October 25, 2014
Sane on the Seine
Paris Club debt no more than a good (and late) start
Around this time last week the government was clinching its Paris Club agreement with surprising speed and ease (almost concluding it on the day it started, May 28), thus sparking a celebratory mood which some leading members accused judicial and media party-poopers of seeking to puncture with the court subpoena for Vice-President Amado Boudou the following day.
But in the best of cases the celebrations of this overrated triumph were premature — there is no crying any final victory over the return to global capital markets until technical default has been definitely averted in United States courtrooms.
Yet there is no lack of criticism even if the most frequent faults the agreement for its late timing costing the country billions of dollars rather than for moving in the wrong direction (the international press in particular was warmly favourable and the bond form of repayment recently favoured by the CFK administration seems to whet market appetites more than cash down might). There are also those who accuse the Cristina Fernández de Kirchner administration of paying too much too quickly (or alternatively not fast enough, leaving plenty of debt payments to burden the next presidency) — quite apart from those who oppose repaying any debts as a matter of principle.
Any chain is only as strong as its weakest link — all the recent progress towards mending fences with such major creditor instances as the International Centre for Settlement of Investment Disputes global arbitration centre (or CIADI in its Spanish acronym), Repsol oil over the YPF expropriation and now the Paris Club would be completely undone by a decision favouring holdouts (or “vulture funds” in CFK parlance), thus obliging the government to repatriate debt payment jurisdiction and effectively retreat into its shell. And this last stage also seems to be the toughest.
Yet this move would not only hurt Argentina but also New York as a venue of international financial jurisdiction, thus feeding optimism that the US Supreme Court will pick up the case on Argentina’s behalf (France, Brazil, Mexico and the American Bankers Association are already pushing in that direction as amici curiae). Other reasons to treat Argentina with greater respect would be its status as a sovereign country at odds with a tiny handful of its creditors and the aforementioned recent progress. Indeed Economy Minister Axel Kicillof’s flexibility in Paris last week over just about every point in the Paris Club negotiations except International Monetary Fund intervention might well be understood as a bid to tweak that decisive US instance in his direction.
But there is also no lack of legal experts who strongly doubt whether the US Supreme Court will place itself on a hiding to nothing by picking up this case — there is no direct US interest involved nor any conflict of jurisdiction which the justices are supposed to resolve.
Regardless of who is right, the long wait for the Supreme Court decision should not delude us into ruling out the possibility that it could be imminent — indeed even before the final stages of the World Cup when it is hoped that the triumphs of Lionel Messi’s squad would blot out default, Boudou or any conceivable disaster. Yet even in the event of the US Supreme Court shunning the case, the reaction of the CFK administration would not have to be immediate — New York Judge Thomas Griesa would still have to define how the holdouts are to be paid off according to pari passu principles of equal treatment (which would not automatically mean payment in full but any preferential terms for the “vulture funds” would create a storm, not to mention semantically contradicting pari passu).
One of the most frequent criticisms levelled against the CFK administration is lacking a plan but there could be method in the madness. The worst crises of Argentine economic history have almost invariably been preceded by a plan — be it convertibility, the tablita of José Martínez de Hoz, the Austral Plan, various other (usually Peronist) attempts at a wage-price freeze, etc. Perhaps leaving everybody guessing could be the best approach after all. So what was the big idea in creating a National Planning Secretariat yesterday?
But at the same time all those “best-laid schemes of mice and men” going awry is not just Murphy’s law in action — the root cause of past crises has always been deficit spending spiralling out of control and this government is heading straight down that road with its money-printing orgy. Kicillof spoke of fixing a dire legacy bequeathed by neo-conservatism but the latter have no monopoly on piling up debt — indeed his whole Paris Club repayment initiative is a step in that direction.
Another frequent criticism of the CFK administration is its fixation with “concentrated groups” — even if a state which nets some 36-43 percent of Gross Domestic Product (multiple exchange rates do not help here in setting a precise figure) in tax revenue, as against just over 10 percent of GDP in the case of India, does not seem to be doing a bad job in concentrating either. Yet Argentina’s rulers are not alone in their critique of concentrated markets — this is starting to be more frequent elsewhere in the world, including the US. Traditionally, the argument has been that the economies of scale favour efficiencies at various levels — especially creating scope for lower prices but also research and development (R&D). But the recent mega-mergers, especially in the telecommunications sector, have been so gigantic that they have created fears of monopolies which strangle competition and thus also innovation. These business trends are also deepening income inequality with company profits boosted at the expense of markets.
Trebling the money supply since CFK was inaugurated in 2007 should be given its full share of the blame for inflation here (down from summer’s post-devaluation peaks but still at last year’s levels in a much slower economy) yet the monopolies and oligopolies at key points of the price chain make for price inflexibility. It is not just that a free competitive market is not given a chance in Argentina by state populism — it also does not give itself a chance.
Anyway next Thursday Brazil will be kicking off against Croatia and as from then, this column might well be at the wrong end of the newspaper.