Economist Joseph Stiglitz isn’t shy about his opinion on Argentina’s default.

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Stiglitz says America will suffer from Argentina’s Default

Saying “America will suffer, too,” Stiglitz touches on the issue discussed behind closed doors.  The US legal decision to rule against Argentina was a “travesty” that “will carry a high price,” he says, contrary to the assurances of the financial establishment.

It was not a decision backed by the Obama administration, but rather a court decision that is being called into question. The Obama administration had actually indicated their support for the Government of Argentina, indicating that the issue could damage the US on a world stage.

This apparently didn’t impact the participants, however.

During the arm twisting, publicly played out negotiations that often featured subtle “scare campaign” tactics delivered by third parties to the fight, one of the messages sent to Argentina was that its financial system would suffer ruin. The country would be isolated and alone.

But is it the US that might become isolated?

Stiglit: Argentina’s default type first ever in history

Stiglitz notes this was the first time in history a country was willing and able to pay its debts, but a US Judge would not allow that to happen.  Global investors are aware this “default” was really more of a forced separation, providing Argentina the benefit of the doubt based on corporate loan rates in the country.

Griesa’s ruling, said Stiglitz, “encourages usurious behavior, threatens the functioning of international financial markets, and defies a basic tenet of modern capitalism: insolvent debtors need a fresh start.”

After Argentina reached agreement with over 90 percent of creditors and restructured its previous debt, those who accepted the agreement saw significant appreciation in the bonds.  “The economy soared, so the GDP-indexed bonds paid off handsomely,” Stiglitz notes.

But then the “vulture investors” spied an opportunity to build even more wealth. This group, led by Elliott Management’s Paul Singer, bought as the blood was on the street. As panicky investors sold at a huge discount, the “vultures” bought.

This group wasn’t happy with a normal return from a rising Argentine economy. They wanted full repayment – plus interest at a high risk premium.

Griesa ruling against Argentina

They went to court and found a willing judge Thomas Griesa. He not only ruled that essentially Argentina couldn’t default – but that the holdout bond holders were entitled to a significant risk premium interest rate associated with their investment. As Stiglitz points out, on the one hand the judge said the bonds cannot default, while on the other hand he is saying bond investors should receive a high risk premium in case of default.

The potential profits were huge.  Elliott stood to generate a 1,600 percent return on investment – unheard of for a bond investment.

This is how absurd the deal was, Stiglitz points out.

It is also the logic behind the Twitter hashtag, #Griesafault, which lays blame for the disaster on the US judge.

The US financial system, according to Stiglitz, has “already practiced at exploiting poor Americans,” which was really the appetizer.  Now it “has extended its efforts globally.”

Time for the world to experience the power of the US financial system.