On 30 July Argentina ‘defaulted’ on its debt for the second time in 15 years. The difference this time is that it is trying to pay but being blocked by a US judge. In 2001, Argentina’s default led to economic recovery and large falls in both poverty and inequality. Now, its defiance of ‘vulture funds’ – financial speculators seeking to profit from countries in debt crisis – and the US courts is crucial to the wider struggle for debt justice across the world as well as the Argentine people.
The story begins in the 1970s, when western banks awash with money from high oil prices lent large sums to the military junta. More than 30,000 people were ‘disappeared’ during Argentina’s ‘dirty war’, as the regime tortured and killed trade unionists, students and anyone believed to be associated with ‘socialism’.
Argentina’s debt soared as the junta was supported by loans from the World Bank and governments including the US and UK, as well as the banks. After elections in 1983, the new government was saddled with a huge debt, which undermined the economy throughout the 1980s.
In the 1990s, under Carlos Menem, Argentina turned to the IMF and became a poster-child for the ‘Washington consensus’ mix of free market economic policies, including privatisation, trade liberalisation and free movement of capital. Poverty and inequality grew as debt payments continued to suck money out of the country. According to the World Bank the number of people living on less than $2 a day increased from 3 per cent of the population in 1991 to 10 per cent by 2000.
The East Asian financial crisis in 1997 led to a reversal of the foreign capital inflows that had kept the economy afloat. A four-year recession began in 1998 and by the end of 2001 the debt had become unpayable, costing half of the country’s revenues from exports. Argentina defaulted over Christmas 2001.
The default, combined with controls on capital leaving the country, led to stabilisation and recovery. The proportion of people living on less than $2 a day has fallen to less than 2 per cent, while inequality has returned to the levels of the early 1990s, having increased by a quarter in the IMF years.
In 2005 and 2010, Argentina reached deals with 93 per cent of its creditors to pay 30 cents in every dollar owed. Those who refused to accept this have continued to receive nothing.
These ‘holdouts’ are led by two vulture funds: NML Capital, headed by Republican funder Paul Singer, and Aurelius Capital Management, now infamous for its role in the takeover of the Cooperative Bank. The funds bought the debt cheaply following the 2001 default. Their strategy to make money – potentially more than 1,000 per cent profit – rests on other creditors accepting the reduction in the amount owed, and them then claiming the full amount for themselves.
The past decade has seen a succession of court cases, the most recent of which saw US Republican Judge Thomas Griesa rule that Argentina must pay the vulture funds in full, or it is not allowed to pay anyone. In June, the US supreme court refused to hear Argentina’s appeal. Since then, the Argentine government has continued to deposit the agreed debt payments with the banks, which have refused to process them.
Argentina’s refusal to pay the vultures has been bolstered by domestic pressure. Campaigners such as Diálogo 2000 are calling on the government to publicly audit all the debts and repudiate those that are illegal or illegitimate, including debts that can be traced back to the military junta. There has also been international support, including from 100 British MPs who have signed a motion calling for action to prevent vulture funds profiting from Argentina.
A review of the history of government debt defaults for the IMF found that they are usually beneficial for a country’s economy. It is in the interests of financial speculators to present them as disastrous but defaults can be a good thing, and we need to defend them.
Tim Jones is policy officer at the Jubilee Debt Campaign