An Ol' Broad's Ramblings
Siding With Foreign Countries?
Obama’s Troubling Acceptance Of Sovereign Default
Ireland, Greece and other nations on Europe’s periphery are laboring mightily to avoid default, swallowing their austerity medicine as they repair their balance sheets. This is what responsible nations do, since default should only be a last, disgraceful resort. They deserve Washington’s encouragement and support.
aus·ter·i·ty [aw-ster-i-tee]
–noun, plural -ties.
1. austere quality; severity of manner, life, etc.; sternness.
2. Usually, austerities. ascetic practices: austerities of monastery life.
3. strict economy.
When a nation finds itself so far in debt, what would be the responsible thing to do? Go further into debt, or man up, take the consequences? It appears to me that Portugal has the right idea. Argentina, on the other hand, is more like a spoiled child, continuously breaking its toys and/or hiding them, and expecting them to be replaced.
Argentina has emerged as the world’s most egregious serial defaulter, jilting bondholders six times in its modern history. Its most opprobrious default occurred in 2001 to the tune of $81 billion. This is by far the largest sovereign debt default in global financial history.
At one time, countries that defaulted on their debts would be blockaded, until they paid up. Not so these days. A country evidently just say, “we ain’t gonna pay ya what we owe, and you’ll just have to make do with what we decide to fork over”. (source) Argentina’s economy is growing, yet they are still unwilling to pay their debts, in large part to the former president, husband of current the current Argentinian president. Both quite unpopular with the ‘middle class‘ folks too, apparently. (The Perons come to mind.)
Over the last decade, the Argentine central bank has become a pawn of the government. It has squirreled reserves away in the Bank of International Settlements (BIS) in Switzerland, the bank for central banks, in an effort to evade the enforcement of lawful judgments issued by New York courts. Multiple governors of Argentina’s central bank openly criticized the Argentine government for its growing infringement on central bank independence.
Governmental encroachment. Why does this sound extremely familiar? While the courts have sided with the independence of the central bank, Argentina has consistently failed to pay its U.S. creditors, and continues to brag about having a large chunk of change in a Swiss bank ($54 BILLION).
District Court Judge Thomas Griesa, ruling in favor of bondholders, said at the time, “in all the years of litigation, the [Argentine government] has shown not the slightest recognition of obligation to pay. And it is clear beyond any question that the [Argentine] Republic, as it went on from the crisis of 2001, has at times had resources at its command to pay the judgments, or at least to make substantial part-payments.
*getting out calculator* $105 million from $54 billion….. Yep, there would STILL be a very large sum in the bank over there in Switzerland.
Lost amid the midterm election mayhem was a move by the Obama administration in this case. Early in November the departments of Justice, State and Treasury filed a joint brief before the United States Court of Appeals for the Second Circuit supporting the Argentine government against American creditors. The brief advocates overturning Judge Griesa’s ruling.
What? Now, why would the Obama administration fight AGAINST U.S. companies, and FOR a foreign nation?
The administration worries that in response to the Judge’s ruling, other countries might permit attachment of U.S. government accounts abroad. But this would happen only if the U.S. government defaulted on its debt, something the Obama administration has rightly and forcefully argued is not possible. Furthermore, over 90% of U.S. reserves are held in gold, at Fort Knox and safe from foreign creditors.
Is Obama planning on defaulting? If not, then why argue against the companies with the claims?
The New York Fed in its own brief conjures the nightmare scenario of other foreign central banks withdrawing their reserves to reduce the risk of suffering the same fate as Argentina. Such fears are unfounded. Other countries need only fear attachments if they default on their debt, fail to offer a fair restructuring and have non-independent central banks.
Far from being an economist, even I can understand this issue. Why doesn’t the president and his administration?
But let’s suppose the New York Fed is right and foreign countries withdraw their reserves. The administration argued that this will weaken the dollar, drive up interest rates and increase our balance of payment deficits. Those claims are all patently false.
While it is perhaps true that withdrawn dollars could be moved outside the U.S., those dollars would continue to be held elsewhere, probably at the BIS. Where dollars are held has no effect on U.S. interest rates or dollar soundness; only the sale of those dollars does that.
To put it my simple terms, if I close my account at one bank, and open another account in a different bank, those dollars are still there, in the new account. Nothing has changed. Have I got that right?
There is a bigger picture the Obama administration is missing concerning other nations that might be tempted by the siren call of default. With the United States at the center of the global financial system and architect of many of its norms, what signal does it send to distressed nations at Europe’s periphery when the U.S. government sides with sovereigns that default?
The distrust for this administration grows. The bowing to foreign heads of state is one issue, but its siding with foreign countries against the interest of American companies/bond holders is even more disturbing.
Argentina has felt free to flout international financial norms and stiff its creditors for years. When the U.S. government sides with Argentina against those creditors, you can be sure that financial officials in Dublin and Athens as well as Lisbon, Rome and Spain all take keen notice.
The Obama administration must reaffirm America’s commitment to the sanctity of contract. And U.S. courts would be best served by not letting misguided policy arguments influence the rule of law.
The “hand shake” is rarely honored anymore. A written contract should be. When our government flouts the law, this sends an extremely disturbing signal to other countries, and to her citizens as well.
This is how ‘jilting’ bondholders can work against you.
Obama’s admin has already shown a willingness to jilt bondholders, they did that to the GM bondholders.
China has bought hundreds of billions,if not trillions, of US govt bonds.
Suppose China got nervous and decided to cash in all of those bonds?
Our money would be ruined and NO ONE would be willing to buy our debt!!!
Our dollar would be worthless!!!!
http://marshallramsey.com/?p=222 sorry this has nothing to do with the bolg but it’s the only way i had to send this to you.
Yeah, this bunch have NO problem screwing people over.
No mark, but it’s cute as all get out! and great for lightening the mood a smidge.