U.S. News and World Report, June 24, 2014
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When Cristina Kirchner first ran for president of Argentina in 2007, she had a campaign commercial with adorable young children answering the question, “What is the IMF (International Monetary Fund)?” They offered cute little ridiculous answers like “The IMF is a place where there are many animals,” and the punch line from the narrator was “We have succeeded in making it so that your children and grandchildren won’t know that the IMF is.”
To this day there is no love lost between the IMF and Argentina, since the Fund presided over Argentina’s terrible economic collapse of 1998-2002, as well as numerous failed policies in the years prior. But when the U.S. Court of Appeals for the Second Circuit ruled in favor of vulture funds trying to collect the full value of Argentine debt that they had bought for 20 cents on the dollar, even the IMF was against the decision.
So it surprised many observers last Monday when the U.S. Supreme Court refused to even review the appellate court’s ruling, which was in favor of the vulture funds. The court only needs four justices to grant a petition for “certiorari,” or review, and this was an extremely important case. Most experts agree that it has serious implications for the international financial system. Perhaps most importantly, the appellate court ruled that Argentina must pay the vulture funds if it is going to pay the more than 90 percent of bondholders who accepted a restructuring agreement in 2005 and 2010.
What does this mean? In the midst of a deep recession and unable to finance huge debt payments, Argentina defaulted on its debt at the end of 2001. The default was the right move: the Argentine economy began a robust recovery just three months later. But it was not until 2005 that 76 percent of the bondholders agreed to accept a restructuring that included a “haircut” of about two-thirds of the value of their bonds. By 2010, over 90 percent of the bondholders had joined, accepting new bonds in place of the defaulted ones.
The court’s decision means that a vulture fund, or any “holdout” creditor, can prevent or destroy an existing agreement negotiated with the rest of the bondholders. Since there is no such thing as bankruptcy law for government borrowers, this would severely limit the ability of creditors and debtors to work out an orderly agreement in the event of sovereign debt crises. This is a very big deal for the functioning of international financial markets.
So why didn’t the Supreme Court hear the case? It could be that the Court was influenced by a change of position on the part of the U.S. government, which may have convinced them that the case was not that important. Unlike France, Brazil, Mexico, and Nobel Prize winning-economist Joseph Stiglitz, the U.S. government did not file an amicus brief with the Supreme Court, despite its filing in the appellate case. And – here is the big mystery – neither did the IMF, even though it has publically expressed concerns about the impact of that ruling.
On July 17, 2013 IMF Managing Director Christine Lagarde submitted notice that the Fund would file an amicus brief with the Supreme Court. But then the IMF Board met and – somewhat embarrassingly -- because of objections from the U.S., decided against it. This could be why the Supreme Court did not invite a brief from the U.S. Solicitor General, and ultimately did not hear the case. But who is responsible for Washington’s reversal?
As in an Agatha Christie novel, there are numerous suspects who could have done the deed. The vulture fund lobby -- a well-connected group led by former Clinton administration officials -- known as the American Task Force Argentina, spent over $1 million in 2013 on the case. Then there are the usual suspects in Congress, mostly neo-conservatives and the Florida delegation, who want a different political party in power in Argentina after this fall’s elections.
And they have allies within the Obama administration, which has mostly adopted a Cold War strategy toward the Latin American left governments, including Argentina. In this case the administration was putting its strategic interests in international financial markets first – as their amicus brief to the New York court shows – until somebody changed their minds. But who?
It could be that all of the suspects were involved, as in “Murder on the Orient Express.” But one important clue may be this grilling of U.S. Treasury Secretary Jacob Lew by Florida Congressman Mario Díaz-Balart. A nephew of Fidel Castro’s first wife, he is part of the hardline anti-Cuba lobby which – like the neocons generally -- sees all of the left governments in Latin America as enemies that would look much better out of power. Now it is pretty clear that Mexico would not have filed an amicus brief at the Supreme Court without at least a wink and a nod from Treasury. In an aggressive interrogation in the House of Representatives, Diaz-Balart tried to get Lew to admit that Treasury was guilty of the crime of getting Mexico to file a brief in support of Argentina.
Lew manages to wriggle out of giving a direct answer, but the episode shows us just how interested this political faction was in the Supreme Court denying review to the case. It also indicates that Treasury itself was at least divided on muzzling the IMF. So I would look to Congress – and especially Diaz-Balart’s faction -- for the main culprits here. Historically, Congress has caused some trouble for Treasury and the Fund by holding up funding to the IMF. Although they have ultimately always gotten the money, there have occasionally been conditions attached. And there is currently unprecedented opposition in the House of Representatives for an IMF funding increase that the Obama administration has already promised the other G20 countries. This is probably where the murder weapon is buried.
After the IMF board voted not to file a brief with the Supreme Court, a reporter asked IMF spokesperson Bill Murray at a press conference why the Fund reversed course. “[G]o to the U.S. Treasury and ask them to explain their decisions,” he replied. But nobody did.