Cry for Argentina: Fiscal Mismanagement, Odious Debt or Pillage?

Guest post by Ellen Brown.

Argentina has now taken the US to The Hague for blocking the country’s 2005 settlement with the bulk of its creditors. The issue underscores the need for an international mechanism for nations to go bankrupt. Better yet would be a sustainable global monetary scheme that avoids the need for sovereign bankruptcy.

Argentina was the richest country in Latin America before decades of neoliberal and IMF-imposed economic policies drowned it in debt. A severe crisis in 2001 plunged it into the largest sovereign debt default in history. In 2005, it renegotiated its debt with most of its creditors at a 70% “haircut.” But the opportunist “vulture funds,” which had bought Argentine debt at distressed prices, held out for 100 cents on the dollar.

Paul Singer’s Elliott Management has spent over a decade aggressively trying to force Argentina to pay down nearly $1.3 billion in sovereign debt. Elliott would get about $300 million for bonds that Argentina claims it picked up for $48 million. Where most creditors have accepted payment at a 70% loss, Elliott Management would thus get a 600% return.

In June 2014, the US Supreme Court declined to hear an appeal of a New York court’s order blocking payment to the other creditors until the vulture funds had been paid. That action propelled Argentina into default for the second time in this century – and the eighth time since 1827. On August 7, 2014, Argentina asked the International Court of Justice in the Hague to take action against the United States over the dispute.

Who is at fault? The global financial press blames Argentina’s own fiscal mismanagement, but Argentina maintains that it is willing and able to pay its other creditors. The fault lies rather with the vulture funds and the US court system, which insist on an extortionate payout even if it means jeopardizing the international resolution mechanism for insolvent countries. If creditors know that a few holdout vultures can trigger a default, they are unlikely to settle with other insolvent nations in the future.

Blame has also been laid at the feet of the IMF and the international banking system for failing to come up with a fair resolution mechanism for countries that go bankrupt. And at a more fundamental level, blame lies with a global debt-based monetary scheme that forces bankruptcy on some nations as a mathematical necessity. As in a game of musical chairs, some players must default.

Most money today comes into circulation in the form of bank credit or debt. Debt at interest always grows faster than the money supply, since more is always owed back than was created in the original loan. There is never enough money to go around without adding to the debt burden. As economist Michael Hudson points out, the debt overhang grows exponentially until it becomes impossible to repay. The country is then forced to default.

Fiscal Mismanagement or Odious Debt?

Besides impossibility of performance, there is another defense Argentina could raise in international court – that of “odious debt.” Also known as illegitimate debt, this legal theory holds that national debt incurred by a regime for purposes that do not serve the best interests of the nation should not be enforceable.

The defense has been used successfully by a number of countries, including Ecuador in December 2008, when President Rafael Correa declared that its debt had been contracted by corrupt and despotic prior regimes. The odious-debt defense allowed Ecuador to reduce the sum owed by 70%.

In a compelling article in Global Research in November 2006, Adrian Salbuchi made a similar case for Argentina. He traced the country’s problems back to 1976, when its foreign debt was just under US$6 billion and represented only a small portion of the country’s GDP. In that year:

An illegal and de facto military-civilian regime ousted the constitutionally elected government of president María Isabel Martínez de Perón [and] named as economy minister, José Martinez de Hoz, who had close ties with, and the respect of, powerful international private banking interests. With the Junta’s full backing, he systematically implemented a series of highly destructive, speculative, illegitimate – even illegal – economic and financial policies and legislation, which increased Public Debt almost eightfold to US$ 46 billion in a few short years. This intimately tied-in to the interests of major international banking and oil circles which, at that time, needed to urgently re-cycle huge volumes of “Petrodollars” generated by the 1973 and 1979 Oil Crises. Those capital in-flows were not invested in industrial production or infrastructure, but rather were used to fuel speculation in local financial markets by local and international banks and traders who were able to take advantage of very high local interest rates in Argentine Pesos tied to stable and unrealistic medium-term US Dollar exchange rates.

Salbuchi detailed Argentina’s fall from there into what became a $200 billion debt trap. Large tranches of this debt, he maintained, were “odious debt” and should not have to be paid:

Making the Argentine State – i.e., the people of Argentina – weather the full brunt of this storm is tantamount to financial genocide and terrorism. . . . The people of Argentina are presently undergoing severe hardship with over 50% of the population submerged in poverty . . . . Basic universal law gives the Argentine people the right to legitimately defend their interests against the various multinational and supranational players which, abusing the huge power that they wield, directly and/or indirectly imposed complex actions and strategies leading to the Public Debt problem.

Of President Nestor Kirchner’s surprise 2006 payment of the full $10 billion owed to the IMF, Salbuchi wrote cynically:

 This key institution was instrumental in promoting and auditing the macroeconomic policies of the Argentine Government for decades. . . . Many analysts consider that . . . the IMF was to Argentina what Arthur Andersen was to Enron, the difference being that Andersen was dissolved and closed down, whilst the IMF continues preaching its misconceived doctrines and exerts leverage. . . . [T]he IMF’s primary purpose is to exert political pressure on indebted governments, acting as a veritable coercing agency on behalf of major international banks.

Sovereign Bankruptcy and the “Global Economic Reset”

Needless to say, the IMF was not closed down. Rather, it has gone on to become the international regulator of sovereign debt, which has reached crisis levels globally. Total debt, public and private, has grown by over 40% since 2007, to $100 trillion. The US national debt alone has grown from $10 trillion in 2008 to over $17.6 trillion today.

At the World Economic Forum in Davos in January 2014, IMF Managing Director Christine Lagarde spoke of the need for a global economic “reset.”  National debts have to be “reset” or “readjusted” periodically so that creditors can keep collecting on their exponentially growing interest claims, in a global financial scheme based on credit created privately by banks and lent at interest. More interest-bearing debt must continually be incurred, until debt overwhelms the system and it again needs to be reset to keep the usury game going.

Sovereign debt (or national) in particular needs periodic “resets,” because unlike for individuals and corporations, there is no legal mechanism for countries to go bankrupt. Individuals and corporations have assets that can be liquidated by a bankruptcy court and distributed equitably to creditors. But countries cannot be liquidated and sold off – except by IMF-style “structural readjustment,” which can force the sale of national assets at fire sale prices.

A Sovereign Debt Restructuring Mechanism ( SDRM) was proposed by the IMF in the early 2000s, but it was quickly killed by Wall Street and the U.S. Treasury. The IMF is working on a new version of the SDRM, but critics say it could be more destabilizing than the earlier version.

Meanwhile, the IMF has backed collective action clauses (CACs) designed to allow a country to negotiate with most of its creditors in a way that generally brings all of them into the net. But CACs can be challenged, and that is what happened in the case of the latest Argentine bankruptcy. According to Harvard Professor Jeffrey Frankel:

[T]he US court rulings’ indulgence of a parochial instinct to enforce written contracts will undermine the possibility of negotiated restructuring in future debt crises.

We are back, he says, to square one.

Better than redesigning the sovereign bankruptcy mechanism might be to redesign the global monetary scheme in a way that avoids the continual need for a bankruptcy mechanism.  A government does not need to borrow its money supply from private banks that create it as credit on their books. A sovereign government can issue its own currency, debt-free. But that interesting topic must wait for a follow-up article. Stay tuned.


Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her 200+ blog articles are at


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  • Steven

    I have problems with Ellen’s explanation of the first causes here. If Argentina were permitted to do what the U.S., Japanand other European nations do, it could just keep adding zeros to its debt; IOW
    there is no ” mathematical necessity”. And nations should not have to repay their debt. If the Fed is to be believed requiring them to do so would leave the U.S. without at least the foundation for a money supply, i.e. the ‘near money’ of government debt. The first cause of Argentina’s problems is most likely the same as that for Greece, Spain, most Western nations; their elites have been allowed to run up government debt for their own purposes, e.g. evading the taxes necessary to finance civil society, stuffing their pockets with the proceeds from crony capitalism, etc.

    This probably comes under the heading of ‘odious debt’ which, I think, should be moved to first place in the list of primal causes. I haven’t read the material at the link to Michael Hudson. But I suspect his point is that with compound interest any debt (i.e. any numerical base to which an exponent is repeatedly applied, AKA an exponential function) will eventually become un-repayable in any real-world sense.

    This financial Armageddon (AKA default, national bankruptcy) could, of course, be postponed by eliminating the obligation of a borrowing government to repay its debt. The financial solvency of the state, as opposed to its citizens, could be preserved by eliminating the requirement of the borrowing entity to pay interest on the borrowed money – something the Fed with its zero interest rate policy obviously knows. It is also something Ellen knows. As part of her advocacy of public banking she has repeatedly observed that the effect of a state borrowing from its own bank would be just that – eliminating the interest on borrowed money.

    (This scheme has the potential for allowing the state to replace private bond holders as the principle beneficiary of interest collection. The interest collection mechanism could become just another revenue source for the growth of its bureaucracy, with interest on its borrowing perhaps replacing the taxes it now collects.)

    It is clear that if Paul Singer’s Elliott Management, the judge in this case and on the Supreme Court
    actually understood how the monetary system works, they would never have allowed the case to proceed this far. The only possible ‘rational’ explanation (from the perspective of the powers that be) is that this is part of an effort to eliminate the public domain, i.e. to buy up / take possession of ‘the commons’. I would really like to know if the U.S. might not find itself in the position of Argentina some
    day. If the equivalent of Paul Singer were to buy up its debt at pennies on the dollar and then insist on full repayment, would (s)he be allowed to take possession, e.g. of the national parks?

    What we have here is a system under which, since the end of Bretton Woods, money creators have abandoned any pretense of ‘backing’ the money they create with real wealth.
    (Whatever your feelings about gold as money, you have to admit that its finite availability limited the creation of money which is supposedly backed by it – or at least required periodic devaluations and / or creative accounting.) Hudson details all this in his “Super Imperialism”. It is a theme he has continued to explore along the lines of the use of money as a weapon of conquest. But the U.S. isn’t the only bad guy in all this. It has simply provided what the financial markets demanded – a sink for all the money (as
    debt) the rest of the monetarily affluent nations have demanded.

    In summary, it is time for much more than a ‘reset’. It is time for a global ‘debt jubilee’.

    • Steven

      Actually, the more I think about it those interest payments will eventually have to come from taxes – from which those who pay them have a right to expect government services in return. And since, as Leona Helmsley noted, “Only little people pay taxes.” that would mean it would have to come from tax revenue like Social Security should Congress ever decide again to pose as fiscally prudent, i.e. refuse to raise the debt limit.

      Ultimately, somebody is going to have to pay (or not, i.e. default) – if not the debt we are running up, at least the interest on it. If not this generation, then generation n + x.

    • Not Authorized
  • jadan

    Yes, a sovereign state can issue its own debt-free currency. No need to borrow from financiers. Let the financiers borrow from the government! But no nation does this. All are under the control of financier-owned central banks. And if Ms. Brown advocates sovereign money, why doesn’t she advocate it for the US? She is a supporter of the Fed in this country. It’s difficult to take her seriously when she speaks out of both sides of her mouth.

  • paul

    I think it is the IMF system that should repay those loans, if anyone should – though the idea that loans are sacrosanct beyond all other considerations is crazy anyway.

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