Argentina’s new right-wing president, Mauricio Macri, has announced that he is restarting negotiations with U.S.-based hedge funds which have been harassing the country in recent years. Though the bargaining is not yet very far along, this move by Macri is cause for worry, and not only for Argentines.
Under Macri, Argentina is returning to the neoliberal approach of making concessions to attract direct foreign investment, rather than relying on internal resources and taxing wealthy domestic interests to pay for improvements in infrastructure, housing, health care, and education – as previous government attempted to do. Evidently, Macri’s idea is that by surrendering to the “vulture funds,” he will be able to create an investment-friendly atmosphere to bring in more foreign money.
To further sweeten his deal, Macri has fired over 10,000 public sector employees as “fat” left over from the previous government of Cristina Fernandez de Kirchner. The move is prompting massive protests from Argentine labor unions. He also ordered the removal of taxes on exports of agricultural commodities, pleasing the big agricultural interests but creating an immense potential budgetary problem for the future.
Fernandez de Kirchner and her husband and predecessor, Nestor Kirchner, restructured Argentina’s foreign debt after the country defaulted in 2001. This allowed Argentina to return to the bond markets to finance government priorities. A small percentage of debtors, including, principally, U.S.-based Elliot Management and Aurelius Capital Management, refused to accept the debt restructuring efforts and moved to destabilize the Argentine state. Elliot’s head, Paul Singer, has been leading the international campaign of harassment against Argentina with the legal backing of a New York judge.
The trouble is that if Argentina now lowers its flag to Singer and his ilk, it could undo the whole debt restructuring the Kirchners achieved. The bondholders who had earlier agreed to be paid a partial payment for their bonds could now come back and demand equity – to be paid back in full as Elliot and Aurelius demand. This would be a disaster for the country. Is Macri really willing to risk it?
How did Argentina acquire these debts? A good part of it started with the military regime that was in power from 1976 to 1983. In addition to massive arms purchases and corrupt contracts, the generals started a truly foolish (and losing) war with the United Kingdom over the Falkland Islands. Domestically, the military enforced a system where anyone who dared call them to account risked losing their life, as 30,000 people eventually did. This was an unelected government that came to power by violence and was not accountable to any legislative body or legal system, let alone to the Argentine people.
The vulture funds bought up these distressed debts from the past for pennies on the dollar. Now, they are demanding repayment of the whole original value, thus making a killing on the deal.
This brings up the subject of odious debt. This refers to debt payment demands so reprehensible that they shock the conscience.
One extreme past example of odious debt was that which France claimed against Haiti after that country achieved its independence from Paris in 1804. Estates of French nationals were confiscated by the new Haitian government, and King Charles X responded by sending the French fleet to menace Haiti in 1825. In addition to the value for the seized land, the King demanded compensation for the value of the slaves who had been freed by Haiti’s revolution. With its overwhelming economic and military power, by 1838 France was able to force Haiti to agree to pay this outrageously odious debt. It was not until 1947 that Haiti paid France in full for its liberated slaves. This is a major cause of Haiti’s historic poverty and remains a point of contention between the two governments to this day.
A second case is that of the Jecker Bonds and the French intervention in Mexico. Jean Baptiste Jecker was a Swiss banker operating in Mexico during the mid 19th Century. In the 1850s, Mexico was wracked by the Wars of the Reform, which pitted the old landowning elites and the Catholic hierarchy on the one side against the modernizing liberals led by Benito Juarez on the other. In 1859, a young military adventurer, Miguel Miramon, seized power in a coup against Mexico’s liberal elected government.
To finance his regime and his military campaign, Miramon organized a loan from Jecker on terms outrageously unfavorable to Mexico. Miramon’s government got only $700,000 up front from the deal but committed to pay back Jecker and his partners $15,000,000. As if this were not bad enough, Miramon put up vast amounts of Mexican national territory as security.
When it was clear that Miramon could not hold onto power and the liberals, headed by Benito Juarez, were going to triumph against him, Jecker arranged to have himself made a citizen of France. He cut a deal with the Duke of Morny, who was half brother of the French emperor, Napoleon III. The politically influential Duke made the agreement with Jecker to ensure that he would also profit handsomely from this crooked bond deal.
When Juarez, temporarily back in power, repudiated the deal that Miramon, Jecker, and Morny had cooked up, France saw this as an opportunity to intervene in Mexico. A campaign was launched to force the supposedly deadbeat Mexicans to pay this and other debts owed to French citizens. But Napoleon III also saw it as an opportunity to extend the French Empire into the Americas. The French initially persuaded Spain and the United Kingdom to join in their debt collection adventure. When the British and Spanish military leaders realized the French had other ambitions, however, they withdrew their troops from Mexico.
The French army, after suffering an initial defeat at the Battle of Puebla on the 5th of May (Cinco de Mayo) 1862, eventually captured Mexico City and installed Archduke Ferdinand Maximillian as the Emperor of Mexico. Their puppet was the brother of Austrian Emperor Franz Josef. Maximillian’s “empire” would survive only a few years.
Things did not end well for him or Miramon. They were both shot by a firing squad when the French eventually pulled out and Juarez’s forces again triumphed. Mexico beat back the French but at the cost of many casualties and much suffering and destruction.
There was no happy ending for Jean Baptiste Jecker either. In 1871, he too faced the guns of a firing squad. He met his fate during the uprising known to history as the Paris Commune. The financial wizardry which had made him so influential in the grand game of world politics was of no help to him in the end.
The Haiti story, and especially the one of the Jecker bonds, are perfect illustrations of the concept of odious debt. The Argentine debt which the vulture funds are trying to collect on today is only the latest case. In each instance, the original contracting of the debt was illegitimate, because it was done by governments that did not represent the people who would eventually have to pay.
The terms were outrageously usurious and would be considered illegal under the laws of most countries today. Yet in all three cases, the creditors assumed an attitude of moral superiority, for no other reason than that they were backed by wealthier and more powerful countries than the debtors. Might makes right – especially if you’re white.
If President Macri hauls down the Argentine flag and buckles to Elliot and Aurelius, it will set a horrible precedent for other relatively poor and indebted countries in Latin America, Africa, Asia, and Europe. It could bring vast suffering to some of the neediest people in the world.
In such an outcome, things will not go well for Mauricio Macri in the history books of the future. The hope now is that the Argentine Congress, where Macri still lacks a majority, will be able to stop such a surrender.
Image: Jubilee Debt Campaign, a global movement to break the chains of debt.