Last Thursday, a judge in Ghana upheld a court order impounding the legendary three-masted flagship of the Argentine Navy as part of a debt dispute with a commercial creditor of the Latin American country. While Judge Richard Adjei Frimpong’s ruling was limited to the particulars of the case before him, its implications are quite significant for Ghana and developing countries in general—and also for their relationship with the international financial system.
Ever since authorities in the West African country detained the ARA Libertad on the basis of a court order obtained from a local tribunal, much of the discussion about the incident has taken its cue from the angry reaction of the Foreign Ministry spokesman in Buenos Aires who denounced the action as that of “vulture funds” and “speculators” who had “crossed a new limit” in their “extortion.” The rather undiplomatic implication was that Ghana is somehow a dupe, if not a stooge, of these malevolent predators. Yet there is another, more likely, explanation: by bringing the Argentines to book in the spectacularly dramatic manner which they did, officials in Ghana knew exactly what they were doing and acted in their own interest—and that of other developing countries—by holding an international scofflaw accountable.
At its independence in 1957, the British colonial administration bequeathed the new Ghanaian state a treasury flush with nearly half a billion dollars in foreign reserves. Most of the money was quickly squandered by incompetent management and statist economic fetishes, even as a succession of military coups set the nation even farther back. By 1990, the country ranked thirtieth from the bottom on the United Nations Development Program’s inaugural Human Development Index. Ghanaians, realizing that drastic action was needed to turn the country’s direction around, restored constitutional order and multiparty, democratic politics in 1992.
In recent years, Ghana has become something of a model. Sound macroeconomic policy combined with high prices for gold and cocoa have delivered a consistently strong growth rate over the last two decades, in the process reducing the proportion of the population living in poverty from 52 percent to less than half of that during the same period. With production well underway on the country’s hitherto-untapped offshore petroleum reserves, it is likely that the West African country will rapidly ascend the ranks of middle-income countries—a not unreasonable expectation given that it was fourth-fastest-growing economy in the world last year with a 13.6 percent real growth rate in GDP.
Along the way, the country learned more than a few lessons about the importance of political liberties. According to Freedom House, Ghana also has enjoyed the distinction of being the second-freest country in Africa (the tiny island republic of Cape Verde beats it by a fraction of a point). Perhaps even more important is a new focus on the rule of law and fiscal probity.
Having long misspent its original endowment and needing to build up its infrastructure so as to attract the type of investment that ultimately produced its remarkable turnaround, Ghana had no choice but to turn to global financial markets. In order to do so, the country needed to offer potential partners a legally binding assurance that any money they advanced, whether as loans or investments, would be repaid. They needed to provide a credible judicial remedy in the event that something went awry. Having provided for these two requirements, it is no wonder that Ghana raked in nearly $8 billion in foreign direct investment (FDI) last year.
In contrast, Argentina—a regional power with twice the population, twelve times the GDP and eight times the foreign-exchange reserves of Ghana—received just $7.2 billion in FDI last year. This sharp contrast is understandable when one considers that Buenos Aires has been something of a deadbeat with its obligations since it underwent the largest default in history in 2001, one involving some $100 billion in bonds.
Much of the bad debt was held by pensioners in Germany, Italy, Spain and other countries who were in no position to contest the stingy terms dictated to them by the Argentine government when it swapped the defaulted bonds for still more bonds at a much-reduced nominal value that, in most cases, gave them only pennies on the dollar. However, a number of larger investors balked at the shotgun settlement and demanded full repayment of the money owed to them. These holdout creditors have won more than one hundred court judgments against Argentina in courts around the world.
Despite these legal victories, however, Argentina’s creditors have been repeated stymied in their collection efforts by a government determined to evade its obligations. This includes the petitioner in the Ghanaian case involving the Libertad, a New York-based hedge fund that manages investments for pension funds, university endowments, other institutional investors and some private citizens.
The U.S. federal judge who has presided over many of cases, Thomas Griesa, has not only repeatedly found that Argentine officials “defaulted on millions of dollars of debt,” but also that they are “doing everything they can to resist paying legitimate judgments.” Two years ago, in a case involving different holder of Argentine debt, Judge Griesa vented exasperation from the bench: “The whole process could be put to rest if the Republic would simply own up honestly to its obligations to pay these judgment debts, which they are defying deliberately and intentionally and continually.”
While Argentina has tried to raise questions about of the character and politics of some of its creditors, including Paul Singer of Elliott Management, neither these nor even the amounts that were paid to acquire the debts on secondary markets are relevant issues (there is nothing wrong with secondary markets—without them, many risk-averse players would not even be in the primary markets). What is at stake is the sanctity of lawful contracts freely entered into and legal recourse in the event of their breach. The international financial system does not have anything as straightforward as debt collection involving governments, even those such as Argentina that, as the Commercial Court in Accra found, explicitly waived its sovereign immunity in the process of getting the loans it eventually defaulted on. This lack of legal remedy is what drives up borrowing costs for developing countries—that is, when they can get access to funds at all.
Ghana, perhaps more than countries that have not had similar struggles, recognizes the need for a reliable international credit market and knows that in order to benefit as a recipient of capital, it must also play its part in enforcement of the attendant obligations. That’s why it is so encouraging to see a reformist African country resist the facile temptations of hollow Third World solidarity and take a stand for the rule of law by holding an irresponsible government accountable.
While the impounding of the Libertad may well prove to be a stunt, it is a profoundly useful one. It focuses attention on the basic rules that render possible global trade, economic development and above all, the bright prospects of countries like Ghana.
J. Peter Pham is director of the Michael S. Ansari Africa Center at the Atlantic Council.
Image: Juan Ramon Rodriguez Sosa