An interesting thought isn’t it? It was CNN that gave me the idea in the first place. It all started with the article on the upcoming Argentinian default (at http://money.cnn.com/2014/07/25/investing/argentina-default/index.html). I have skin in the game here. Part of my family comes from there, which is why it caught my eyes in the first place. This is not the first time that Argentina has been in such a problematic state. The last time was in the late 90’s when it faced the great depression.
So, why is this event such a big deal?
Let us not forget that apart from soccer, many regard Argentina, no matter how beautiful it is, as a third world nation. So why is it allowed on the International Capital markets in the first place?
That was not an offensive question, but I need to ask it so that I can answer the questions many of us have in the first place. Argentina is in second place when it comes down to South American GDP, after Brazil (who is in first place by a massive margin), it is followed by Colombia and Argentina has a GDP that is 50% better than the nation holding position three, Colombia. So, within the ‘third world’ Argentina is pretty high up there. The second fact is that Argentina has the 21st position in regards to GDP, so this gives a massive view to how big its economy is. So why is it about to default on a 1.5 billion bond?
Well, Argentina is playing hard ball, a statement that seemed weird, because in the light of Argentina it seemed like worrying about a shave on route to the guillotine (a fake fear many former French Aristocats had, pun intended).
My first thought was the ‘worry’ why the IMF was not speaking out on all this. It seems so outspoken on a little place like Cyprus (no insult intended), yet is remains silent on an economy a hundred times larger?
What gives?
Well, my faithful old Yahoo had a nice part on this (at https://au.finance.yahoo.com/news/impact-argentine-default-100849473.html).
I particularly liked the following quotes: “The IMF proposed an international debt restructuring mechanism in 2003 but the plan was abandoned under pressure from the United States, the institution’s largest stakeholder, and the major emerging-market economies“, so the USA needed to keep Argentina as a cash cow or what?
The second one was “Under a US court order, Argentina has until Wednesday to either pay hedge funds demanding full payment on of its bad debts — or face a default that could have serious economic consequences“. So is this another USA hedge fund game?
If we consider the generic statement “Hedge funds are made available only to certain sophisticated or accredited investors and cannot be offered or sold to the general public. As such, they generally avoid direct regulatory oversight, bypass licensing requirements applicable to investment companies, and operate with greater flexibility than mutual funds and other investment funds“, we see the fear that governments are financially no longer run by governments but by those holding the credit bill behind the scenes.
This gives us a lot more fear then we should have to deal with and as such, it seems that democracy is no longer in the hands of the people, but in the hands of those managing the hedge funds. As such, did US District Judge Thomas Griesa buckle under internal pressures or is there something else in play? We should ask this question as we see that the response we see (at http://www.irishtimes.com/business/economy/us-judge-orders-argentina-and-bondholders-to-agree-deal-1.1875547), which is quotes as “Jonathan Blackman, a lawyer for Argentina said even with around-the-clock talks ‘it would be unlikely, if not impossible, to result in settlement. It simply can’t be done by the end of the month’ he said“
This feels like a game played with millions of households on the butcher’s counter, with the meat cleaver already raised up high. There is not enough information in these sources to clearly state how the game was played up to now, or the involved players behaved and how the international justice courts (not just the US) as such have been behaving on the given facts. The fact that the IMF has warned that an Argentine economic default could not only hurt the country’s economy, but also the global financial system is another fact in the entire game as this is currently playing out. What is FACT, is that we have seen hedge funds cash in at the expense of close to a billion people, they played a game that made them wealthy and left the rest in destitution, yet now we see more and more that these players are implied not to be held to rules of oversight and it can bypass licensing in apparently too many flexible ways. Yet, it must also be clear that Argentina is not blameless in this game either.
Not unlike the USA, when we compare debt to GDP (governments seem to love that comparison) USA is currently set to 101.45%, whilst Argentina is only at 45.6%, which implies that Argentina has an economy twice as solid as the US has (a false statistic, I know!). So when we play the numbers game, this default, or even to allow for this event to occur seems massively stupid in my books. The question becomes why Argentina is continuing to play such a level of hardball, the debts will not go away, Argentina would lose its place as a G20 member and beyond that the foundations of the Argentinian economy will be shaking for a long time to come, opening additional doors for investors to bail out of Argentina, take the first row boat across the Rio de La Plata and set up shop there. This in the end will be a massively good thing to Uruguay and the economy of Montevideo for the next 10 years.
So, how is this all affecting democracy?
In my view if we want to remain true democracies, then it is time to regulate Hedge Funds and their managers. It will require a level of oversight that is beyond reasonable, as the economic fall of the USA in 2008 has proven to require. In that regards the term ‘Vulture funds‘ seem very appropriate. The US and in particular its FBI are all about hunting down Loan Sharks, whilst at the same time they ignore a 2.4 trillion dollar market right under their noses.
Yet, in all this Argentina is not without blame either. Someone approved these debts. If we accept, no matter how repulsive that these funds, referred to the behaviour of vulture birds “preying” on debtors in financial distress by purchasing the now-cheap credit on a secondary market to make a large monetary gain, is as such opening a market, which is high risk and also at time high yielding, then we must accept that Argentina stepped, willingly or not, into a field with their eyes wide open, as such they largely have themselves to blame.
If these are matters of fact then we see the acts on both sides of the isle to allow and even mandatory pursue the need for a change to the democratic standards we see in monarchies and republics. If you wonder why I made the reference to the Guillotine, than consider the History of France, its bankers and the change as it brought order through Napoleon Bonaparte. The statement ‘War never changes‘ seems highly appropriate here, it is a quote from a Videogame, yet the truth behind it is as solid as the writings of ‘von Clausewitz’ and ‘Sun Tzu’. The question remains in these economic wars, who are the warring parties and who are the people behind the screens. You can be certain that those names are not the names of any elected official. Does that not change the premise of both economic war and democracy?
Lawrence van Rijn - Law Lord to be 