ARGENTINA'S FOREIGN DEBT: THE TANGO WITH DEATH

ARGENTINA'S FOREIGN DEBT: THE TANGO WITH DEATH.

We see statement ads appearing in the American newspapers. One days the Argentine Government publishes a statement with the following heading: "A handful of vultures is rendering Argentina insolvent and thus threatens the world economy." The following day, you can see a statement coming from the investors who are accused of being vultures as follows: "We are not vultures. This is our investment and there is a court resolution regarding it. We want to have our rights on it; because the Argentina's Government does not accept us as interlocutors, they are risking the world system."

Then what is the problem? Argentina could not pay the bonds maturing in 2001 and became somehow insolvent. Then in 2005, a debt restructuring agreement was made with the bond holders​​. A further restructuring of the debt had been made in 2010. It was a bond stock worth about 100 billion dollars. And the interest rate was too high. With the first restructuring, an agreement had been reached with 76% of the bond holders in 2005. They took their new bonds and retreated. Then in 2010, the number of investors with whom an agreement had been reached attained 93%. But the remaining investors refused to enter into agreement. These bonds had been accumulated by some vulture funds. Recently, the U.S. Supreme Court announced that the Argentina's Government had to reach an agreement by paying an interest for the period without agreement too as well as for these bond holders. When Argentina saw the bill put before her by the court, she said "that's too much!". And that is precisely when the war of ads begun.

Why did it happen? For a very simple reason. The payments to the bond holders were being done through Mellon Bank of New York in New York. Because the transaction was taking place in the United States, the American courts could come into play quite easily. Because the U.S. dollar was a reserve currency, the American law was valid everywhere.

But another news came forward. The French Finance Minister Michel Sapin gave a statement where he stated in a romantic fashion that the reserve currency characteristic of the U.S. dollar should be brought to an end. The French Minister was quite unhappy about the 9 billion dollar fine given by the American courts towards BNP Parisbas. BNP Parisbas had performed transactions with Soudan and Cuba without respecting the sanction decisions taken by the American Congress. Transactions effectuated against the sanction decisions brought 9 billion dollars fine. BNP Paribas accepted this fine. There was nothing left to Michel Sapin other then complaining. The big French bank blatantly did not respect the American sanction. That was the first mistake. More importantly, the French Government did not determine even on its own the transactions that were contrary to the sanction. And that was the second mistake and it was a severe embarrassment.

The sanction comes out from the American Congress. The American Courts rule for fines to the ones who do not comply to it. And the French bank said "yes" to it. And the only thing that the French Minister can do is to complain about it. As a matter of fact, there is nothing that he can do. Why not? Because the world keeps on working with the U.S. dollar. The world has about 10 trillion U.S. dollar of reserve currency. 60% of it is constituted of U.S. dollars. The remaining is acting like a dwarf: their trading volume do not beyond billions of dollars. China's money is kept in the depositories of the United States. Why is everybody investing in China where there no law? Because its money is kept in the United States. If a problem arises, you open a lawsuit, obtain a freezing of the assets and then make the necessary collection. BNP Paribas is paying its fine. Argentina will try to reach a compromise with the bond holders with whom she did not reach to an agreement. The resolutions of the American courts are going to be applied and Argentina will be forced to comply to them one way or the other...

If successful, all these things could make us think that one should expect a similar development regarding the other populist Latin American countries such as Chile, Venezuela etc. The aim would be nothing more than the destitution of the populist governments and their replacement with liberal governments. Let's see what's going to happen...