Planned Bond Exchange Declared Illegal

You bet it is illegal – in its continued attempt to welsh on its creditors, Argentina's  government has attempted to move its debt out of the reach of US courts by swapping its debt for new debt issued under local law. The problem is of course that “local law” can be made up to the government's liking. Simply put, investors would never have lent the government money in the first place if these bonds had not been issued under US law. By entering clauses that determined that New York would be the relevant jurisdiction, Argentina's government enticed investors to lend a lot of money to it at what were then quite favorable terms.

Obviously, for the government to attempt to alter these clauses retroactively by means of a swap makes a complete mockery of these contractual agreements. Hence, judge Griesa's determination that such action would be illegal is perfectly justified and correct (for details on the legal backdrop, we refer you to our previous article  “Argentina – Deadbeat State Goes on the Attack”). In the interest of achieving a settlement, the judge wisely refrained from issuing a contempt of court finding (he can't very well throw Argentina into jail anyway). It is obvious that judge Griesa just wishes the issue would go away, but to his credit, he continues to stand firm on the law.

According to a recent Bloomberg report:

 

“Argentina’s plan to pay its restructured debt beyond the reach of U.S. courts is illegal, said the judge overseeing litigation stemming from the nation’s 2001 default, while declining to hold the country in contempt.

U.S. District Judge Thomas Griesa said in Manhattan federal court today that the proposal, announced Aug. 19 by Argentina President Cristina Fernandez de Kirchner, is “invalid, illegal and in violation of current court orders and injunctions.”

Griesa declined a request by lawyers representing investors holding Argentina’s defaulted bonds that he find the nation in contempt of court. The judge told lawyers for both sides that a contempt finding wouldn’t add to the prospects of a settlement between Argentina and its creditors.

“The thing that is of paramount necessity is to have a settlement,” Griesa said. “There must be a settlement.”

 

(emphasis added)

We must once again emphasize here that it does not matter that many of the current owners of Argentine debt that comprise the so-called “hold-outs” are denounced as “vulture funds” because they have bought the defaulted debt cheaply. It is completely immaterial to the legal questions at hand whether some of the original creditors have capitulated and sold their claims in the secondary market. Anyone who becomes a bondholder inherits all the rights connected with the bonds.

We must stress once again that we are a bit torn on the issue for the reason that we believe that lending money to governments is somewhat dubious per se. After all, those who lend to governments do so in the knowledge that the State is the only entity in the market economy that legally obtains its income by coercion. Certainly investors would benefit from being taught the lesson that lending to governments is not as risk-free an activity as is widely assumed. The fact that Argentina's tax payers will pay the price for their government's folly is undoubtedly deplorable.

On the other hand, we are talking about a government here that has just raised its spending by 56% in a single year, is hell-bent on destroying the country's economy and is abridging the economic liberty of its citizens ever more. As a result, there may actually be unexpected benefits for Argentina's citizens from the action of the hold-outs as well, as it is likely to restrict the government's room to maneuver.

 

Next “Official” Peso Devaluation Imminent

The renewed default is actually a sideshow to the ongoing economic catastrophe induced by the government's policies in Argentina. Its economy minister is a declared central planner, who actually believes markets to be surplus to requirements. As Nicolas Cachanosky writes:

 

“Argentina’s economic minister, Axel Kicillof, has become famous for his assertion that it is possible to centrally manage the economy now because we have spreadsheets such as Microsoft Excel. This assertion comes from the mistaken view that the cost of production determines final prices, and it reveals a profound misunderstanding of the market process.

This issue, however, is not new. The first half of the twentieth century witnessed the debate over economic calculation under socialism. Apparently, Argentine officials have much to learn from this old debate. The problem is not whether or not we have powerful spreadsheets at our disposal; the problem is the impossibility of successfully creating a centrally-planned market.”

 

(emphasis added)

 

CFK and KicillofArgentina's president Christina Fernadez-Kirchner and her economy minister Axel Kicillof.

(Photo credit: DyN)

 

Indeed, Mises showed already in his 1920 monograph “Economic Calculation in the Socialist Commonwealth” that there was a fundamental problem all central planners were confronted with that could not possibly be overcome. Without markets and market-determined prices, economic calculation becomes impossible – therefore no rational economic choices are possible either. As the debate between Marxists, Mises and Hayek in the decades following the publication of Mises' article showed, none of the attempts to rescue central economic planning from this fundamental challenge were successful. In fact, it often seemed that Mises' and Hayek's opponents did not even fully grasp what the nature of the problem was. How powerful one's computers are is for instance completely irrelevant to the issue. As Mises noted later in Human Action:

 

The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark.

There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.”

 

(emphasis added)

All socialist economic planning schemes presuppose the existence of the fictional state of equilibrium (which is merely a mental tool, but has no counterpart in reality) and a static, unchanging economy, which is just as unrealistic. Even if one were to simply attempt to preserve all existing economic processes and end all economic and technological progress, change would still occur (population numbers will change, the weather will be different from year to year, mineral deposits will run out, etc.). Almost needless to say, even if such a fictional “equilibrium economy” were attainable, it wouldn't be worth having. It would be completely contrary to the human spirit.

Argentina's “economy minister” has something in common with France's Arnaud Montebourg – he is economically illiterate, to put it bluntly. In fact, the entire Argentinian government is apparently laboring under the misconception that it can successfully “plan” the economy.

For instance, deputy economy minister Emanuel Alvarez Agis believes he knows what the “correct” exchange rate for the Argentine peso is (note that the currency has lost as much of its value in the past ten years as the US dollar in an entire century). As rumors about an imminent devaluation begin to circulate – which is undoubtedly unavoidable, not only due to the renewed default, but simply due to the combination of enormous government spending and unbridled money printing that characterizes Argentina's economic policy – Agis asserts that this is “not the plan”. Of course his vehement denial essentially cinches it, based on the “never believe anything until it is officially denied” principle.

 

“Argentina’s deputy economy minister, Emanuel Alvarez Agis, rejected the idea that the country is heading for another devaluation.

“We won’t apply that program,” Alvarez Agis said in an interview with Radio Del Plata yesterday. “The exchange rate has to be competitive enough to benefit regional economies, but not so high that it makes imports too expensive.”

Economy Ministry spokeswoman Jesica Rey didn’t respond to an e-mail and telephone call seeking comment about another possible devaluation this year.

Argentina’s central bank controls the peso rate by buying and selling dollars in the spot and futures markets almost daily, as well as limiting foreign exchange purchases. Yesterday the bank sold $10 million, according to preliminary data.

The peso is poised for further declines, Alan Ruskin, the global head of Deutsche Bank AG’s Group of 10 foreign exchange in New York, said in an interview on “Bloomberg Surveillance.”

“Guys like ourselves are saying the currency could still lose something like 25 percent,” Ruskin said. “It still is one of the big shorts on the currency side.”

 

(emphasis added)

Argentina's citizens meanwhile are buying as many dollars as is legally possible for them. Citizens may exchange up to 20% of their salary or income into dollars, provided they leave the dollars on deposit with a bank for a minimum of one year. Otherwise, a 20% tax is imposed on the purchase (i.e., if the dollars are taken out in the form of cash currency). Dollars that are kept on deposit remain of course easily accessible for the government, which is not exactly a paragon of regime certainty, to put it mildly. Argentinians have lost their savings more times than we care to count, whether by inflation or by confiscatory deflation. They evidently know what is coming next:

 

“People have seen this before and they know there will be fewer and fewer dollars, while more pesos flow into the economy as the government increases spending,” Buscaglia said in an interview from Buenos Aires. “The natural reaction is to buy more dollars.” Government spending surged 56.5 percent in June from a year earlier.

Peso forwards showing trader expectations for the currency in three months declined 2.2 percent this week to 9.3 pesos per dollar.

The perception that Fernandez is radicalizing her policies is also driving investors to the dollar on concern she’ll tighten existing currency controls, according to Olaiz.

 

(emphasis added)

 

ARG peso-annThe official (green line) and black market (blue line) peso rates, via dolarblu.net. The gap between the two continues to widen, a sure sign that the official rate will soon “catch up” a bit – click to enlarge.

 

The Argentine government meanwhile once again demonstrated its contempt for property rights by suing the subsidiary of a US company for daring to declare bankruptcy after having been ruined by the government's very own policies. The government is using an “anti-terrorism law” to attempt to reverse the bankruptcy. What is there to reverse one wonders? The company is insolvent. As an aside to this, it seems that the government also wants to introduce price controls and begin to “regulate profit margins” on a broad basis:

 

“Since defaulting, Fernandez has said she will use an anti-terrorism law to file a legal case against the local unit of Chicago-based RR Donnelley & Sons Co. (RRD) for “upsetting economic and financial order” after the printing company filed for bankruptcy and wrote off its assets in Argentina.

RR Donnelley said in a statement on Aug. 16 distributed by Globe Newswire that its Argentine unit wasn’t solvent and faced rising labor costs, inflation, materials price increases, devaluation, inability to pay debts and other issues that led to its decision to file for bankruptcy.

After Fernandez’s speech, securities regulator Alejandro Vanoli later said Argentina would seek to reverse the bankruptcy using a law against economic crimes.

Fernandez is also attempting to change a supply law that would seek to regulate prices and profit margins of goods.

 

(emphasis added)

In short, Argentina now has all the hallmarks of a full-blown Zwangswirtschaft based on the fascist model. Private property still exists on paper, but what may be done with it is decided by government bureaucrats. Ms. Kirchner's economic policy ideas obviously still had some room to get even worse than they already were. 

 

Conclusion:

It is actually quite sad to watch the continued downfall of Argentina's economy under the inept ministrations of its government. The only good thing that can possibly come from this is that it will set yet another example for others so they may avoid making similar mistakes. Unfortunately the example is being set on the backs of the country's citizens, who are seemingly forced to live from crisis to crisis. Politicians rarely pay the price for their atrocious policies, and we are quite sure Ms. Kirchner and her cronies have feathered their nests in ways the average citizen cannot even dream of (most recently, corruption allegations have caught up with Ms. Kirchner's vice president. Rampant government corruption has long been a hot topic in Argentina under Ms. Kirchner's rule). It is not as though Argentina didn't have great potential. If only politicians would leave its economy alone and stopped inflating the currency into oblivion, the country could easily and quickly regain its former prosperity.

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

4 Responses to “Argentina – Sliding Down a Slippery Slope”

  • The day a country stands on the value of their money a quits devaluing, after a little pain and a few insolvent banks, they will have a stronger economy and a better position of trade. Otherwise, the government will continue to rip people off under the guise of helping out. Is there a government on Earth with enough principles left to do so?

  • Kreditanstalt:

    “Private property still exists on paper, but what may be done with it is decided by government bureaucrats.”

    “…the entire Argentinian government is apparently laboring under the misconception that it can successfully “plan” the economy.”

    What’s new? These are true, to a greater or lesser extent, with ALL governments…though conceiving of “partial” or circumscribed property rights is essentially an exercise in doublethink…

  • GlobalDan:

    Very surprised that the Argentinian military has not yet stepped in. Multiple times in Argentinian history, massive economic mismanagement has been terminated by a military take-over. Just a matter of time or is it different now?

    • rodney:

      Shouldn’t be a surprise … The generals have made it clear that they are not available this time. They are tired of taking matters into their hands and then turning it over to politicians who proceed to send them to jail. Civilians and politicians will have to work it out for themselves or descend further into chaos.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Is the Canary in the Gold Mine Coming to Life Again?
      A Chirp from the Deep Level Mines Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal - and hence highly leveraged to the gold price - South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).   Mining engineer equipped with bio-sensor Photo credit: Hulton Archive   As we write these...
  • Fed Credit and the US Money Supply – The Liquidity Drain Accelerates
      Federal Reserve Credit Contracts Further We last wrote in July about the beginning contraction in outstanding Fed credit, repatriation inflows, reverse repos, and commercial and industrial lending growth, and how the interplay between these drivers has affected the growth rate of the true broad US money supply TMS-2 (the details can be seen here: “The Liquidity Drain Becomes Serious” and “A Scramble for Capital”).   The Fed has clearly changed course under Jerome Powell...
  • Are Credit Spreads Still a Leading Indicator for the Stock Market?
      A Well-Established Tradition Seemingly out of the blue, equities suffered a few bad hair days recently. As regular readers know, we have long argued that one should expect corrections in the form of mini-crashes to strike with very little advance warning, due to issues related to market structure and the unique post “QE” environment. Credit spreads are traditionally a fairly reliable early warning indicator for stocks and the economy (and incidentally for gold as well). Here is a...
  • The Gold Standard: Protector of Individual Liberty and Economic Prosperity
      A Piece of Paper Alone Cannot Secure Liberty The idea of a constitution and/or written legislation to secure individual rights so beloved by conservatives and among many libertarians has proven to be a myth. The US Constitution and all those that have been written and ratified in its wake throughout the world have done little to protect individual liberties or keep a check on State largesse.   Sound money vs. a piece of paper – which is the better guarantor of liberty?...
  • Fed President Kashkari Hears Voices – Are They Lying?
      Orchestrated Larceny The government continues its approach towards full meltdown. The stock market does too. But when it comes down to it, these are mere distractions from the bigger breakdown that is bearing down upon us.   Prosperity imbalance illustrated. The hoi-polloi may be getting restless. [PT]   Average working stiffs have little time or inclination to contemplate gibberish from the Fed. They are too worn out from running in place all day to make much...
  • US Stocks and Bonds Get Clocked in Tandem
      A Surprise Rout in the Bond Market At the time of writing, the stock market is recovering from a fairly steep (by recent standards) intraday sell-off. We have no idea where it will close, but we would argue that even a recovery into the close won't alter the status of today's action – it is a typical warning shot. Here is what makes the sell-off unique:   30 year bond and 10-year note yields have broken out from a lengthy consolidation pattern. This has actually surprised us, as...
  • Switzerland, Model of Freedom & Wealth Moving East – Interviews with Claudio Grass
      Sarah Westall Interviews Claudio Grass Last month our friend Claudio Grass, roving Mises Institute Ambassador and a Switzerland-based investment advisor specializing in precious metals, was interviewed by Sarah Westall for her Business Game Changers channel.   Sarah Westall and Claudio Grass   There are two interviews, both of which are probably of interest to our readers. The first one focuses on Switzerland with its unique, well-developed system of  direct...
  • Exaggerated Economic Growth of the Third World
      Exciting Visions of a Bright Future Fund Managers, economists and politicians agree on the exciting future they see in the Third World. According to them, the engine of the world’s economic growth has moved from the West to what were once the poverty-stricken societies of the Third World. They feel mushy about the rapid increase in the size of the Middle Class in the Third World, and how poverty is becoming history.   GDP of India vs. UK in 2016 – crossing...
  • Choking On the Salt of Debt
      Life After ZIRP Roughly three years ago, after traversing between Los Angeles and San Francisco via the expansive San Joaquin Valley, we penned the article, Salting the Economy to Death.  At the time, the monetary order was approach peak ZIRP.   Our boy ZIRP has passed away. Mr. 2.2% effective has taken his place in the meantime. [PT]   We found the absurdity of zero bound interest rates to have parallels to the absurdity of hundreds upon hundreds of miles of...
  • Why You Should Expect the Unexpected
      End of the Road The confluence of factors that influence market prices are vast and variable.  One moment patterns and relationships are so pronounced you can set a cornerstone by them.  The next moment they vanish like smoke in the wind. One thing that makes trading stocks so confounding is that the buy and sell points appear so obvious in hindsight.  When examining a stock’s price chart over a multi-year duration the wave movements appear to be almost predictable.   The...
  • How Dangerous is the Month of October?
      A Month with a Bad Reputation A certain degree of nervousness tends to suffuse global financial markets when the month of October approaches. The memories of sharp slumps that happened in this month in the past – often wiping out the profits of an entire year in a single day – are apt to induce fear. However, if one disregards outliers such as 1987 or 2008, October generally delivers an acceptable performance.   The road to October... not much happens at first - until it...
  • Yield Curve Compression - Precious Metals Supply and Demand
      Hammering the Spread The price of gold fell nine bucks last week. However, the price of silver shot up 33 cents. Our central planners of credit (i.e., the Fed) raised short-term interest rates, and threatened to do it again in December. Meanwhile, the stock market continues to act as if investors do not understand the concepts of marginal debtor, zombie corporation, and net present value.   The Federal Reserve – carefully inching forward to Bustville   People...

Support Acting Man

Item Guides

Austrian Theory and Investment

j9TJzzN

The Review Insider

Archive

Dog Blow

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com