The Argentine Debt Crisis

Class struggle cannot be fully understood outside of its larger economic context. The working class fights against economic imperatives embodied by the ruling class and it is influenced towards or away from struggle by the change in its economic conditions. Therefore I will begin to elaborate on Argentina’s specific economic context in this post.

Argentine economics right now is something of a treasure trove of devastating economic phenomena that affect class struggle. There is especially a lot of interest going on with the Argentine currency as inflation is rampant and the exchange rate between the peso and the dollar is out of control. In this post however I will focus on economic event that has received the most media attention recently: Argentina’s debt crisis.

As of July 30th Argentina is in a rather unusual default. It has been dubbed a “technical” default and the Argentine president Kirchner claims, with some validity, that it is not really a default at all. The cause of this lies in the Argentine default of 2001. A huge amount of debt had been run up by the notorious Argentine dictatorship of the 70s (famous for “disappearing” those who opposed them) and the subsequent neoliberal government did little to control it. By 2001 the Argentine government was no longer able to make its interest payments and so it went into default. In stead of simply annulling the debt however due to inability to pay, the government offered a restructuring of the debt. Those who had lent money to the government would be paid back, but only partially. Most of the lenders accepted this. However, a few large American hedge funds, representing a total of only 7% of the debt, refused this deal and demanded that they be paid in full. These “holdouts” engaged in a long series of attempts to try and force the Argentine government to comply. It is this most recent attempt that has caused this technical default.

There is a clause in Argentine debt, present in most sovereign debt, called the pari passu clause. It requires that all debt holders be treated as equal. The main reason for this is to avoid there being a better form of debt, with higher interest rates or preferential treatment in terms of repayment. However the “holdouts” are trying to use this clause to argue that the Argentine government should not be allowed to treat them differently from those who agreed to the debt restructuring. As it is, since they did not accept the restructuring that allowed the government to keep making payments on its debt, they are not being payed. And they have managed to successfully argue in a New York court that this violates the pari passu clause. Since the Argentine debt payments are being made through a New York bank, the judge who upheld their claim, Thomas Griesa, had Argentina’s most recent debt payment annulled on the grounds that they must also pay the holdouts. This put Argentina into a technical default, not because they couldn’t pay, but because they would not pay. Since then, in order to avoid this, the Argentine government has been attempting to circumvent the order by making its debt payments through an Argentine Bank in stead, a move which Judge Griesa claims puts them in contempt of court.

The move of the holdouts is akin to a gambler who sues when he/she loses a bet. When they lent to Argentina they accepted the risk of default. But when the risk became a reality they tried to avoid it by claiming they have been wronged. It is quite clearly ridiculous, all the more so because this 7% of the creditors has managed to prevent all creditors from being paid.

More interesting though is to look at this in the broader context. To a certain extent this is a show of force by the american ruling class over that of the argentine ruling class. The holdouts were American while many of those who accepted the restructuring were Argentine. It is quite significant, and a little surreal, that an American judge in New York can make decisions about Argentine sovereign debt and how it is repaid. Furthermore, it is claimed that this absurd situation could be ended if President Obama were to intervene under the principle of “comity” which allows the president sole authority to conduct foreign policy. I am by no means a legal expert, and so cannot say whether or not this is actually possible. But the fact that there has not been more of an outcry from the US government is significant.

However, I believe that the international ruling class and even the american ruling class is not going to let this stand. Or rather, more precisely, it is not going to let it be repeated. If a few debtors can essentially block debt restructuring, as was the case here, this puts in jeopardy the whole system of dealing with default without annulling debt. After all, if a few can get away with being repaid in full after a default, who wants to be the sap who takes a loss in order to make it possible for the government in question to be able to repay its debts. If restructuring plans become impossible then this greatly increases the risk to lending capitalists. And risks mean costs, as it entails higher insurance payments or setting aside more money to cover the risk.

Indeed, the IMF has started to begin to take steps to avoid this occurring in the future. It is in the process of reforming the way debt restructuring works in order to avoid specifically this problem. However, it is unclear in all of this, at least as far as I can tell, whether the Argentine government will be able to make use of this. The goal of the IMF seems to be preventing this occurring in the future, not helping the argentine government. It certainly would have no qualms letting this assertion of the interests of american capital over those of argentine capital continue so long as there is no risk of it occurring again in the future. How the Argentine case is resolved I believe depends on how the situation plays out. A lot will depend on whether the Argentine government bends, what deal it might be offered, and whether this whole course begins to threaten another actual default.

It is important to note that the Argentine government is far from blameless in this. President Kirchner after all legitimized this debt, the debt largely of a military dictatorship, by restructuring it. The Argentine government acted in the interests of Argentine capital, who needed as much repayment as possible while also requiring the government to be able to function.

Understanding all of this is vital to understanding the behavior of the Argentine ruling class. It is under a lot of pressure right now. The government is unable to issue bonds for the moment due to the default and it is in a struggle with at least some of the american ruling class. It can let the protests occur, particularly because they are directed at american corporations, but it cannot let them get out of hand either.

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