Twelve Years After
by Sinclair Noe
DOW + 135 = 15,326
SPX + 5 = 1689
NAS – 4 = 3725
10 YR YLD – .04 = 2.92%
OIL – .08 = 107.31
GOLD + 2.50 = 1366.80
SILV + .25 = 23.32
The war hasn’t started…, yet.
The war with Syria hasn’t started yet. We’re still at war; troops still in Afghanistan, slowly exiting; but, we’re still at war, 12 years after.
The Dow Industrials have climbed for 6 out of the last 7 sessions, which coincides with the announcement by Obama to seek a Congressional vote on Syria. The Dow has added over 500 points since then. The price of oil hit highs for the year in the buildup to war. We’ve grown averse to war. Even on Wall Street, the idea of not going to war is a good thing. Maybe that is something we’ve learned from the last 12 years. War is bad; not going to war is good.
And so last night we listened to the president trying to sell the necessity of more war, this time in Syria. He called it military intervention, but whenever you drop bombs on another country, it is war. I’m still not sure what the objective would be. I’m not sure what the cost would be, but the cost of the past 12 years has been much higher than anyone thought at the time. And then, halfway through the speech last night, we heard the possibility of a diplomatic solution. Today, diplomatic efforts intensified. France drafted a resolution for the UN Security Council to have Assad give up his chemical weapons. Secretary of State John Kerry meets with Russian foreign minister Sergei Lavrov tomorrow in Geneva
It will be very difficult to reach a diplomatic deal, and even if that happens it will be tougher to enforce and verify. The chemical weapons complex of Syria includes factories, bunkers, storage depots and thousands of munitions, all of which would have to be inspected and secured under a diplomatic initiative that President Obama says he is willing to explore. And there is a civil war in Syria, which makes things more difficult. We didn’t hear many details last night but a confrontation has been postponed for a while. The Senate formally ended its consideration of a resolution authorizing military force against the Syrian government. We’ll give peace a chance.
And if that doesn’t work out, then we’ll bomb the hell out of the place, and it won’t be a little pinprick strike. A few senators have already started work on a bill that would authorize US military force in Syria if the Security Council can’t pass a workable resolution, or if Syria fails to comply with it.
So, that’s where we stand, 12 years later.
The whole thing has a certain, as yet unidentified stench. The US and France are going to bomb Russia’s only Middle East foothold? What are the odds? Russia was willing to start World War III over Syria? What are the odds? Someday we’ll follow the money trail and it will all make more sense, or at least some sense. It’s understandable that we are all very wary of warfare, but we shouldn’t forget that such levels of wariness can be easily used to play with our minds, and to focus our attention away from other events.
So, today let’s look at something that should be capturing our attention. There is a great article from Nobel prize winning economist Joseph Stiglitz. His argument involves a narrow issue, but it looks like a blueprint for future action. We’re seeing a lot of these attempts lately. In that vein, the way the Detroit bankruptcy is handled will in all likelihood have profound ramifications for other municipalities across the US. And this spring’s Cyprus bail-in model is the likely blueprint in Europe’s periphery. If it worked in Cyprus, it’ll work in Greece, or Portugal, or Spain. I’ve cross posted it on my blog:
A recent decision by a United States appeals court threatens to upend global sovereign debt markets. It may even lead to the US no longer being viewed as a good place to issue sovereign debt. At the very least, it renders non-viable all debt restructurings under the standard debt contracts. In the process, a basic principle of modern capitalism – that when debtors cannot pay back creditors, a fresh start is needed – has been overturned.
The trouble began a dozen years ago, when Argentina had no choice but to devalue its currency and default on its debt. Under the existing regime, the country had been on a rapid downward spiral of the kind that has now become familiar in Greece and elsewhere in Europe. Unemployment was soaring, and austerity, rather than restoring fiscal balance, simply exacerbated the economic downturn.
Devaluation and debt restructuring worked. In subsequent years, until the global financial crisis erupted in 2008, Argentina’s annual GDP growth was 8% or higher, one of the fastest rates in the world.
Even former creditors benefited from this rebound. In a highly innovative move, Argentina exchanged old debt for new debt – at about 30 cents on the dollar or a little more – plus a GDP-indexed bond. The more Argentina grew, the more it paid to its former creditors.
Argentina’s interests and those of its creditors were thus aligned: both wanted growth. It was the equivalent of a “Chapter 11” restructuring of American corporate debt, in which debt is swapped for equity, with bondholders becoming new shareholders.
Debt restructurings often entail conflicts among different claimants. That is why, for domestic debt disputes, countries have bankruptcy laws and courts. But there is no such mechanism to adjudicate international debt disputes.
Once upon a time, such contracts were enforced by armed intervention, as Mexico, Venezuela, Egypt, and a host of other countries learned at great cost in the nineteenth and early twentieth centuries. After the Argentine crisis, President George W. Bush’s administration vetoed proposals to create a mechanism for sovereign-debt restructuring. As a result, there is not even the pretence of attempting fair and efficient restructurings.
Poor countries are typically at a huge disadvantage in bargaining with big multinational lenders, which are usually backed by powerful home-country governments. Often, debtor countries are squeezed so hard for payment that they are bankrupt again after a few years.
Economists applauded Argentina’s attempt to avoid this outcome through a deep restructuring accompanied by the GDP-linked bonds. But a few “vulture” funds – most notoriously the hedge fund Elliott Management, headed by the billionaire Paul E. Singer – saw Argentina’s travails as an opportunity to make huge profits at the expense of the Argentine people. They bought the old bonds at a fraction of their face value, and then used litigation to try to force Argentina to pay 100 cents on the dollar.
Americans have seen how financial firms put their own interests ahead of those of the country – and the world. The vulture funds have raised greed to a new level.
Their litigation strategy took advantage of a standard contractual clause (called pari passu) intended to ensure that all claimants are treated equally. Incredibly, the US Court of Appeals for the Second Circuit in New York decided that this meant that if Argentina paid in full what it owed those who had accepted debt restructuring, it had to pay in full what it owed to the vultures.
If this principle prevails, no one would ever accept debt restructuring. There would never be a fresh start – with all of the unpleasant consequences that this implies.
In debt crises, blame tends to fall on the debtors. They borrowed too much. But the creditors are equally to blame – they lent too much and imprudently. Indeed, lenders are supposed to be experts on risk management and assessment, and in that sense, the onus should be on them. The risk of default or debt restructuring induces creditors to be more careful in their lending decisions.
The repercussions of this miscarriage of justice may be felt for a long time. After all, what developing country with its citizens’ long-term interests in mind will be prepared to issue bonds through the US financial system, when America’s courts – as so many other parts of its political system – seem to allow financial interests to trump the public interest?
Countries would be well advised not to include pari passu clauses in future debt contracts, at least without specifying more fully what is intended. Such contracts should also include collective-action clauses, which make it impossible for vulture funds to hold up debt restructuring. When a sufficient proportion of creditors agree to a restructuring plan (in the case of Argentina, the holders of more than 90% of the country’s debt did), the others can be forced to go along.
The fact that the International Monetary Fund, the US Department of Justice, and anti-poverty NGOs all joined in opposing the vulture funds is revealing. But so, too, is the court’s decision, which evidently assigned little weight to their arguments.
For those in developing and emerging-market countries who harbor grievances against the advanced countries, there is now one more reason for discontent with a brand of globalization that has been managed to serve rich countries’ interests (especially their financial sectors’ interests).
In the aftermath of the global financial crisis, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System urged that we design an efficient and fair system for the restructuring of sovereign debt. The US court’s tendentious, economically dangerous ruling shows why we need such a system now.