kirchner, who won next two presidential elections in 2007 and 2011, continued his policy, resulting in nearly 90 percent in real GDP growth from 2002 to 2015. The husband-wife duo (the husband died in 2010) was able to reduce poverty by about 70 percent and extreme poverty by 80 percent in the ten years from 2003 to 2013. They were also able to pay back more than 93% foreign creditors, including Paris Club countries and the IMF, after negotiating the debt re-structuring. Only a few foreign investors, mainly vulture hedge funds who had bought the original debt at very low rate, opted to file a legal case in a New York court and were finally successful in getting nearly the entire value of the debts, resulting in as much as 1600 per cent return on their investments. Mr. Acharya’s eight paragraph statement, quoted below, on Argentina’s Central Bank crisis in 2009-10, pertains to the US vulture hedge fund case in a US case. It is worth noting that not only the governments of France, Brazil, Mexico, and the Nobel Prize-winning economist Joseph Stiglitz but also IMF filed briefs in support of the Argentina in the US Supreme Court against the unjustified and unethical judgement of Thomas Griesa, a New York judge. But the US Supreme Court declined to accept the appeal.

            Due to her term limit, Cristina Kirchner did not fight the 2017 presidential election. Otherwise she would have had won her third term. In her absence, a pro-globalization politician Mauricio Macri was narrowly elected after defeating Daniel Scioli of the Justicialist Party to which Kirchners belonged to. Macri received 51.34% votes as compared to Scioli’s 48.66%. After taking over the reins, Mr. Macri undid most of the economic policies of his predecessors’ and opted for a market-oriented economy by slashing taxes, ending capital controls, paying entire amounts to the vulture investors and curbing public spending. Today, Argentina’s economy is in dire state. The country has to beg the IMF for a record $50 billion loan and under IMF dictates its interest rate is at 60%, a record high.

            As we will see below, it was unfortunate on Mr. Acharya’s part that he put forward eight paragraphs on Argentina’s central bank crisis on how to use its reserves. By quoting statements of Mr Martin Redrado, Argentina’s central bank chief, and Alberto Ramos, an Argentine analyst at Goldman Sachs, Mr. Acharya shows his colors, i.e. whether he sides with vulture investors or the country’s interest. An important point to be noted is that he did not write that Mr. Redrado himself five years earlier had allowed the then President Nestor Kirchner to use the Central Bank’s excess reserves for a similar purpose, i.e. the payment of $10 billion for the payment of IMF debt. Also there was a second paragraph in the statement of Mr Ramos of Goldman Sachs, not quoted by Mr. Acharya, in which Mr. Ramos was in favor of Argentina’s payment for which Argentina would have had paid 14% interest rate, which was the only alternative, instead of the nearly free money of its Central Bank. Nobody should be surprised if a Goldman Sachs person would love some investors getting 14% interest rate on their investments.


(B)          Mr. Viral Acharya’s Eight Paragraphs on Argentina’s Central Bank Crisis


The following is part of Mr. Viral Acharya’s lecture on “government interference undermining the RBI’s functional autonomy,” given on Oct 27, 2018. In the lecture he describes the alleged interference of the then Argentina’s President Cristina Fernandez’s in her country’s Central Bank function (Government interference undermines RBI’s functional autonomy: Viral Acharya, The Economic Times, Oct 27, 2018):


“My time at the central bank is up and that is why I have decided to leave my post definitively, with the satisfaction of my duty fulfilled,” Mr Martin Redrado, Argentina’s central bank chief, told a news conference late on Friday, January 29, 2010.


“We have arrived at this situation because of the national government’s permanent trampling of institutions,” he said. “Basically, I am defending two main concepts: the independence of the central bank in our decision-making process and that the reserves should be used for monetary and financial stability.”


The roots of this dramatic exit lay in an emergency decree passed by the Argentine government led by Cristina Fernandéz on December 14, 2010, that would set up a Bicentennial Stability and Reduced Indebtedness Fund to finance public debt maturing that year. This involved the transfer of $6.6 billion of the central bank reserves to the national treasury. The claim was that the central bank had $18 billion in “excess reserves.” [In fact, Mr. Redrado had refused to transfer the funds; so the government attempted to fire him, by another emergency decree on January 7, 2010 for misconduct and dereliction of duty; this attempt, however, failed, as it was unconstitutional.]


Besides sparking off one of the worst constitutional crises in Argentina since its economic meltdown in 2001, the chain of events led to a grave reassessment of its sovereign risk.


Within a month of Mr. Redrado’s resignation, Argentine sovereign bond yields and the annual premium cost for buying insurance against loss from default on Argentine government bonds (measured as the sovereign credit default swap spread) shot up by about 2.5% or 250 basis points, by more than a fourth of their prior levels.


Alberto Ramos, Argentina analyst at Goldman Sachs, noted on February 7, 2010: “Using central bank reserves to pay government obligations is not a positive development and the concept of excess reserves is certainly open to debate. It weakens the balance sheet of the central bank and provides the wrong incentive to the government, as it weakens the incentive to control the rapid expansion of spending and to promote some consolidation of fiscal accounts in 2010.”


Even more damagingly, a risk that Governor Redrado had warned about came to the fore. By beginning of January, 2010, Thomas Griesa, a New York judge, had frozen the Argentine central bank’s account held at the Federal Reserve Bank of New York, following claims of investors that the central bank was no longer an autonomous agency but under the thumb of the country’s executive branch.


(The above summary is based in part on Argentina’s central bank chief resigns, Jude Webber, Financial Times, January 30, 2010; and Argentina: Bank independence at stake as Redrado exits, Jason Mitchell, Euromoney, February 7, 2010)



Here is the statement of Alberto Ramos, Argentina analyst at Goldman Sachs (Argentina: Bank independence at stake as Redrado exits, Jason Mitchell, www.euromoney.com, February 07, 2010):


"Using central bank reserves to pay government obligations is not a positive development and the concept of excess reserves is certainly open to debate. It weakens the balance sheet of the central bank and provides the wrong incentive to the government, as it weakens the incentive to control the rapid expansion of spending and to promote some consolidation of the fiscal accounts in 2010.


…. investors would be more reassured if the payments of debt obligations were met with solid fiscal surpluses rather than from central bank reserves. In exchange for its international reserves, which are liquid and high-quality assets, the bank gets an asset that is illiquid and of much lower credit quality, and in net present value terms it must absorb a substantial loss.


(C)          Pre-1998 Argentina’s Economy – A Failed Market-Oriented Economy


Argentina was once the richest country in Latin America in terms of per capita income. Before its economic collapse in 2001, Argentina had been the poster child of globalization. Foreign investors funded the market-oriented policies. It brought down its trade barriers faster than most other countries in Latin America and liberalized its capital account more radically. It followed a comprehensive privatization program involving the sale of 400 state enterprises — including airlines, oil companies, steel, insurance companies, telecommunications, postal services, and petrochemicals. The U.S. Treasury Department and its surrogate, the International Monetary Fund (IMF), either urged or approved of all of these measures. In fact, even with financial liberalization called into question in the wake of the Asian financial crisis of 1997-98, then-Secretary of the Treasury Lawrence Summers extolled Argentina’s selling off of its banking sector as a model for the developing world (“The twin debacles of globalization,” Walden Bello, January 2002, https://ratical.org/co-globalize/TDofG.html)


Today, fully 50 percent of the banking sector, 70 percent of private banks, in Argentina are foreign-controlled, up from 30 percent in 1994. The result is a deeper, more efficient market, and external investors with a greater stake in staying put.


(D)          1998-2002 Argentine Great Recession


Due to the 1997 East Asian Economic Crisis, leading to the Russian and Brazilian financial crises, commodity prices dropped. It led to the Great Depression in Argentina during 1998-2002. At the height of the crisis in 2001, four Argentinian presidents took oaths and resigned in just ten days. Instead of bowing to IMF dictates, Argentina defaulted on $132 billion in 2001, mostly of foreign debts.

Before the onset of the 2001 crisis, Argentina’s fiscal deficit and debt were only 3.2 percent and 54 percent, respectively, of its GDP. The economy went into depression, its gross domestic product having declined by double-digit for next few years. Unemployment stood at 21.5 percent of the work force, and 53 percent of Argentines had been pushed below the poverty line. What was once the richest country in Latin America in terms of per capita income plunged below Peru and parts of Central America (“Argentina Defy the Creditors and Get Away with It,” Walden Bello, November 4, 2010, http://www.cadtm.org/Argentina-Defy-the-Creditors-and). 

The Great Depression caused widespread unemployment, riots, the fall of the government, the rise of alternative currencies and the end of the peso's fixed exchange rate to the US dollar. The economy shrank by 28 percent from 1998 to 2002. In terms of income, over 50 percent of Argentines were poor and 25 percent, indigent; seven out of ten Argentine children were poor at the depth of the crisis in 2002. The currency exchange rate (formerly a fixed 1-to-1 parity between the Argentine peso and the U.S. dollar) was floated, and the peso devalued quickly to nearly 4-to-1, producing a sudden rise in inflation to over 40% and a fall in real GDP of 11% in 2002.


(E)          Kirchners’ Era – From Recovery to Prosperity (2003-15)


Nestor Kirchner, a left-leaning Peronist won the 2003 presidential election. He attacked the IMF for funding what he called the failed free-market policies of his predecessors. Due to his economic policies and also due to commodities boom, Argentina's economy began to stabilize under him as shown in various Charts below. He governed from 2003 to 2007.

In 2007 presidential election, Nestor Kirchner opted to support his wife Cristina Fernandez de Kirchner to fight the election on his party ticket. She won and continued his economic policies, leading to the further improvement in the economy. Her government, which was in power from 2007 until 2015, raised public spending, nationalized companies and heavily subsidized many items of daily life.

By the first half of 2003, however, GDP growth had returned, surprising economists and the business media and the economy grew by an average of 9% for five years. Argentina's GDP exceeded pre-crisis levels by 2005, and Argentine debt restructuring that year resumed payments on most of its defaulted bonds. A second debt restructuring in 2010 brought the percentage of bonds out of default to 93%, though holdout lawsuits led by vulture funds remained ongoing. Bondholders who participated in the restructuring have been paid punctually and have seen the value of their bonds rise. Argentina repaid its International Monetary Fund loans in full in 2006, but had a long dispute with the 7% of bond-holders left.

In late December 2009, Cristina Fernandez de Kirchner launched the Bicentennial Fund, $6.569 billion US dollars, created with the excess reserves of the Central Bank, in order to guarantee the payment of interest on the foreign debt, which would drastically reduce the interest that multinational financial companies expected to charge. Five years earlier Redrado himself had endorsed the decision of former President Nestor Kirchner to use the excess reserves of the Central Bank for the payment of $10 billion, nearly a third of then reserves, for the payment of the total debt with the IMF (They throw to Redrado and they denounce it by breach, Jan 8, 2010, http://archivo.laarena.com.ar/el_pais-echan_a_redrado_y_lo_denuncian_por_incumplimiento-42923-113.html, in the newspaper the Sand (Santa Rosa); UPDATE 4-Argentina surprises with Paris Club debt plan, Hilary Burke, Reuters, Sept 2, 2008; Argentina clears entire $14b IMF debt, The New Zealand Herald, Jan 4, 2006). At that time, Argentina’s Central Bank’s reserve was about $44 billion which increased to $49 billion at the end of 2010.

The measure of the government was explicitly supported by an economic philosophy contrary to the neoliberal school, who dominated the Argentine economic policy between 1985 and 2001. Aligning herself with a non-neoliberal heterodox economic current, President Fernández maintained the thesis that, in case of surplus reserves, those amounts can be used to improve the performance of the Argentine economy. In this case, the economic reasoning considers that the State receives between 0.3% and 0.5% for the funds that make up the reserves, while it should pay 14%, some thirty times more, to obtain international financing. Therefore, the possibility of using excess reserves reduces the interest that the State should pay about 30 times. Complementarily, the guarantee of the payment of the external debt, reduces the uncertainty and with it the country risk of Argentina, improving access to financing of private companies and investment. In this case, the creation of the Bicentennial Fund, according to President Fernandez, was a way to get out of debt and to meet the debt payments committed, without adjusting the State's expenditure to reduce the amounts allocated to social welfare and the promotion of economic growth.


Chart 1 Argentina Inflation Rate (in percent)




Chart 2 Argentine Currency Peso Exchange Rate vis-à-vis US Dollar



(Source: https://tradingeconomics.com/argentina/currency)


Chart 3 Argentina Government Debt to GDP (in percent)




Chart 4 Argentina Growth Rate (in percent)




Chart 5 Argentina Unemployment Rate (in percent)




Chart 6 Argentina Unemployment Rate (in percent)



(Source: https://www.theglobaleconomy.com/Argentina/Unemployment_rate/)



(F)          Post-Kirchner Era (2015-) – Another Failed Market Oriented Economy


Due to the constitutional term limit, Cristina Kirchner did not fight the 2017 presidential election, otherwise she would have had won a third term. In her absence, the pro-globalization politician Mauricio Macri was narrowly elected after defeating Daniel Scioli of Justicialist Party to which Kirchners belonged to; Macri received 51.34% votes as compared to Scioli’s 48.66%.

When a business-friendly conservative was elected president of Argentina in October 2015, hopes were high he would put the South American country's economy on a stable path. He promised to revive Argentina's economy and achieve “zero poverty”. He also promised to bring down inflation by curbing public spending and to end all distortions and returning Argentina to a market-oriented economy where supply and demand, not the state, would define prices.

After taking over the reins, Mr. Macri undid most of the economic policies of his predecessors and opted for a market-oriented economy, slashing taxes, ending capital controls, and paying entire amounts to the vulture investors. Mr. Macri curbed public spending and paid the full amount to the 7% vulture/hedge funds. Spending cuts were implemented gradually to protect the third of Argentines below the poverty line. The strategy worked. There was a painful recession in 2016, the result of raising interest rates to tackle 25% inflation but after that the economy rebounded. In 2017, Argentina’s GDP grew by 2.9% (Argentina’s president struggles with a sinking economy, The Economist, Sept 20, 2018).

But just three years into Mr. Macri’s regime, Argentina’s economy is in dire state. As shown in various charts above, nearly all economic indicators are in steep downfall. In September 2018, another recession, the second since Mr Macri took office, seemed inevitable. In May, the central bank had raised interest rates to 40% to tackle a currency crisis that had seen the peso lose more than half its value against the dollar since the beginning of the year. The following month the government secured a $50 billion credit line from the IMF, the largest in the fund’s history. In August, as the peso continued its slump, the central bank raised rates to 60%. None of these measures bought more than temporary relief (Argentina’s president struggles with a sinking economy, The Economist, Sept 20, 2018).

The government expects the economy to shrink by 2.4% this year and inflation to reach 42%. Next year it predicts a further contraction of 0.5% and inflation averaging 23%. With interest rates set to remain at 60% until at least December, output could fall even more than forecast (Argentina’s president struggles with a sinking economy, The Economist, Sept 20, 2018).


(G)          Details of Vulture Investors’ Case in a New York (US) Court


I am quoting below three articles, published in US newspapers, which would give you the details of this case. The Hill is an American political newspaper and website published in Washington, D.C. since 1994. It is published by Capitol Hill Publishing, which is owned by News Communications, Inc. It focuses on politics, policy, business and international relations. It is worth noting that US justices are either elected by citizens for a fixed term or appointed, in most cases life-time, by politicians. Hence they are highly biased.


(1)  Joseph Stiglitz co-authored an article in The New York Times in which he severely criticized the entire case (How Hedge Funds Held Argentina for Ransom, Martin Guzman and Joseph E. Stiglitz, The New York Times, April 1, 2016):


PERHAPS the most complex trial in history between a sovereign nation, Argentina, and its bondholders — including a group of United States-based hedge funds — officially came to an end yesterday when the Argentine Senate ratified a settlement.


The resolution was excellent news for a small group of well-connected investors, and terrible news for the rest of the world, especially countries that face their own debt crises in the future.


In late 2001, Argentina defaulted on $132 billion in loans during its disastrous depression. Gross domestic product dropped by 28 percent, 57.5 percent of Argentines were living in poverty, and the unemployment rate skyrocketed to above 20 percent, leading to riots and clashes that resulted in 39 deaths.


Unable to pay its creditors, Argentina restructured its debt in two rounds of negotiations. The package discounted the bonds by two-thirds but provided a mechanism for more payments when the country’s economy recovered, which it did. A vast majority of the bondholders — 93 percent — accepted the deal.


Among the small minority who refused the deal were investors who had bought many of their bonds at a huge discount, well after the country defaulted and even after the first round of restructuring. These kinds of investors have earned the name vulture funds by buying up distressed debt, then, often aided by lawyers and lobbyists, trying to force a settlement.


The companies involved included some of the best-known vulture funds, including NML Capital, a subsidiary of Elliott Management, a hedge fund co-led by Paul Singer, a major contributor to the Republican Party, as well as Aurelius Capital and Dart Management. NML, which had the largest claim in the Argentina case, was the lead litigant of a group of bondholders in New York federal courts.


Then a 2012 ruling by Judge Thomas Griesa of the United States District Court for the Southern District of New York threw the game in the vulture funds’ favor, ruling that Argentina had to pay them back at full value, a cost to Argentina of $4.65 billion. NML, for example, would get a total return of 1,500 percent on its initial investment, according to our calculations, because of the cheap prices it paid for the debt and because of a “compensatory” interest rate of 9 percent under New York law.


The ruling, which became effective in 2014, did something else: Judge Griesa issued an injunction blocking Argentina from paying anything to the creditors who had accepted the deal until it had paid the vultures in full.


The judge gave the vultures the weapon they needed: Argentina had to either pay them off or renege on the default they had negotiated, ruining the country’s credit in the future and threatening its recovery.


On Thursday, Argentina finally settled for something close to the terms that Judge Griesa set. NML Capital will receive about half of the total agreement — $2.28 billion for its investment of about $177 million, a total return of 1,180 percent. (Argentina also paid the legal fees for the vultures.)


This resolution will carry a high price for the international financial system, encouraging other funds to hold out and making debt restructuring virtually impossible. Why would bondholders accept a haircut if they could wait and get exorbitant returns for a small investment?


In some ways, Argentina was an outlier. It fought aggressively for the best terms from the initial set of bondholders, setting the stage for a spectacular recovery: From 2003 to 2008, until the global financial crisis intruded, the country grew 8 percent per year on average, and unemployment declined to 7.8 percent from more than 20 percent. In the end, the creditors who had accepted the initial restructuring got the principal value in full and even 40 percent more.


Most countries are intimidated by the creditors and accept what is demanded, with often devastating consequences. According to our figures, 52 percent of sovereign restructurings with private creditors since 1980 have been followed by another restructuring or default within five years. Greece, the most recent example, restructured its debt in 2012, and only a few years later it is in desperate need of more relief.


It’s common to hear the phrase “moral hazard” when looking at countries that face crushing debt, like Greece or Argentina. Moral hazard refers to the idea that allowing countries (or companies or people) to renegotiate and lower their debts only reinforces the profligate behavior that put them in debt in the first place. Better that the debtor faces disapproval and harsh consequences. But the Argentina deal reversed the moral hazard by rewarding investors for making small bets and reaping huge rewards.


Britain and Belgium have made particular kinds of vulture suits illegal. Similar legislation, with bipartisan support, stalled in Congress in 2009. Last September, the United Nations overwhelmingly approved nine principles that should guide sovereign debt restructuring. During the debate, one ambassador apologized to actual vultures — the birds — for using the term. (One of us, Martin Guzman, made presentations to both the United Nations and to the Argentine Senate, but was not paid in either case.)


Only six countries voted against, but as those are the major jurisdictions for sovereign lending (including the United States), these principles will not be very effective.


Many countries have bankruptcy laws. But there is no equivalent framework for sovereign bankruptcies, not even something remotely close to that. The United Nations has taken the lead to fill this vacuum, and as Argentina’s case proves, the initiative is more important than ever.


(2)  Two years ago, he had co-authored another article on US federal judge Thomas Griesa’s unjustified ruling on the same topic (Argentina default? Griesafault is much more accurate: This was the first time in history that a country was willing and able to pay its creditors but was blocked by a judge – Thomas Griesa – from doing so, Joseph E Stiglitz and Martin Guzman, The Guardian (UK), August 7, 2014):


On 30 July Argentina's creditors did not receive their semi-annual payment on the bonds that were restructured after the country's last default in 2001. Argentina had deposited $539m (£320m) in the Bank of New York Mellon a few days before. But the bank could not transfer the funds to the creditors: US federal judge Thomas Griesa had ordered that Argentina could not pay the creditors who had accepted its restructuring until it fully paid – including past interest – those who had rejected it.


It was the first time in history that a country was willing and able to pay its creditors, but was blocked by a judge from doing so. The media called it a default by Argentina, but the Twitter hashtag #Griesafault was much more accurate. Argentina has fulfilled its obligations to its citizens and to the creditors who accepted its restructuring. Griesa's ruling, however, encourages usurious behaviour, threatens the functioning of international financial markets, and defies a basic tenet of modern capitalism: insolvent debtors need a fresh start.


Sovereign defaults are common events with many causes. For Argentina, the path to its 2001 default started with the ballooning of its sovereign debt in the 1990s, which occurred alongside neoliberal "Washington Consensus" economic reforms that creditors believed would enrich the country. The experiment failed, and the country suffered a deep economic and social crisis, with a recession that lasted from 1998 to 2002. By the end, a record-high 57.5% of Argentinians were in poverty, and the unemployment rate skyrocketed to 20.8%.


Argentina restructured its debt in two rounds of negotiations, in 2005 and 2010. More than 92% of creditors accepted the new deal, and received exchanged bonds and GDP-indexed bonds. It worked out well for both Argentina and those who accepted the restructuring. The economy soared, so the GDP-indexed bonds paid off handsomely.


But so-called vulture investors saw an opportunity to make even larger profits. The vultures were neither long-term investors in Argentina nor the optimists who believed that Washington Consensus policies would work. They were simply speculators who swooped in after the 2001 default and bought up bonds for a fraction of their face value from panicky investors. They then sued Argentina to obtain 100% of that value. NML Capital, a subsidiary of the hedge fund Elliot Management, headed by Paul Singer, spent $48m on bonds in 2008; thanks to Griesa's ruling, NML Capital should now receive $832m – a return of more than 1,600%.


The figures are so high in part because the vultures seek to earn past interest, which, for some securities, includes a country-risk premium – the higher interest rate offered when they were issued to offset the larger perceived probability of default. Griesa found that this was reasonable. Economically, though, it makes no sense. When a country pays a risk premium on its debt, it means that default is a possibility. But if a court rules that a country always must repay the debt, there is no default risk to be compensated.


Repayment on Griesa's terms would devastate Argentina's economy. NML Capital and the other vultures comprise just 1% of the creditors, but would receive a total of $1.5bn. Other holdouts (6.6% of total creditors) would receive $15bn. And, because the debt restructuring stipulated that all of the creditors who accepted it could demand the same terms as holdouts receive, Argentina might be on the hook for $140bn more.


Every Argentine might thus owe more than $3,500 – more than one-third of average annual per capita income. In the United States, applying the equivalent proportion would mean forcing every citizen to pay roughly $20,000 – all to line the pockets of some billionaires, intent on wringing the country dry.


What's more, the existence of credit default swaps creates the possibility of further gains for the vultures. A CDS insures against a default, paying off if the bonds do not. They can yield substantial returns, regardless of whether the bonds are repaid – thus reducing their holders' incentive to achieve an agreement.


In the runup to 30 July, the vultures conducted a scare campaign. A second default in 13 years would be a big setback for Argentina, they claimed, threatening the country's fragile economy. But all of this presumed that financial markets would not distinguish between a default and a Griesafault. Fortunately, they did: interest rates for different categories of Argentine corporate loans have not reacted to the event. In fact, borrowing costs on 30 July were lower than the average for the whole year.


Ultimately, though, the Griesafault will carry a high price – less for Argentina than for the global economy and countries needing access to foreign financing. America will suffer, too. Its courts have been a travesty: as one observer pointed out, it was clear that Griesa never really fathomed the issue's complexity. The US financial system, already practised at exploiting poor Americans, has extended its efforts globally. Sovereign borrowers will not – and should not – trust the fairness and competence of the US judiciary. The market for issuance of such bonds will move elsewhere


(3)  Argentina had appealed Griesa's injunction to the U.S. 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 Supreme Court did not consider the Argentina’s appeal.


I am quoting several paragraphs from an article, published on March 14, 2016 (The political economy of Argentina's settlement with the vulture funds, Mark Weisbrot, The Hill (US), March 14, 2016).


Argentina arguably had no alternative but to default in 2002, but the government also did the right thing by standing up to the International Monetary Fund (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; the settlement also entails 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.


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 gross domestic product (GDP) from 2002 to 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 10 years from 2003 to 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 the vulture funds. For Argentina's 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 an article describing his incompetence: "Put simply, President Macri's election changed everything." That was from Griesa's decision of Feb. 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-wing 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 U.S. 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 U.S. 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 IMF needed.


The U.S. 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 U.S. State Department: In conversations with U.S. officials leaked by WikiLeaks, Macri chastised them for being "too soft" on the Argentine government and encouraging its "abusive treatment" of the U.S.


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 U.S. 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.

Additional information