Planned Bond Exchange Declared Illegal

You bet it is illegal – in its continued attempt to welsh on its creditors, Argentina's  government has attempted to move its debt out of the reach of US courts by swapping its debt for new debt issued under local law. The problem is of course that “local law” can be made up to the government's liking. Simply put, investors would never have lent the government money in the first place if these bonds had not been issued under US law. By entering clauses that determined that New York would be the relevant jurisdiction, Argentina's government enticed investors to lend a lot of money to it at what were then quite favorable terms.

Obviously, for the government to attempt to alter these clauses retroactively by means of a swap makes a complete mockery of these contractual agreements. Hence, judge Griesa's determination that such action would be illegal is perfectly justified and correct (for details on the legal backdrop, we refer you to our previous article  “Argentina – Deadbeat State Goes on the Attack”). In the interest of achieving a settlement, the judge wisely refrained from issuing a contempt of court finding (he can't very well throw Argentina into jail anyway). It is obvious that judge Griesa just wishes the issue would go away, but to his credit, he continues to stand firm on the law.

According to a recent Bloomberg report:

 

“Argentina’s plan to pay its restructured debt beyond the reach of U.S. courts is illegal, said the judge overseeing litigation stemming from the nation’s 2001 default, while declining to hold the country in contempt.

U.S. District Judge Thomas Griesa said in Manhattan federal court today that the proposal, announced Aug. 19 by Argentina President Cristina Fernandez de Kirchner, is “invalid, illegal and in violation of current court orders and injunctions.”

Griesa declined a request by lawyers representing investors holding Argentina’s defaulted bonds that he find the nation in contempt of court. The judge told lawyers for both sides that a contempt finding wouldn’t add to the prospects of a settlement between Argentina and its creditors.

“The thing that is of paramount necessity is to have a settlement,” Griesa said. “There must be a settlement.”

 

(emphasis added)

We must once again emphasize here that it does not matter that many of the current owners of Argentine debt that comprise the so-called “hold-outs” are denounced as “vulture funds” because they have bought the defaulted debt cheaply. It is completely immaterial to the legal questions at hand whether some of the original creditors have capitulated and sold their claims in the secondary market. Anyone who becomes a bondholder inherits all the rights connected with the bonds.

We must stress once again that we are a bit torn on the issue for the reason that we believe that lending money to governments is somewhat dubious per se. After all, those who lend to governments do so in the knowledge that the State is the only entity in the market economy that legally obtains its income by coercion. Certainly investors would benefit from being taught the lesson that lending to governments is not as risk-free an activity as is widely assumed. The fact that Argentina's tax payers will pay the price for their government's folly is undoubtedly deplorable.

On the other hand, we are talking about a government here that has just raised its spending by 56% in a single year, is hell-bent on destroying the country's economy and is abridging the economic liberty of its citizens ever more. As a result, there may actually be unexpected benefits for Argentina's citizens from the action of the hold-outs as well, as it is likely to restrict the government's room to maneuver.

 

Next “Official” Peso Devaluation Imminent

The renewed default is actually a sideshow to the ongoing economic catastrophe induced by the government's policies in Argentina. Its economy minister is a declared central planner, who actually believes markets to be surplus to requirements. As Nicolas Cachanosky writes:

 

“Argentina’s economic minister, Axel Kicillof, has become famous for his assertion that it is possible to centrally manage the economy now because we have spreadsheets such as Microsoft Excel. This assertion comes from the mistaken view that the cost of production determines final prices, and it reveals a profound misunderstanding of the market process.

This issue, however, is not new. The first half of the twentieth century witnessed the debate over economic calculation under socialism. Apparently, Argentine officials have much to learn from this old debate. The problem is not whether or not we have powerful spreadsheets at our disposal; the problem is the impossibility of successfully creating a centrally-planned market.”

 

(emphasis added)

 

CFK and KicillofArgentina's president Christina Fernadez-Kirchner and her economy minister Axel Kicillof.

(Photo credit: DyN)

 

Indeed, Mises showed already in his 1920 monograph “Economic Calculation in the Socialist Commonwealth” that there was a fundamental problem all central planners were confronted with that could not possibly be overcome. Without markets and market-determined prices, economic calculation becomes impossible – therefore no rational economic choices are possible either. As the debate between Marxists, Mises and Hayek in the decades following the publication of Mises' article showed, none of the attempts to rescue central economic planning from this fundamental challenge were successful. In fact, it often seemed that Mises' and Hayek's opponents did not even fully grasp what the nature of the problem was. How powerful one's computers are is for instance completely irrelevant to the issue. As Mises noted later in Human Action:

 

The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark.

There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.”

 

(emphasis added)

All socialist economic planning schemes presuppose the existence of the fictional state of equilibrium (which is merely a mental tool, but has no counterpart in reality) and a static, unchanging economy, which is just as unrealistic. Even if one were to simply attempt to preserve all existing economic processes and end all economic and technological progress, change would still occur (population numbers will change, the weather will be different from year to year, mineral deposits will run out, etc.). Almost needless to say, even if such a fictional “equilibrium economy” were attainable, it wouldn't be worth having. It would be completely contrary to the human spirit.

Argentina's “economy minister” has something in common with France's Arnaud Montebourg – he is economically illiterate, to put it bluntly. In fact, the entire Argentinian government is apparently laboring under the misconception that it can successfully “plan” the economy.

For instance, deputy economy minister Emanuel Alvarez Agis believes he knows what the “correct” exchange rate for the Argentine peso is (note that the currency has lost as much of its value in the past ten years as the US dollar in an entire century). As rumors about an imminent devaluation begin to circulate – which is undoubtedly unavoidable, not only due to the renewed default, but simply due to the combination of enormous government spending and unbridled money printing that characterizes Argentina's economic policy – Agis asserts that this is “not the plan”. Of course his vehement denial essentially cinches it, based on the “never believe anything until it is officially denied” principle.

 

“Argentina’s deputy economy minister, Emanuel Alvarez Agis, rejected the idea that the country is heading for another devaluation.

“We won’t apply that program,” Alvarez Agis said in an interview with Radio Del Plata yesterday. “The exchange rate has to be competitive enough to benefit regional economies, but not so high that it makes imports too expensive.”

Economy Ministry spokeswoman Jesica Rey didn’t respond to an e-mail and telephone call seeking comment about another possible devaluation this year.

Argentina’s central bank controls the peso rate by buying and selling dollars in the spot and futures markets almost daily, as well as limiting foreign exchange purchases. Yesterday the bank sold $10 million, according to preliminary data.

The peso is poised for further declines, Alan Ruskin, the global head of Deutsche Bank AG’s Group of 10 foreign exchange in New York, said in an interview on “Bloomberg Surveillance.”

“Guys like ourselves are saying the currency could still lose something like 25 percent,” Ruskin said. “It still is one of the big shorts on the currency side.”

 

(emphasis added)

Argentina's citizens meanwhile are buying as many dollars as is legally possible for them. Citizens may exchange up to 20% of their salary or income into dollars, provided they leave the dollars on deposit with a bank for a minimum of one year. Otherwise, a 20% tax is imposed on the purchase (i.e., if the dollars are taken out in the form of cash currency). Dollars that are kept on deposit remain of course easily accessible for the government, which is not exactly a paragon of regime certainty, to put it mildly. Argentinians have lost their savings more times than we care to count, whether by inflation or by confiscatory deflation. They evidently know what is coming next:

 

“People have seen this before and they know there will be fewer and fewer dollars, while more pesos flow into the economy as the government increases spending,” Buscaglia said in an interview from Buenos Aires. “The natural reaction is to buy more dollars.” Government spending surged 56.5 percent in June from a year earlier.

Peso forwards showing trader expectations for the currency in three months declined 2.2 percent this week to 9.3 pesos per dollar.

The perception that Fernandez is radicalizing her policies is also driving investors to the dollar on concern she’ll tighten existing currency controls, according to Olaiz.

 

(emphasis added)

 

ARG peso-annThe official (green line) and black market (blue line) peso rates, via dolarblu.net. The gap between the two continues to widen, a sure sign that the official rate will soon “catch up” a bit – click to enlarge.

 

The Argentine government meanwhile once again demonstrated its contempt for property rights by suing the subsidiary of a US company for daring to declare bankruptcy after having been ruined by the government's very own policies. The government is using an “anti-terrorism law” to attempt to reverse the bankruptcy. What is there to reverse one wonders? The company is insolvent. As an aside to this, it seems that the government also wants to introduce price controls and begin to “regulate profit margins” on a broad basis:

 

“Since defaulting, Fernandez has said she will use an anti-terrorism law to file a legal case against the local unit of Chicago-based RR Donnelley & Sons Co. (RRD) for “upsetting economic and financial order” after the printing company filed for bankruptcy and wrote off its assets in Argentina.

RR Donnelley said in a statement on Aug. 16 distributed by Globe Newswire that its Argentine unit wasn’t solvent and faced rising labor costs, inflation, materials price increases, devaluation, inability to pay debts and other issues that led to its decision to file for bankruptcy.

After Fernandez’s speech, securities regulator Alejandro Vanoli later said Argentina would seek to reverse the bankruptcy using a law against economic crimes.

Fernandez is also attempting to change a supply law that would seek to regulate prices and profit margins of goods.

 

(emphasis added)

In short, Argentina now has all the hallmarks of a full-blown Zwangswirtschaft based on the fascist model. Private property still exists on paper, but what may be done with it is decided by government bureaucrats. Ms. Kirchner's economic policy ideas obviously still had some room to get even worse than they already were. 

 

Conclusion:

It is actually quite sad to watch the continued downfall of Argentina's economy under the inept ministrations of its government. The only good thing that can possibly come from this is that it will set yet another example for others so they may avoid making similar mistakes. Unfortunately the example is being set on the backs of the country's citizens, who are seemingly forced to live from crisis to crisis. Politicians rarely pay the price for their atrocious policies, and we are quite sure Ms. Kirchner and her cronies have feathered their nests in ways the average citizen cannot even dream of (most recently, corruption allegations have caught up with Ms. Kirchner's vice president. Rampant government corruption has long been a hot topic in Argentina under Ms. Kirchner's rule). It is not as though Argentina didn't have great potential. If only politicians would leave its economy alone and stopped inflating the currency into oblivion, the country could easily and quickly regain its former prosperity.

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

4 Responses to “Argentina – Sliding Down a Slippery Slope”

  • The day a country stands on the value of their money a quits devaluing, after a little pain and a few insolvent banks, they will have a stronger economy and a better position of trade. Otherwise, the government will continue to rip people off under the guise of helping out. Is there a government on Earth with enough principles left to do so?

  • Kreditanstalt:

    “Private property still exists on paper, but what may be done with it is decided by government bureaucrats.”

    “…the entire Argentinian government is apparently laboring under the misconception that it can successfully “plan” the economy.”

    What’s new? These are true, to a greater or lesser extent, with ALL governments…though conceiving of “partial” or circumscribed property rights is essentially an exercise in doublethink…

  • GlobalDan:

    Very surprised that the Argentinian military has not yet stepped in. Multiple times in Argentinian history, massive economic mismanagement has been terminated by a military take-over. Just a matter of time or is it different now?

    • rodney:

      Shouldn’t be a surprise … The generals have made it clear that they are not available this time. They are tired of taking matters into their hands and then turning it over to politicians who proceed to send them to jail. Civilians and politicians will have to work it out for themselves or descend further into chaos.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Modi’s Great Leap Forward
      India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions.   India’s Pride and Joy   Indians are...
  • Global Recession and Other Visions for 2017
      Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations.  The New Year is here, after all.  Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad.  But what else will happen?   Image of a recently discarded vision... Image by Michael Del Mundo   Here we begin by closing our eyes and slowing our breath.  We let our mind...
  • US Financial Markets – Alarm Bells are Ringing
      A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
  • The Great El Monte Public Pension Swindle
      Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years.  There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island.  El Monte, California, is one of those places.   Advice dispensed on Interstate...
  • A Trade Deal Trump Cannot Improve
      Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things.   Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
  • Pope Francis Now International Monetary Guru
      Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated.   Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
  • Where’s the Outrage?
      Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
  • Trump’s Trade Catastrophe?
      “Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute -  Larry Summers is wrong about almost everything. Could he be right about this?   Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
  • Money Creation and the Boom-Bust Cycle
      A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote:   I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
  • Trump’s Plan to Close the Trade Deficit with China
      Rags to Riches Jack Ma is an amiable fellow.  Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl.  At a moment of peak inspiration, he executed his first search engine request by typing in the word beer.   Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
  • Side Notes, January 14 - Red Flags Over Goldman Sachs
      Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.   The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
  • Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
      Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action.   Photo via thedailycoin.org   The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices.   Prices of gold and silver...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com