Creditors' snapback raises risk of new crashes

Submitted by Matthew on 28 November, 2012 - 8:36

Behind the current global capitalist crisis is a snapback in the shifting balance between creditors and debtors. A recent US court ruling about Argentina's payments on its bonds (IOUs) marks a sharper snap, with large potential ricochet effects.

After defaulting (ceasing to make payments due) on its bonds in 2001, Argentina worked out a deal with most of the bondholders to cancel the old bonds and replace them by new ones with a smaller payback.

Argentina liked the deal because it opened a way back to borrowing on global financial markets. The bondholders liked it because it replaced old bonds which had become pretty much worthless with new ones worth something.

That sort of operation has become more routine as modern capitalism has developed. In earlier times, for example, Greece’s default in 1826 shut it out of international capital markets for 53 consecutive years.

Now, when radical economists advocate Greece stop payment on its debt, they can assume, more or less, that after the stop Greece will be able to negotiate some deal to restore access to international credit.

It has also become easier for individuals and companies to go bust. Until 1869, in England, you were likely to be jailed if you missed payment on your debts, and kept there until you did pay. Now over 100,000 individuals and 16,000 companies go bust each year, and often emerge hurt but thriving. In the USA, many big corporations have been through "Chapter 11 bankruptcy", and relish it as a chance to shed their obligations to workers.

Easier credit, on the basis of non-payment by a percentage of borrowers being an understood and routinely-managed problem, has become a standard underpinning of capitalist expansion.

The court ruling is a sharp turn backwards. It says that Argentina cannot continue with its reduced-payments bonds deal unless it also makes full payments to the minority bondholders who refused the deal.

The Argentine government is naturally angry. The minority bondholders are "vulture funds" who picked up the bonds at fire-sale prices after Argentina's default, and stand to make huge profits from the ruling. Part of the deal was to issue the replacement bonds under New York law (to give the bondholders more confidence than if they were issued under Argentine law; in the same way, Greece's recent replacement bonds have been issued under English law); so the judgement on Argentina's finances came from an 82-year old judge in a US District Court.

According to financial expert Felix Salmon, “Argentina’s best hope is that the Second Circuit [court] will be swayed [on appeal] by the arguments from the Bank of New York, the New York Fed, the Depository Trust Company, the Clearing House Association, and just about everybody else with a stake in the smooth functioning of New York markets” [who don't want the deal disrupted].

If not, “the obvious thing for Argentina to do is to simply default on all its foreign obligations.

“It could then launch another exchange offer, saying that anybody holding the exchange bonds could swap them into domestic Argentine bonds with exactly the same terms” [but outside the scope of New York law].

The scope of the court ruling is limited by what law bonds are issued under, and the exact legal clauses for each bond issue. Experts, however, reckon that if upheld it will seriously hurt the prospects for future post-default deals, and make the whole system more brittle.

By 2008 the spiral of debt in the capitalist world economy had risen so high that some collapse was inevitable. The working assumption of all capitalist plans to mend the crisis is that deals can be done to wind the spiral back in a fairly orderly way, and then start it going again

Whether that was ever going to be possible without further cataclysmic implosions like the US mortgage crash of 2006-7, and the Lehman Brothers collapse and bank-to-bank lending crash of 2008, was always doubtful. The ruling makes it still more doubtful.

Under capitalism, working-class people generally lose out both when rich debtors escape easily (Chapter 11) and when rich creditors bite back.

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