Today’s US Supreme Court ruling from Argentina will result in a likely set of counter punches but the bigger issue is how this will ultimately reshape government debt defaults to come not only in the developing world, but in larger, “wealthy” nations as well.
Supreme Court delivered a one-two punch against Argentina
In refusing to hear an appeal of a lower court ruling against Argentina, then additionally ruling in a separate matter that bank records must be made available to the holdout hedge funds, the Supreme Court delivered a one-two punch. The first ruling cemented a new debt default template while in the second ruling providing a method to enforce previous debt agreements. With the legal authority to collect, Argentina is likely to head for a default and aggressive bond investors could go on a global hunt for deadbeat assets reminiscent of a TV “reality” show except this time what’s being reposed could be Argentine military equipment or humanitarian assistance.
Another fallout from the ruling could be a rise in additional hedge fund managers imitating Elliott Management and other “vulture funds,” buying debt claims for pennies on the dollar and then demanding payment in full and breaking previous negotiated settlements. What is needed for this hedge fund strategy to succeed is a global enforcer, a more sophisticated version of dog the bounty hunter, to physically repossess debtor assets as Elliott did when it seized an Argentine navel vessel sitting off the shore of Ghana. Or think about those separate holdout investors who attempted to reposes the President of Argentina’s personal jet as it sat refueling in a foriegn airport – with el Presidente inside. The enforcer group must be led by a high level operative familiar with maneuvering government assets to benefit large banks. Eric Holder might be a good person, with potential sponsorship from the large banks and their venture capital arm. This group could include ex CIA working with Blackwater type thugs to collect debt the old school way with a baseball bat. Whatever the future, it might not be kind to governments that grow massive debts – including, surprise, the USA.
Eric LeCompte: Blown away
“I’m blown away,” sighed Eric LeCompte, executive director of Jubilee USA, which had been advocating on the side of poor, concerned with the social impact on Argentina and the case precedent for poor country debt restructuring. Argentina said in court that a court ruling against it could be the causation for “a renewed economic catastrophe.” Privately, sources close to Argentina offered the specter of 1933 Germany where debt payments mandated in the Treaty of Versailles and the related amnesty led to the election of Adolph Hitler.
“This is a decision that doesn’t just benefit the top 1%,” LeCompte said, “It benefits literally 100 or so (hold out investors) while hurting emerging nations with crippling debt problems.”
LeCompte was surprised the court didn’t defer to the Obama administration in the decision because of the international and diplomatic ramifications of the decision. “There is going to be a new game in debt issuance. New York won’t be the world capital any longer,” he taunted. “Paris, Frankfort, London – that’s where the debt deals will be structured.”
Beyond just the restructure of debt, the ruling will impact organizations such as the Paris Club, which has been working on debt relief by negotiating investor “haircuts” or slight losses on their investment when the borrower defaults. “Risk is inherent in investment, and the risk in bond investing is default. The lack of an orderly default process or logical bankruptcy, which is where this action leads, is a global risk,” LeCompte commented. “Debt restructuring is a way of life and all countries have gone through full or partial restructuring in their histories.”
But the problem, when not addressed, will grow. The action goes beyond Argentina. “It will first impact countries like the Ivory Coast and Zambia, but Eastern Europe is fast behind.”
The US, considered among the “wealthiest” nations, is actually on the list of large debt-based countries where a logical debt restructuring process where investors are included in the solution might be a benefit in the future.