August 1, 2014
Tallinn, Estonia
What a disaster.
For the second time in the last fifteen or so odd years, Argentina has defaulted on its debt. And as we reported a few weeks ago, there was no easy way out.
Years ago, most of the creditors that Argentina had stiffed in 2001 agreed on a settlement; they accepted a much lower payment than they were actually owed, figuring that getting -some- money back was better than nothing.
But a handful of bondholders, known collectively as the ‘holdouts’, didn’t take the deal.
These were the people who, you know, actually wanted to get paid what they are obliged to receive.
This is the basic equation of credit. One person lends money. The other person borrows money. In any reasonable deal, the lender is supposed to have some sort of recourse to recover his/her capital when the borrower defaults.
If you default on a mortgage, the bank takes the house. Stop making car payments and they send the repo guy to take your vehicle. When a business fails, bondholders can often liquidate the company’s assets.
Argentina has plenty of assets. The government has nationalized just about everything they can get their hands on, including the really despicable theft of a Spanish oil company’s assets.
Clearly this is a government that feels perfectly fine taking other people’s assets when it suits them. But they’re not willing for others to do the same.
So the holdouts sued.
Eventually they found a sympathetic judge in the United States who ordered Argentina to STOP making payments to all the other bondholders until the government could reach an agreement with the holdouts.
I know what you’re thinking– what gives some judge in the United States authority over a sovereign nation?
Nothing. Except that he threatened them with the kiss of death: if Argentina failed to comply with his instructions, he would banish them from the US banking system.
Now… imagine you’re the finance minister of some developing nation out there, watching this all unfold in the newspapers.
Would reading about all of this inspire more confidence in the US government? Would it make you want to continue relying on the US banking system? Use the dollar? Or even hold Treasuries?
Probably not.
The Argentina debacle is a lot of things. But one important lesson is that the rest of the world is watching very closely… and thinking, “No way do I want to end up like that.”
This is a HUGE reason why other countries are now starting to form their own international finance system. They’d rather rely on China and Russia than the Land of the Free.
And the US government is practically begging them all to run away like scalded dogs, further accelerating the decline of the US and the dollar’s dominance.
Argentina’s economic minister summed it up best from New York the other day when a reporter asked him about how a potential default would affect the rating agencies’ outlook on his country.
He said, “Who believes in the rating agencies?” After all, these were the guys who completely missed the 2008 financial crisis… who were slapping AAA ratings on toxic debt, and never accepted responsibility for it.
Why do they still have such a dominant role in the global financial system? And for that matter, why does the dollar?
Why indeed. And as the US keeps up this kind of behavior, it won’t for long.
