Daniel Ozarow, Lecturer at Middlesex University London and Convener of the  Argentina Research Network UK
Adapted from an article in Critical Legal Thinking

An eerie sense of calm pervaded the bustling streets of Buenos Aires as local Porteños calmly went about their daily business. It was 31st July 2014 and the clock had just run out on the deadline for Argentina’s government to make a $539 million interest payment to the 93 percent of its bondholders which had agreed to debt restructuring in the years since the country’s 2001/2 economic and political crisis. Back then, Argentina had been forced to declare the largest sovereign default in world history, but with the latest deadline having been missed, the South American nation was now once again in ‘technical default’. Profound economic upheaval potentially lay in store.

 If the locals’ seemingly misplaced serenity wasn’t disturbing enough, what made the situation even more Kafkaesque was that the government had already deposited the bondholders’ payment into its Bank of New York Mellon account, only to have its transfer blocked by US Judge, Thomas Griesa. This was just the latest twist in the so-called ‘debt trial of the century’ – a lawsuit brought about by billionaire Republican Party donor Paul Singer on behalf of two hedge funds, NML Capital and Aurelius. These entities deliberately hoovered up cheap Argentine bonds after the 2002 collapse, then refused to renegotiate the debt terms when the country was on its knees, in the hope of making exorbitant profits out of its people’s misery. Better known as ‘vulture funds,’ they had been holding Argentina to ransom for several years by demanding the full value of the debt on which they had originally speculated.

 However, the predatory practices of these funds which thrive amidst a lack of speculative regulation, have not only inflicted serious harm upon developing countries like Congo, Peru and Zambia, but are also an increasing concern closer to home. Vulture fund activity has recently intensified in the UK, with Aurelius’ speculation on the debts of the UK’s Cooperative Bank having forced it to abandon its mutual structure in 2013, and Singer squeezing huge payments from the Greek government during the Eurozone crisis by threatening to create a mass default of banks across Europe.

 Having adopted a somewhat austere interpretation of pari passu (the legal concept of ‘equal treatment’ for all creditors) which effectively means that either all bondholders are paid the original pre-renegotiated bond value (which would have bankrupt Argentina), or none of them receive a penny, Judge Griesa’s ruling in a New York court (where the bonds were issued) declared Argentina’s restructured bond payments illegal, even though they had been subject to lawful agreement by two consenting parties. In legal proceedings that were fraught with allegations of abuse of authority and lack of judicial independence (Griesa- a lifelong Republican- was presiding over a case brought by one of the Party’s largest donors), Argentina refuses to accept the Court’s jurisdiction today.

 Yet the ruling will have enormous ramifications for the global debt system because it effectively affirms that the right of a handful of wealthy investors to reap multi-million dollar profits from financial speculation supersedes the right of sovereign nations to protect their citizens under international law. It also establishes a legal precedent that removes any incentive for investment funds to agree to restructure the value of their distressed debt bonds following developing country defaults. As the IMF has warned, this will create far-reaching financial instability and gives the green light to the vulture funds to continue attacking some of the poorest countries in the world, consequently draining their economies of already depleted treasuries that could be used to provide education, food and protection against disease.

 Yet the lack of political will from either President Obama or the United States Congress to follow the example set by the British Parliament in 2010, which as a result of a Jubilee Debt Campaign initiative, approved a landmark law that restricts vulture funds from suing the poorest countries in UK courts, represents Washington’s tacit approval for unregulated speculative capitalism. This is barely surprising given the vultures’ growing influence over elected representatives and the media, as well as their potential to inflict political damage upon opponents. Indeed, the vulture funds’ lobby group, American Task Force Argentina has already spent $4 million persuading US Congressmen to support them. The US State Department’s refusal to accept Argentina’s lawsuit against it at the International Court of Justice for violating its sovereignty and immunities, illustrates the futility of existing global governance institutions until now.

 Few checks and balances on vulture fund activity remained. That was until a historic vote at the UN General Assembly on 9th September 2014 when a proposal by Argentina and the G77 coalition of developing nations to establish a legal framework to create an international convention that regulates the restructuring of foreign debt was overwhelmingly approved. Yet whilst this offers hope, it does little to question the dubious legitimacy of these debts in the first place.

 I am back in Buenos Aires and desperately scouring the city for some kind of resistance or rage against the vultures that had provoked the default. I catch a cab to the city’s equivalent of Trafalgar Square – Plaza de Mayo and see a group of frail-looking, aging women wearing white headscarves and slowly pacing around the centre of the square. These were the Mothers of Plaza de Mayo, marching -as they had done every Thursday since 1977- to demand justice for their children who were among the 30,000 young men and women abducted, tortured then murdered by Argentina’s brutal military dictatorship in the 1970s and 80s.

 A tingle shoots up my spine as I recall how regime’s National Reorganisation Process attempted to end the existing import-substitution industrialisation model and impose neoliberalism, fiscal discipline and so-called “stability” upon the Argentine population… out of the barrel of a gun. The systematic slaughter of political opposition, muzzling of the trade unions and imposition a police state was shamefully backed by ideologically sympathetic western governments including those of Thatcher and Regan.

 Then, one of the members of the Mothers’ Founding Line faction, Nora Cortiñas addressed the crowd. As camera-clad tourists gather round frivolously taking holiday snaps, she reminds us that not only is much of Argentina’s current debt illegitimate- due to having been recycled from interest payments that accrued unconstitutionally from loans the military used to arm their concentration camps, purchase the weapons with which they tortured their sons and daughters and to pay the salaries of the functionaries who administered the genocide- but also immoral for other reasons.

 Firstly, former finance minister and president of the Central Bank, Domingo Cavallohad transferred millions of dollars of private debt liabilities into state coffers and during the “Mega bond-swap” of April 2001. This added $54 billion to Argentina’s long-term debt in a colossal fraud to public finance for which Cavallo is currently under criminal investigation. Secondly and most crucially, Cortiñas highlighted the 2000 Olmos Case ruling under which Judge Ballesteros identified 477 separate “fraudulent and arbitrary” acts which bring the debt’s very legality into question. The basic legal principle is that no illicit action can later serve as the basis for a legal act such as NML and Aurelius’ bond purchases. On that premise, all the successor debt falls, nullifying the value of investments made in it, including the vulture funds’ bond purchases after Argentina’s 2001/2 economic crisis. A federal court decision that may well declare the debt null and void is pending.

 The poignance of her words hit me as I become mindful of something David Graeber said in Debt: The First 5,000 Years.

 “If history shows anything, it is that there’s no better way to justify relations founded on violence, to make such relations seem moral, than by reframing them in the language of debt—above all, because it immediately makes it seem that it’s the victim who is doing something wrong.”

 It is becoming ever more apparent that we live in debtocracies, not democracies. A system in which the governing principle is debt, rather than popular will, as anyone living through the devastating austerity policies implemented in the name of debt reduction would attest. Our governments and the corporate media tell us there is no alternative.

 However Argentina is far from alone. National debt burdens continue to impede growth, development, and poverty alleviation in the world’s poorer countries. Jamaica, Pakistan, El Salvador, Philippines, and Tunisia are among those which remain trapped in a historical cycle of dependence upon western financial capital’s institutions like the IMF, the Paris Club, and hedge funds and which also lock them into a politically subservient relationship with G8 countries. Yet like Argentina’s, these countries’ historic debts also have highly questionable legitimacy, payment of which must also be challenged.

 With developing countries’ total outstanding external debt having doubled to $5 trillion since 2005, how might national governments in Africa, Asia, and Latin America seek the necessary finance to uphold their central role as health, education and, social protection providers without perpetuating the conditionality and dependence upon western financial hegemony that has so profoundly harmed their prosperity?

 Alternative and ostensibly less harmful funding sources to those of western financial hegemony have been proposed. These include the People’s Bank of China and the new BRICS development bank which was formed as recently as last month. However, as China asserts its political and economic authority in the global south through foreign direct investment, bilateral trade deals and loans, it presents the danger of old relationships of dependence being replicated.

 Meanwhile as the detail of the BRICS development bank’s borrowing arrangements emerge, it appears that they would leave debtor countries with little room for manoeuvre to escape neoliberalism’s financial infrastructure. Requiring an existing “on-track-arrangement” with the IMF in order to qualify for financial assistance, the BRICS bank would be far from the counter-hegemonic institution that many had hoped for.

 Neither of these are viable alternatives to debt dependence for poorer nations and the system will keep generating debt crises regardless of who plays neoliberalism’s “banker”. What is urgently required is fundamental change in the rules of the game because preserving the status quo is leading even those countries like Ghana, which initially benefited most from debt cancellation in 2005, to head back towards high debt payments.

 However, there remains one other possibility, and we must shout about it loudly because neoliberalism’s advocates seek to muzzle attempts at its proposal. Conduct national public audits to determine the amount of debt in each country that can be deemed “illegitimate,” then for these nations to club together (perhaps initially through the G77) to press for the establishment of an International Debt Court (IDC) under United Nations auspices. The IDC’s brief; to regulate against harmful speculative practises committed against states and to verify and legitimise the public debt audit findings. In this way, a large proportion of national debts could be legally written off, ushering in a new era of economic emancipation for the vast majority of the world’s population. There is currently an unprecedented groundswell of global solidarity for Argentina against the vulture funds from the G77+China, to the Union of South American States and a multitude of internationally respected economists, politicians and NGOs. This momentum must be seized upon to openly challenge the legitimacy and indeed legality of both external debts themselves and subsequent speculative investments made in them on the table of casino capitalism.

 As for the public audits, these have already been performed by several countries which not only survive non-payment of the proportion of their debt that is determined to be illegitimate, but boast thriving economies today. For example in 2008 Ecuador’s President Correa established a Commission which found 70 percent of its debt to be illegitimate. By partially defaulting and selectively buying back bonds, the country’s debt burden was slashed by $3bn. It is currently one of region’s fastest-growing economies. Meanwhile Iceland held a referendum in which its people voted to refuse to take on their banks’ foreign debts. The country has since benefitted immensely, with the economy booming and unemployment down to 2 percent. Even in France, a citizen’s audit found 60 percent of its public debt to be illegitimate. Public debt audits are feasible and refusing to pay does not mean financial Armageddon.

 Such a solution represents a win-win outcome for all but the multimillionaire private hedge fund executives, international financial institutions and banks which hold debt liabilities. Meanwhile the global benefits of growth, job creation, poverty reduction, and wealth redistribution that result from a once and for all vanquishing of debt burdens would be truly unimaginable. Performing public debt audits together with pressing for the foundation of an international debt court is worth a try. The people of the world have nothing to lose but their (debt) chains.

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