Argentina's Default Debacle: Sign of the Slow Unraveling of the Global Financial System?

The only remaining question is whether the common interest of states in reining in the financial sector will overcome their separate interests of backing their own “national champions.”

Perhaps mercifully, Argentinian President Cristina Kirchner missed the World Cup final because of illness and her grandson’s first birthday, while Angela Merkel was there to see Germany seal the win. In the aftermath of football’s disappointment and euphoria, both leaders have some tricky problems to deal with regarding international finance and their relations with the United States.

Kirchner’s problems are the most pressing. On June 16, the U.S. Supreme Court declined to hear an appeal from a decision of the 2nd U.S. Circuit Court of Appeals ordering Argentina to pay in full the claims of a group of creditors, who hold roughly $1 billion in Argentine bonds, about 1 percent of the country’s outstanding debt. The investors, led by New York billionaire Paul Singer and politically well-connected in Washington, acquired the tag of ‘vultures’ by buying up the bonds at steep discounts and refusing to accept an agreement signed by around 92 percent of bondholders. U.S. courts have also ruled that banks operating in New York must disclose information about non-U.S. assets of the Argentine government.

This financial dispute is entangled with a political relationship that is at best tense. The U.S. Department of State has criticized Kirchner’s government for interfering with freedom of the press, while Argentina has complained about U.S. espionage.

Merkel has similar problems, though of course, Germany is in a much stronger position than Argentina. The disclosure of NSA spying on Germany, including the tapping of Merkel’s own phone, and the refusal of the U.S. administration to offer any substantive redress have provoked much genuine (and some confected) outrage in Germany, culminating with the expulsion of the U.S. intelligence station chief in Berlin. Against this background, the U.S. Department of Justice (DoJ) is considering charges against German banks, including the partly state-owned Commerzbank accused of violating U.S. sanctions on Iran.

Meanwhile, the DoJ has announced an agreement by which Citigroup will pay $7 billion to avoid civil prosecution for its role in the sale of bogus mortgage-backed securities in the lead up to the global financial crisis. The deal also exempts Citigroup from any punishment in the much larger scale involving collateralized debt obligations (CDOs).

Looking at these events, it’s obvious that, while courts are involved, there is nothing like the rule of law at work here. The DoJ’s objectives in its dealing with Citigroup are entirely political. On the one hand is the need to recover from the political disaster of the ‘too big to jail’ episode, in which the DoJ deferred prosecution of HSBC, despite evidence of egregious criminal misconduct, for fear that the bank would fail, perhaps endangering the entire financial system. On the other hand, the commitment to maintain that system and most of the key players in much their current form remains intact. DoJ has decided that penalties of $7 billion (about six month’s profit for Citi) are sufficient to look serious, while having minimal actual impact.

Similarly, any decision on charging the German banks will depend on political judgments. The U.S. position is weakened first by the fact that it is attempting to enforce an extraterritorial imposition of U.S. foreign policy (the Iran sanctions) and second by the ham-fisted operations of the intelligence apparatus.

The political nature of the process is even more evident in Argentina’s case. Obviously, if the nationalities were reversed, with foreign ‘vultures’ upsetting a debt-restructuring agreement negotiated by, say, a U.S. city, within the U.S. political process, the Appeals court would have given the investors short shrift. Had the court somehow managed to decide in favor of the foreign party, the Supreme Court would certainly not have let the judgment stand.

All of this may seem self-evident from a viewpoint informed by international realism; as Thucydides puts it in the Melian dialog ‘the strong do what they can and the weak suffer what they must’. Yet the situation was totally different in the early 1990s, when the Argentine bonds now in dispute were issued.