Capitalism is a Shame

The case of Argentina’s default shows it again: capitalism is a shame. Argentina has been declared in default, but the default is with them, the finance people ruling the world, supported by a judicial system that defends their interests.

Here is a report from Reuters:

Argentina braces for market reaction to second default in 12 years

By Sarah Marsh

BUENOS AIRES Thu Jul 31, 2014 1:58am EDT

0 CommentsinSha

A woman walks past a graffiti that reads ''No to the debt payment'' in Buenos Aires, July 28, 2014.

Credit: Reuters/Marcos Brindicci

(Reuters) - Argentina defaulted for the second time in 12 years after hopes for a midnight deal with holdout creditors were dashed, setting up stock and bond prices for declines on Thursday and raising chances a recession could worsen this year.
After a long legal battle with hedge funds that rejected Argentina's debt restructuring following its 2002 default, Latin America's third-biggest economy failed to strike a deal in time to meet a midnight deadline for a coupon payment on exchange bonds.
Even a short default will raise companies' borrowing costs, pile more pressure on the peso, drain dwindling foreign reserves and fuel one of the world's highest inflation rates.
"It is going to complicate life for businesses like YPF which were going to look externally for financing," said Camilo Tiscornia, a former governor of Argentina's central bank. State-controlled energy company YPF (YPFD.BA) needs funds to develop Argentina's huge Vaca Muerta shale formation.
Argentina had sought in vain to win a last-minute suspension of a ruling by U.S. District Judge Thomas Griesa in New York to pay holdouts $1.33 billion plus interest. He ruled Argentina could not service its exchange debt unless it paid holdouts at the same time.
A proposal for Argentina banks to buy out the hedge funds' non-performing debt also fell through, sources told Reuters.
"This is a very particular default, there is no solvency problem, so everything depends on how quickly it is solved," said analyst Mauro Roca of Goldman Sachs.
As dire as it is, the situation is a far cry from the mayhem following the country's economic crash in 2001-2001 when the economy collapsed around a bankrupt government. Millions of Argentines lost their jobs.
This time the government is solvent. How much pain the default inflicts on Argentina, which is already in recession, will depend on how swiftly the government can extricate itself from its obligations.
Buenos Aires had argued that agreeing to the hedge funds' demands to pay them in full would break a clause barring it from offering better terms than those who accepted steep writedowns in the 2005 and 2010 swaps.
However, that clause expires on Dec. 31, after which the government would be able reach a deal with the funds. Many investors and economists still hope for a separate solution before then between the holdouts and private parties.
"Our base case is that a default would be cleared by January 2015," said Alberto Bernal, a partner at Miami-based Bulltick Capital Markets. He projected that a default would cause the economy to shrink 2 percent this year compared with a previous market consensus for a 1 percent contraction.
Failure to strike a deal will not cause financial turmoil abroad because Argentina has been isolated from global credit markets since its 2002 default on $100 billion, but domestic markets that had rallied on hopes of a deal in recent days will probably reverse course.
Yields on Argentina's key dollar bond due 2033 fell to the lowest level in about three and a half years on Wednesday, and the country's MerVal index .MERV hit a record.
"The correction will depend on perceptions of how long the default will take to solve," said Roca.
HOW DIRE A DEFAULT?
The default could get much messier and take longer to clear up if creditors force an "acceleration" for early payment on their bonds.
"How bad the outcome ends up being depends on whether bondholders accelerate," said Alejo Costa, strategy chief at local investment bank Puente.
"Acceleration would open a new legal battle for the government that could end up in a new restructuring."
Argentina has foreign currency restructured debt worth about $35 billion while its foreign exchange reserves stand at $29 billion.
U.S. ratings agency Standard & Poor's on Wednesday downgraded the country's long- and short-term foreign currency credit rating to "selective default". The default rating will remain until Argentina makes its overdue June 30 coupon payment on its discount bonds maturing in 2033, the agency said.
Holders of insurance against an Argentine credit default will have their eyes peeled for an announcement from the International Swaps and Derivatives Association (ISDA). If ISDA declares an Argentine default, the total amount of money that would be paid out is just over $1 billion.
After two days of talks with holdouts in New York, Argentine Economy Minister Axel Kicillof on Wednesday evening told reporters that Argentina was not in default because it had made the June $539 million interest payment to holders of exchanged bonds - even if this had not reached creditors by July 30, at the end of the month-long grace period.
Judge Griesa called the payment illegal and blocked the funds' onward transfer to creditors. It remains in limbo in the Buenos Aires account of trustee agent Bank of New York Mellon.
Argentines were sanguine about news of the default.
"We have been in a similar situation before, and we will make it through," said a 27-year old employee at an automobile firm who declined to give his full name. "The sun rises each day. It will get resolved, be it next week, or next month."
(Additional Reporting by Richard Lough and Eliana Raszewski; Editing by Ken Wills)

Argentina's debt restructuring attacked

Here is an interesting article in the New York Times about bondholders ('vulture funds') obstructing a reasonable restructuring of Argentina's debt.

The Debt Vultures' Fell Swoop

By MARK WEISBROT 

JUNE 22, 2014

WASHINGTON — Last week, the United States Supreme Court decided not to review a ruling in the Second Circuit Court of Appeals whose effect is that Argentina must pay “holdout” creditors who refused to participate in debt restructuring agreements that Argentina reached with the majority of bondholders following the 2001 default on its sovereign debt. Argentina’s lawyers warned that the court’s decision created “a serious and imminent risk” that the country would again be forced to default. But the ruling also has profound and disturbing implications for the functioning of the international financial system, and even the United States would most likely be adversely affected.

Parties as diverse as the International Monetary Fund and leading religious organizations wanted the Supreme Court to overturn the decision, and briefs supporting this position were filed by the governments of France, Brazil and Mexico, as well as by the Nobel Prize-winning economist Joseph E. Stiglitz. The I.M.F. — which has had mostly sour relations with Argentina since its involvement in that country’s 1998-2002 recession — was also planning to file a brief on Argentina’s side to the Supreme Court, but was blocked by the American government from doing so. This action may have influenced the court’s decision not to hear the case.

Argentina defaulted on its international debt at the end of 2001, following a deep recession. After years of negotiations, the government reached a restructuring agreement with its private creditors, in which the bondholders accepted a loss of about two-thirds of the value of their bonds. In 2005, 76 percent of the creditors had signed on; by the end of 2010, more than 90 percent had. Argentina has made all of its payments on the new, restructured bonds, on time.

The complication was over a group of “holdout” bondholders who did not agree to the restructuring. The plaintiffs in the New York case are widely known as “vulture funds,” because they bought the bonds after the default at a fraction of their value, hoping to use court rulings like this one to force payment at the bonds’ original face value.

The appellate court ruled that if Argentina was paying the holders of restructured bonds, it must also pay the holdout or vulture fund creditors in full — and its decision implies that the punishment for an attempted default could be never-ending. This raises the question of how many decades a people should be forced to suffer for the mistakes or transgressions of earlier leaders — whether elected or, as is often the case, unelected. (Much of the Argentine debt, in fact, was incurred by a dictatorship.)

Another key implication of the ruling is that governments that are bankrupt would now find it difficult or impossible to negotiate a settlement with their creditors. Who will take a haircut on their bonds if they can refuse the terms and sue for the full value?

In the United States, and most other countries, there are bankruptcy laws designed to allow for companies and individuals facing unpayable debt to make a new start. There is no such legal mechanism for countries, so these restructuring agreements are an important way of resolving problems of unpayable sovereign debt.

The court’s decision would make it difficult to issue the new bonds needed for restructuring, as well as further debt in the future. Just one holdout bondholder or vulture fund creditor could torpedo the process.

In addition, Argentina’s default and devaluation in 2001-2 is widely regarded as a success. The country’s economy shrank for just three months after the default, and then began a rapid-growth recovery. By the end of 2011, Argentina had achieved a record rate of employment, reduced poverty by nearly 70 percent and allowed for a tripling of social spending in real terms.

A decade after the devaluation, the Argentine economy has run into trouble — partly because the vulture funds have prevented it from borrowing on international markets — but there is no doubt that Argentines are vastly better off for the path that was taken. For comparison, look at Greece: After six years of austerity-driven recession, which included a 40 percent cut in health care spending, the unemployment rate stands at 26.8 percent (and more than double that rate for youth) and the net public debt has grown to 169 percent of the country’s gross domestic product.

Most experts agree that the appellate court ruling would have a destabilizing effect on international financial markets. There is economic justice to consider, too. Argentine bondholders were paid high interest rates on their bonds because there was risk. Capitalism is not supposed to be a “heads I win, tails you lose” bet — but the Second Circuit Court’s decision would make it that way for sovereign debt bondholders.

Argentina may find a way around the court’s decision, by issuing new bonds and making payments that are outside of the court’s jurisdiction. But this ruling in favor of the vulture funds will do continuing damage to ordinary people around the world that will show up in future debt crises.

Mark Weisbrot is the co-director of the Center for Economic and Policy Research and the president of Just Foreign Policy. 

You may also be interested in this interview.

March in London against austerity

Tens of thousands march in London against coalition's austerity measures

An estimated 50,000 people in London addressed by speakers, including Russell Brand, after People's Assembly march

• Kevin Rawlinson and agencies
• theguardian.com, Saturday 21 June 2014 20.45 BST
• Jump to comments (679)

Russell Brand told the marchers there will be a 'peaceful, effortless, joyful revolution' against austerity in the UK. Photograph: Rex Features

Tens of thousands of people marched through central London on Saturday afternoon in protest at austerity measures introduced by the coalition government. The demonstrators gathered before the Houses of Parliament, where they were addressed by speakers, including comedians Russell Brand and Mark Steel.
An estimated 50,000 people marched from the BBC's New Broadcasting House in central London to Westminster.
"The people of this building [the House of Commons] generally speaking do not represent us, they represent their friends in big business. It's time for us to take back our power," said Brand.
"This will be a peaceful, effortless, joyful revolution and I'm very grateful to be involved in the People's Assembly."
"Power isn't there, it is here, within us," he added. "The revolution that's required isn't a revolution of radical ideas, but the implementation of ideas we already have."
A spokesman for the People's Assembly, which organised the march, said the turnout was "testament to the level of anger there is at the moment".
He said that Saturday's action was "just the start", with a second march planned for October in conjunction with the Trades Union Congress, as well as strike action expected next month.
People's Assembly spokesman Clare Solomon said: "It is essential for the welfare of millions of people that we stop austerity and halt this coalition government dead in its tracks before it does lasting damage to people's lives and our public services."
Sam Fairburn, the group's national secretary, added: "Cuts are killing people and destroying cherished public services which have served generations." (...)

An international student call for pluralism in economics

"...it is time to reconsider the way economics is taught. We are dissatisfied with the dramatic narrowing of the curriculum that has taken place over the last couple of decades. This lack of intellectual diversity does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century - from financial stability, to food security and climate change. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods."

The quote is from the international student call below. This is positive news, students who take the social science of economics more seriously than most of their teachers. I only copy the beginning of their Open Letter, you can read the rest here or by clicking on the links in the text below. The Press coverage of the student call is also encouraging.

International Student Initiative for Pluralism in Economics

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An international student call

for pluralism in economics

 

It is not only the world economy that is in crisis. The teaching of economics is in crisis too, and this crisis has consequences far beyond the university walls. What is taught shapes the minds of the next generation of policymakers, and therefore shapes the societies we live in. We, over 65 associations of economics students from over 30 different countries, believe it is time to reconsider the way economics is taught. We are dissatisfied with the dramatic narrowing of the curriculum that has taken place over the last couple of decades. This lack of intellectual diversity does not only restrain education and research. It limits our ability to contend with the multidimensional challenges of the 21st century - from financial stability, to food security and climate change. The real world should be brought back into the classroom, as well as debate and a pluralism of theories and methods. Such change will help renew the discipline and ultimately create a space in which solutions to society’s problems can be generated. 

United across borders, we call for a change of course. We do not claim to have the perfect answer, but we have no doubt that economics students will profit from exposure to different perspectives and ideas. Pluralism will not only help to enrich teaching and research and reinvigorate the discipline. More than this, pluralism carries the promise of bringing economics back into the service of society. Three forms of pluralism must be at the core of curricula: theoretical, methodological and interdisciplinary.

(...)

Staggering news from the Netherlands - The bankruptcy of neoliberalism according to bankers and entrepreneurs

On November 14, 2013 there was a meeting in Amsterdam with interesting and surprising statements, coming from the financial and business community in the Netherlands and Europe. They advocated – in a confidential setting – for measures virtually no socialist party would dare to take on his behalf. In business circles one is surprised that people do not rebel against the state’s budget cuts. Here is a report.

Last night we had a special, baffling Gulf Group Evening about neoliberalism. One of the attendees had just returned from a meeting with Dutch bankers and entrepreneurs, employees of the European Commission and the Dutch Central Bank and some scientists.
Here is a brief account of the evening. The following was said by bankers and entrepreneurs, with additions of participants to the evening:
- The Dutch economic and financial policy is all wrong , the economy is hurt dramatically by the cuts;
- The multinationals have accumulated too much money and are not investing it productively;  so there is over-accumulation, a Marxist term used by the bankers;
- The corporate tax for companies should be dramatically and rapidly increased so that money flows back to the state and can redistribute it;
- The ratio between capital and labour is totally skewed and has grown at the expense of labor;
- The wages in the Netherlands for many years have been too low and should urgently be increased because people are not spending and small and medium businesses go bankrupt;
- The cuts in state expenditures are fragmenting and undermining society;
- It is astonishing that the Dutch do not revolt, said a surprised banker;
- The 3 % target for the government budget deficit relative to GDP, which makes people widely unemployed and unhappy (according to a recent newspaper article the suicide rate in the Netherlands has increased by 30 percent) is a randomly picked rate;
- The banks in the Netherlands are in a precarious situation, because when people want to get their money en masse from the bank, that money is not there and the government must intervene with much higher amounts than previously - which is probably impossible;
- The trade union movement in the Netherlands is very weak, they are wimps, they walk behind the government policy .

The participants to the Gulf Group Evening noted that the same austerity policies in the Netherlands and other European countries in the thirties had led to almost all political parties to look alike in their austerity drive, and that this had led to a mellow population that lost confidence in politics, and to the emergence of nationalist and fascist movements, in the Netherlands and elsewehere, but especially in Germany. And it had led to the Second World War.
Only after the devastating war in Europe Keynesian policies were put in place, with an important role for the state in the economic process, and a redistribution of power between capital and labour in favour of labour, and the welfare state was carefully built.
Participants also noted that it was strange and unfortunate that it first appeared the financial and economic crisis of 2008 would lead to a replacement of the global financial system – that with its derivatives and ever newer and incomprehensible financial products had become unmanageable - by a better system, but that nothing was done with the proposals of the international committees that were set up. The current financial (non)system just went on, and even deepened. A large part of the population of Europe goes along with it, and is part of it by home ownership and as co-holder of the pension system.

Aafke Steenhuis
Jan Joost Teunissen

The future of Europe

Drawing made by my daughter Belle after a photo of 1967 when young people in Europe were full of energy and optimism.

In July 2013, FONDAD organised a conference on the future of the euro and Europe at the Dutch central bank in Amsterdam (De Nederlandsche Bank) that was attended by officials and academics. It was a closed meeting of a small group of experts exchanging views.

In August, September and October I was six weeks in Latin America for a book my wife and I are writing on ports and the world economy and upon my return, after I had done some follow-up to that trip, I resumed my readings on internet about the current state of thinking and acting on the world financial system and the future of Europe.

A week ago I received from one of my friends of the FONDAD network, Avinash Persaud, an article to be published in the Financial Times, Bail-ins are no better than fool's gold. I circulated it among the participants of the July Conference at the Dutch central bank and a few others. That prompted reactions and I circulated more articles, the last one being a speech George Soros gave at a conference in Kiel on the future of Europe.

When I circulated these articles over the past week, I accompanied them by short letters. To share with you some of my thoughts on the world economic system and Europe I copy those letters below.

22 October 2013
Friends,
Below is a piece by Avinash Persaud, partly inspired by the FONDAD conference held at De Nederlandsche Bank in July.
After a quick reading my initial comment is that, in my view, financial crises are, first of all, a result of policy failure (rather than market failure), and that boom-bust cycles can be prevented by establishing a better international monetary and global financial system, and by good countercyclical policies.
I fully agree with Avi that we do not need bail-ins if we prevent systemic crises. In my view it is a shame that, say during the last decades, evitable systemic crises have not been prevented. Crisis prevention should have become a priority for policymakers. Policymakers should have listened to the warnings Bill White and Avinash and others made many years before the current crisis started in 2007. It is a shame they did not.
Yours,
Jan Joost

23 October 2013
For those of you who are not familiar with Bill White's analysis and warning of systemic crisis many years before it erupted in 2007, here is a piece that summarises Bill's role. I assume it is based on a long article that was published earlier by Der Spiegel. You may agree or disagree with the last para of the piece that follows (arguing that central bankers should step back and let the free market control financial activities). http://www.thenewamerican.com/economy/economics/item/4442-william-white-of-the-bank-of-international-settlements-predicted-the-economic-crisis

27 October 2013
I recognise some of my own thinking in Soros' recent speech on the future of Europe (see below) and agree with him that Europe's creditor countries (including the Netherlands) are in a position to create a more hopeful and more efficient Europe.
In my view, Europe could become again an inspiring example for the world -- if it maintains its social ideals, its social system and creates more effective economic policies, for the sake of Europe and for the world at large.
Large companies are thinking and acting locally and globally, and people and governments in Europe and elsewhere should do that as well. It would be a shame if Europe drowned in its own impotence and self-created problems catering at nationalism and xenophobia.
I apologise for sending you during a week so many articles and bothering you with my own beliefs and intellectual and social anger, but I hope you will forgive me and take into account that I was in Latin America for six weeks (for a new book I am writing with my wife on ports and the world economy) and gradually updated myself by reading old and new news.
Have a nice Sunday,
Jan Joost
http://business.financialpost.com/2013/10/02/george-soros-the-euro-crisis-might-be-over-but-europes-nightmare-is-getting-worse/

28 October 2013
I hope the German and Dutch officials are going to move, but I doubt they will and I am almost sure that if they move they will do so insufficiently. The dogmas among the officials and the economic interests of the companies and better-off citizens (not only in Germany and Holland) are strong and the politicians and technocrats with other, wiser views are weak. Also, there is too little wisdom and too little pressure coming from academics; many of them sharing the same dogmatic ideas about proper economic policies and systems. I remember Robert Triffin once was saying to me, with a sad and lightly angry expression on his face, that most of his academic colleagues were whitewashing policies rather than criticising them and suggesting alternative policies. 
Yours, Jan Joost

Dijsselbloem is right!

 

Jan Joost Teunissen

Just a few days ago, I was disappointed by Jeroen Dijsselbloem ... and now I am excited and would like to give him a compliment, even a great compliment!

He challenged the financial sector, telling them that from now on it would not be the taxpayer who would pay for the risks they have taken, but themselves and that the party - where profits were private and losses borne by the community - was over!

Naturally he received a lot of criticism for his surprising stance, both as leader of the Euro group and as Minister of Finance of the Netherlands. The criticism came, not surprisingly, from people who had set aside a lot of money in the Cypriot banks. And it came from politicians who said that, okay, he was right to finally tackle the financial sector, but he should have done this silently and not openly and publicly as it would stir emotions in the financial markets and among savers who would no longer trust that their money was safe in the banks. Thus it could prompt a widespread run on European banks when the next banking crisis emerged in another European country. And if that country were a large country, then the whole euro system might tumble. It would not be the first time that a chain reaction would damage the world financial system. This young and inexperienced Dutch minister of finance has behaved incompetently and irresponsibly. He should be replaced as soon as possible by someone more experienced who is familiar with financial markets and knows what one can say and do, and what one cannot say and do!

Since late Tuesday evening I have followed the harsh and emotional attacks on Dijsselbloem. What was actually the criticism? No more than that he had sown anxiety among people who work in the financial markets or among people who defend the markets through thick and thin. And, obviously, among savers who have put more than 100,000 euros in the Cypriot banks that are now being "cut up" or dissolved.

Dijsselbloem’s new policy is clear: "Shareholders, bondholders and big savers: from now on, you will have to contribute to the rescue or restructuring of a bankrupt bank."

Good, I think, finally there is the beginning of a change of policy vis-à-vis the financial sector! It's high time!

The only exception I would make is for people and companies in Cyprus that are "unreasonably" affected by the new policy of Dijsselbloem and his colleagues. If a business customer of a bank has all his money in a bankrupt bank, it seems unjust that he will lose an important part of the money that exceeds 100,000 euros. If I would still be in the position that Fondad would have over 100,000 euros on a business bank account and I would have established Fondad in Cyprus instead of the Netherlands, I would now protest and say that our work was made impossible if our bank was dissolved and we had lost a significant portion of our revenues.

For the rest, I have nothing but praise for the initiative by Dijsselbloem, and his openness about it. Without that openness, without the media echoing his words, the financial sector could have continued to lean backwards and let the taxpayer pay for its risks, revenues and losses.

I hope Dijsselbloem’s initiative will be the beginning of a democratization and socialization of the international financial system, in which governments and politicians take back the reins instead of, as they have done way too long, giving the financial sector free play. The current crisis in Cyprus, in Europe and in the rest of the world, gives good reasons for such democratization and socialization.