- The legitimacy of the debt must be challenged and proposals for a public debt audit resuscitated.
Dan Ozarow is Chair of Jubilee Debt Campaign’s Academic Advisory Network and member of Action for Argentina UK.
Here in Europe, quite how Argentinians live with constant economic precarity and in particular, periodic cycles of economic crises remains baffling. We both admire their resilience, whilst remaining perplexed as to how their governments get away with it.
But what is the source of such instability and is there a way out?
First it is important to highlight that capitalism is an inherently unstable system. It generates great wealth for a small minority but ever-growing, yet unsatisfiable wants and political disaffection for the majority. Yet it is also prone to cyclical recessions regardless of whether you are a centre or periphery economy. However, certainly Argentina has experienced particularly deep depressions and especially frequent crises in the last forty years compared to other nations.
Economists have accounted for these due to numerous features of its economy. Its traditional agro-exporter model leaves it susceptible to fluctuating global demand, commodity prices, US Dollar value, international interest rates and climatic conditions. Incremental deregulation since 1976 has left the country’s prosperity at the whim of western speculators who frequently pull out their investments and facilitate the collapse the economy at the first sign of trouble. The country’s historically weak terms of trade mean that like other semi-periphery countries its natural resources are open to exploitation by Western capital and current account deficits prevail.
Other characteristics leave the vast majority of the population exposed when crises hit. The lack of Land Reform compared to the rest of Latin America has kept wealth and ownership concentrated in few hands. This aggravates inequality and leaves small-scale farmers vulnerable when times get tough. Meanwhile low savings ratios leave the urban population devoid of a safety net in times of crisis. Further (and this may surprise some), Argentinians in comparative terms internationally, have suffered from a historically low level of human capital possession relative to its GDP. These have remained especially low in the provinces. Coupled with the high concentration of wealth mentioned earlier, alongside endemic corruption and weak institutions, it has resulted in not all boats rising equally during the good times. The benefits of growth are enjoyed by a relatively small number, whilst during downturns, the masses lack the necessary human, physical and financial endowments to recover their livelihoods.
But of all these factors, its nemesis can be described in one word. Debt.
From the economic crisis of 1982-3 caused by massive external debt assumed by the military dictatorship, to the Lost Decade of the 1980s which culminated in the hyperinflationary crisis of 1989, to the cataclysmic 2001 debt default to the ludicrously named “technical” (or as I call it “imposed”) default by New York Judge Thomas Griesa of 2014. All have been induced by external indebtedness, IMF conditionality and foreign speculation, often with the complicity of respective national governments.
This leads us to the recent financial turmoil. Starting with President Macri’s capitulation to the US vulture funds on preposterously unfavourable terms (1,180% profit according to Stigliz) which added US$ 14bn to the debt, further economic mismanagement such as the delivery of reforms that made it easier for foreign speculators’ hot money to flow out of the country, and the accumulation of record trade deficits since 2016 have further exacerbated the debt.
The capital flight and subsequent currency crash we witnessed in 2018 were fuelled by the record indebtedness assumed by the Cambiemos government since December 2015. As national debt doubled in just three years to 70% of GDP, the investor exodus was sparked by nervousness about Argentina’s ability to honour its debt payments. This culminated in President Macri pitifully handing his begging bowl to the IMF and receiving a record $56bn standby loan to avoid yet another default. The required public spending adjustment that the IMF conditionality demands means 74% cuts to financing the country’s provinces, a 31% reduction in social subsidies and 81% fall in capital expenditure. These are worsening the already severe hardship that many Argentines are facing as the cost of utilities soars, public infrastructure works are suspended and the tax, pensions and employment changes hit. We now face the extraordinary situation that interest payments on the public debt (up 49% following the deal) has become the largest item of government spending, exceeding health, education and welfare. According to a preliminary report from the government’s Finance Secretary last week, the national debt currently stands at US$ 321 billion, not including that held by the state’s provinces and the central bank. When accounting for currency devaluations, that is a phenomenal 99.5% of GDP.
Yet while record borrowing, the world’s highest interest rates (60%) and public spending cuts will only lead to a deepening recession, to perpetual crisis and longer-term debt rather than resolving the latter, President Macri’s government has committed an economic crime that is truly unforgivable. Much of the evidence points to the fact that its New Indebtedness Model will condemn not just the current generation, but its children and grandchildren to decades of austerity and misery.
This is because although debt levels have become unsustainable, today the possibilities of voluntary restructuring is almost impossible.
Following the 2001 default, the Kirchner governments were able to restructure 60 percent of the renegotiated part of the debt in 2005 and 2010. However, such a negotiation with foreign speculators is effectively embargoed in the future, given that Judge Griesa’s 2014 New York ruling in favour of NML and Aurelius set a legal precedent which has removed any incentive for creditors to restructure the value of their bonds, knowing that they can successfully appeal to the courts in order to claim 100% of the debt owed to them. That ruling confirmed that the right of speculators to make multi-million dollar profits supersedes that of a sovereign nation to defend the welfare of its citizens.
In contrast, some point to how the UN General Assembly’s 2015 approval of Resolution 69/319 that adopted nine principles that should guide sovereign debt restructuring processes: sovereignty, good faith, transparency, impartiality, equitable treatment of creditors, sovereign immunity, legitimacy, sustainability, and majority restructuring offers hope to Argentina for a fair and safe escape when default or pre-emptive restructure inevitably comes. However, in the major restructurings to have occurred since then, few those principles have been respected. Although only six countries voted against them, they include the two major jurisdictions for sovereign lending, the US and the UK. That doesn’t bode well for Argentina.
Indeed Argentinians are well aware of these dangers. 75% reject the standby loan and the return to economic subservience to the IMF which has been agreed by the President.
So is there an exit route along this road to hell?
What is needed urgently in these times of national emergency is some blue sky thinking. Certainly policies are needed that will stimulate the economy, not contract it. Controls on trade and capital movements must be implemented to prevent further capital flight. Increasing taxes on financial transactions and on the country’s wealthiest economic actors are also a necessity.
However none of these policies will directly deal with the debt itself. Instead, Argentina’s current, or more likely next government must openly challenge the legitimacy and indeed legality of its external debt and the subsequent investments made in them on the altar of casino capitalism. Indeed, the origins of its debt can be traced to the brutal military dictatorship of the 1970s and 80s. Not only was the debt accrued unconstitutionally and immorally by a genocidal regime that “disappeared” 30,000 citizens. Further, Judge Jorge Ballesteros’ ruling in the Olmos Case in 2000 found that the debt was “fraudulent and arbitrary”, having been accumulated by way of over 400 separate corrupt, illicit and illegitimate acts. These continue to be the subject of ongoing judicial proceedings.
The basic legal principle is that no illicit act can later be legalised, or serve as the basis for a legal act such as subsequent bond purchases. On that premise, all the successor debt falls, nullifying the legality and thus the value of investments made in it.
Thus the time is ripe for a public debt audit to be conducted, and the proportion of the debt found to have illegitimate origins to be cancelled.
This is not a particularly radical solution, indeed President Alfonsin first toyed with the idea in the mid-1980s. In any case, several countries have already performed such audits and have not only survived to tell the tale, but boast thriving economies today. For example in 2008 Ecuador’s President Correa established a Commission which much of its debt to be illegitimate. Through partial default and selective buyback, the country’s debt burden was slashed by 70% (US$ 3bn) and it became one of the fastest-growing economies in the region in subsequent years. In Iceland in 2010, people voted to refuse to take on their banks’ foreign debts and have gained immensely from doing so – with the economy booming again and unemployment down to 3%. Meanwhile in France in 2014, a citizen’s debt audit led by economist Michael Husson found 60% of its public debt to be illegitimate. Public debt audits are feasible and a refusal to pay does not have to mean financial Armageddon.
Of course a debt audit and cancellation would be no silver bullet. It would need to be conducted with public support, within the legal framework outlined by the Olmos Case and alongside some of the above policy suggestions. It would entail short-term pain and might need to be delayed until after the IMF’s final loan instalment is paid in 2020, so as not to ignite an immediate default. It might also lead to Argentina becoming a pariah in the international financial markets again. However, given how precisely that circumstance permitted the country to become the fastest-growing economy in the western hemisphere following the 2001 default, the danger is overstated.
The benefits of growth, job-creation, poverty reduction, and wealth redistribution that are engendered by significant proportions of the debt burden being vanquished once and for all and for national sovereignty over economy returning, would be truly unimaginable. In the longer-run the possibilities of debt-driven crises occurring would be drastically reduced. Argentinians have nothing to lose but their chains (of debt).