FINANCIAL HISTORY IN THE MAKING

Pope Francis, “Che” Guevara, Evita, Jorge Luis Borges, Diego Maradona, Lionel Messi. You choose the order of relevance but they are all Argentine names that left or are leaving a mark in our world’s history. But, beyond its contributions in terms of personalities, Argentina has other claims to fame. The country is not a world power. Possibly not even an emerging one. But the fact is that — at least in the world of global finance — it has managed and is still managing to unleash processes and debates that shape the way in which things happen and are done.

The Baring crisis back in 1890 was an interesting starting point. It was not the first foreign debt problem faced by the country. But what made that default special, is that it dragged the City into serious problems. Back in London, the Barings Bank had been recklessly greedy. It had floated the debt on behalf of the Argentine government. But the terms of the loan were so profitable to the lenders that — in order to maximize its gain — Baring had kept much of the Argentine bonds in its own vaults, instead of marketing them and, thus, spreading the risk. When Argentina defaulted, the inevitable happened. Barings faced a bankruptcy which would have — in turn — affected the rest of the City. The Bank of England could not — on its own — cope with the situation. So it had to ask for help from the French and Russian Central Banks to avert the crisis. An interesting footnote to this story. Back in 1995, Baring was — once again — facing terminal difficulties. This time on account of reckless speculation from Nick Leeson, one of its officials. Rumour has it that Barings’ authorities went to knock the Bank of England’s door to get help. And were told that “The Old Lady of Threadneedle Street” helps British Banks. But only one time. And Baring had already used that facility back in 1890.

Argentina contributed to world financial history again in 1956. Overwhelmed by its debts with official creditors Argentina asked for French help. Paris gathered the creditor governments, and an agreement with Argentina was reached in May, 1956. The Paris Club was born. As informal and quite loose organization with the mission of setting guidelines for, and dealing with, the difficulties faced by borrowing countries with their government creditors. Despite the fact the organization remains quite loose and formal (by comparison with, say, the IMF), it has developed quite comprehensive “rules of engagement” for creditor governments to deal with foreign debtors’ issues.

Then, in December 2001, Argentina set a new milestone. Under President Rodríguez Saá, the country defaulted on its foreign debt. It was an impressive figure, over US$100 billion, and considered to be the biggest default in world history. Argentina was in the midst of a terrible economic crisis. This perhaps explains the oddity of the country’s Congress welcoming this first formal declaration of bankruptcy with a cross-party standing ovation. It was Néstor Kirchner who — after becoming President in 2003 — started the long and protracted process of debt restructuring which included a substantial reduction of nominal amounts (“haircut” in the jargon). A vast majority of creditors (93%) entered the restructuring. The current conflict with the 7% holdouts is a last legacy of that process. And it has highlighted what seems to be a vacuum in international laws and regulations governing sovereign countries’ debt issued in, or under the jurisdiction of, the major financial centres.

In one of the statements it issued at the end of last week, the Argentine government made the US responsible for any damages caused by decisions of its Judiciary, namely Judge Griesa. So, if this happens, the US government faces a liability because of a decision from a Judge that is independent from both the US executive or legislative branches. Interesting concept in terms of international relations, especially because it follows that the government could be forced to twist a judicial court’s ruling, if it affects another country. What happens in this case with the judiciary’s independence? An interesting constitutional quagmire.

The other — obvious — question is about how much power is vested in the hands of a minority of creditors. In the case of a company seeking protection from its creditors, and offering a repayment scheme, a majority of — say 65% — approving the deal, makes it compulsory for all the creditors. This is not what applies with sovereign debt. Perhaps the time has come to protect the interests of the majority of sovereign debt creditors in a way similar to normal bankruptcies.

There is also the issue about the legitimacy of purchasing defaulted and devalued debt titles, with the sole purpose of collecting their full value in subsequent court actions. There is a strong body of legal opinion which says that such speculative operations should be definitely banned. This has to do not only with ethics but also with the practicalities of dealing with sovereign debt restructurings. In addition to G-77 + China, Mercosur and regional partners, a number of other voices are being raised in favour of Argentina’s position. They include the IMF, or top business publications like the Financial Times and The New York Times. It is not that they love creditors and investors less, but that they love a healthy international financial system more.

@andresfederman

CREDITS: BUENOS AIRES HERALD

PERFECT MESSAGE, PERFECT FORMAT

Many US journalists say that The Wall Street Journal is read by the people who run the country, The New York Times by those who think they run the country, The Washington Post by those who think they ought to run the country and The Boston Globe by people whose parents used to run the country. This comes to mind when analyzing some of the Argentine government’s moves in the handling of last week’s events. A strange — and apparently uncontrolled — saga followed. The US Supreme Court’s decision not to take up the case of the holdouts (a.k.a. vulture funds), thus validating Judge Griesa’s initial ruling against Argentina. It started with the wrong presidential message delivered through a totally adequate format continued with the right message in a seemingly inadequate format, and ended with a perfect message delivered through a perfect format.

The holdouts/vultures saga invites a number of conclusions. One of them is that foreign affairs very often come blended with domestic politics and become “intermestic.” Judge Griesa could have perfectly argued — if asked — that his ruling answered to US domestic laws but it is quite obvious that it had a clear international dimension. If in doubt, just ask the personnel at the US Embassy in Buenos Aires faced with a crowd of angry demonstrators blaming the US for Giesa’s judgment, the vultures, and God knows what else. The mitigating factor — for them — is that, because of the US’s global role, this kind of things simply come with the territory, become routine and are simply a new example of the intermestic factor.

Ironically, the Embassy depends from the US State Department. And there was a generalized view in this country that the State Department would lobby in Argentina’s favour in order to obtain the much needed postponement of the decision until January 1, 2015, in order to avoid any claims from the creditors who had accepted the two initial debt restructuring offers. But the fact is that if (repeat: if) State tried to influence the decision, it failed. Proving — for the umpteenth time — that US foreign policy is an arena with multiple players.

It is a known fact that domestic messages become global with their own dynamics. In fact, when — on Monday — the cameras focused on Cristina, sitting by herself at an elegant desk, the expectation was of a “state of the Nation” type of speech rather than what she actually delivered. A fervent preach mainly aimed at the converted or — at best — at her domestic audience. And one can just imagine Judge Griesa’s staff, monitoring the website and reporting on her usage of the word “extortion” — at the earliest possible moment. In return, he made public his distrust for Cristina. Reply in kind? Yes. Justified? Perhaps. Helpful? Definitely notBy mid-week, it was quite obvious that, if the crisis was going to be managed, a move to a new screen was essential. Especially because the messages from the Argentine government were not too clear while those of the Cristinista hard line followers were far from helpful. And looming was the June 20 Flag Day commemoration in Rosario with the “Cristinistas” mobilizing their activists from all over the country. So there was a perfect stage for an inflammatory anti-vulture, “Yanks go home” speech in reply to Mr Griesa’s distrust, with flags waving and banners displayed. In addition, in Buenos Aires, Cristina’s followers were calling for demonstrations outside the US Embassy. A perfect occasion for split screen TV broadcasting contributing to heat things up.

Instead, the president delivered a totally reasonable message asking “the other side” (Griesa and holdouts/vultures) to be reasonable as well. True, the images from Buenos Aires, as well as the text in the Rosario banners were much harsher and not in line with the presidential speech. But even a newcomer to Argentine politics is aware of the fact that — for the time being — Cristina is the boss and the young activists fall in line when she speaks. Even if they have to “swallow a couple of frogs” to use one of the best established practices in the ruling party. No risk then for domestic politics going intermestic and getting in the way of government policies.

After that — for many, unexpected — turn of events came the final — and perfect — touch. A paid advertisement published by the Argentine government in The Wall Street Journal. The financial daily is not a friendly terrain for Cristina and her followers. After all, the daily runs — in partnership with The Heritage Foundation (anathema for learned Kirchnerites) — an Index of Economic Freedom. The Heritage Foundation defines itself as “a think-tank whose mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defence.” In the Index, Argentina ranks in position 160 out of 177 countries. And this is what makes the move perfect. Rather than going for friendlier media, the government chose to match the format to the targeted audience. And to deliver a factual message which can be read as a statement for the record, in the newspaper of record of “the other side.” True, the negotiations under Judge Griesa’s auspices still have to start. And the holdout/vultures are not easy customers. But as things stand now, it looks as if the government has the high ground. A perfect move for a good start.

@andresfederman

Credits: BUENOS AIRES HERALD

HANDLE WITH CARE

Rumour has it that Russia is courting Argentina. The signs are quite clear. Mr Putin took the initiative of inviting Cristina to a BRICS summit even if it means that — Russia not being the host country — he took the liberty of asking her to someone else’s home. In fact, the invitation had the bonus of allowing the Argentine president the chance of shouting such prestige from the Twitter rooftops.
Argentina is responding with subtle gestures of its own. To those in the know, the presence of several ministers and high level government officers at the celebration of Russia’s national day last week did not go unnoticed. The Argentine government is far from generous with the ministerial time it devotes to activities at the Embassies it hosts.
The new friendship has triggered comments, some quite qualified, about the possible negative impact of these developments, on Argentina’s relationship with the US. True, the Cold War has been over for more than 20 years. Moreover, Russia and the US have occasionally complemented each other in containment policies, at the time of dealing with rogue or extremely rogue states. But these actions are never automatic or even totally predictable. And the fact remains that both big (still super?) powers do not see eye to eye on many issues as well as often competing for regional influence. The most recent example is — obviously — Ukraine.
President Putin’s policies seem aimed at recouping past imperial glories. And it looks as if many Russian voters share his nostalgia. After all, in the last Presidential elections his “United Russia” party obtained 63.6 percent of the vote, almost doubling the total sum of 36.4 percent of votes obtained by his five opponents. So it comes as no surprise that the Russian Federation wants to extend its presence and influence in Latin America. Consequently, Argentina is worth courting.
But: is it worth it for Argentina to be courted by Russia, even at the risk of raising some US eyebrows? Especially because, despite some recent helping hands on several financial matters, the bilateral relation with the US has not been trouble free. The Argentine government does not share the US’s views on some rather important matters that range from relations with Cuba and Venezuela to the role of the IMF and the Security Council. This can — perhaps — be quantifiable in terms of the smallish number of high-level contacts which the Argentine government was offered by the Obama administration, thus contributing to the view of an “isolated Argentina” espoused by opposition columnists and politicians. Following this line of thought, the Russian dimension would only be adding to the aggravation.
The big question brought up by the possibility of closer ties with Russia is what is in it for Argentina. Currently, bilateral trade stands at a — some would say — unimpressive US$ 2,000 million. How much can this be expanded? Will the Russian state-owned company Rosatom — specialized in nuclear power electricity generation, effectively be cooperating more with Argentina in that sector? The improved benefits for Argentina will have to be seen. Whilst the consequences of incurring in the US’s wrath can come quite quickly.
In terms of foreign policy management, Russia should be a more comfortable new friend, especially if compared with the US. The Russian decision making processes seem to be quite centralized, so the number of interlocutors at the time of lobbying and negotiation are limited and clearly defined. This comes handy to the Russian government at the time of linking apparently disconnected issues, thus increasing its negotiating capacity. And — for a foreign policy interlocutor like Argentina — it makes it easier to strike delicate balances in the negotiation.
The other good news is that the US government can be quite pragmatic and — off necessity — it is used to allowing some deviations within its areas of influence. Perhaps it is the privilege of the powerful.
But the very bad news about is that the pragmatism that can be shown by the State Department is easily overtaken by other players. Because, the truth is, that the foreign policy field in the US is full of players. The first point of call is — obviously — the State Department. But — as the Argentine, and many other governments have learned at their own cost — it is frequently necessary to knock on other doors as well. Congress, including both sides of the bipartisan aisle is often a necessary stop. And then there are the specialized lobbying arenas. The Council of the Americas is the best example. It often works as a powerful loudspeaker for the American private sector. Far from being a mere chat shop, what is said there, often finds its way back to influence in Congress and the State Department. After all, many of those who speak there are — at the same time — important contributors to the politicians’ campaigns.
So, if things go forward with Russia while, at the same time, Argentina wants to keep its links with the US, the ideal dictum would be “both and” rather than “either or.” But because the world is far from ideal, the best dictum stamped in Argentina’s foreign policy management with the two big players should be “Handle with Care.” (Please note that — at he time of writing this — the US Supreme Court ruling on the holdouts’ demands is still unknown.)


@andresfederman

CREDITS: BUENOS AIRES HERALD

BRING IN THE EUROCRATS

They do not have good press. And probably never did. There are more than 33,000 of them and each year they get paid an aggregate of 4,200 million euros. Their job is to manage a wide range of issues including environment, trade, human rights and several etceteras. In fact, their decisions deal with matters affecting the daily life of 503 million people living in 27 countries spread across an area of over four million square kilometres. Moreover, they manage the single currency used in 17 of those countries. They come from all over Europe and most of them live in Brussels. Ladies and gentlemen: meet the Eurocrats. They are the political bosses of the European Union and the civil servants working for them.

Eurosceptics complain that the nosy Eurocrats get their fingers into anything and everything from air traffic liberalization, to passenger rights or roaming charges. Europhiles praise them for exactly the same reason. But this multi-target social, political and economic build-up has very humble origins. The first brick of this wall was placed in 1951 with the creation of the European Coal and Steel Community which included six states: Belgium, France, Germany, The Netherlands, Italy and Luxembourg. Beyond economics, the main objective of that intial supranational organization was, in France’s Robert Schuman’s words to “make war not only unthinkable but materially impossible.”

Then came the other bricks, the European Economic Community in 1957 and the European Union in 1991. The successive steps were accompanied with the inclusion of new members and, of course, a dramatic increase in the Union’s supranational element. So much so, that 17 members were ready — by joining the Euro — to resign one of the pillars of sovereignty, monetary and currency policy and management.

True, it has not been an easy road. In fact, right now things look far from rosy in the EU. In the last European elections the (some rabidly) anti-Europeans made impressive, and in some cases frightening, electoral gains. Their blaming of the EU for current unemployment and economic hardship pushed many votes in their direction. It is a serious crisis but by no means the first and surely not the last. But, while politicians from member states and the political heads of the EU scratch their heads and exchange acrimony, their civil servants continue to manage the vast number of issues contained within the EU framework. And containment seems to be the operational word. This allows many matters to be sorted out before they get out of hand.

Meanwhile, on this side of the world, we seem to have significantly less lucky. Obviously, Mercosur’s predecessor, the Argentina-Brazil Integration and Economics Cooperation Programme signed between Raul Alfonsín and José Sarney back in 1985 — which included the “gaucho” as a common currency — was over-ambitious. But even the 1991 Treaty of Asunción and its amendment with the 1994 Treaty of Ouro Preto seem to leave a sense of non fulfilment.

The truth is that, as things stand now, the four original member countries of Mercosur exchange acrimonious accusations. Protectionism seems to be at the top of the list but many other items complete it. Uruguay and Argentina are at rather undiplomatic loggerheads over navigation on the River Plate. Argentina and Brazil seem to be fighting the mother of all battles over the automotive industry agreements, although fortunately many expect an agreement to be reached soon. The list is actually longer. And there seems to be no way of managing them in an orderly and constructive win-win style.

It would be more than unrealistic to think that the EU is a problem-free paradise. Differences and controversies between member states are a daily issue, especially because of the sheer extension of the EU’s remit.

The truth is that the EU survives — and from time to time thrives — thanks to Brussels. A myriad of civil servants deal with issues from human rights to mobile phone tariffs going private, national and supranational interests to be compatible with each other, and submitting give-and-take options to the political masters when issues get complicated.

By no means is this a suggestion that Mercosur should go out and hire 33,000 staffers, let alone spend that kind of money. For the time being, Mercosur’s remit and volume means that the staff requirements would be a very small fraction of that.

But that staff would need clear mechanisms and procedures which today seem not to exist or to be too general to be routinely applicable. Without clear regulations and procedural specifications, even the best treaties are nothing more than a collection of good intentions. And here we come to the sticking point: none of the above is possible without some room for supranationalism. Regional unity means more than presidential family photographs and end-of - summit statements. It also means giving up bits of sovereignty.

This is far from easy to stomach and needs strong political leaderships at national and Mercosur levels to carry it forward. The EU shows that supranationalism is possible and often desirable. So bring in the Mercosur Eurocrats.

@andresfederman

CREDITS: BUENOS AIRES HERALD

BRICS QUESTIONS

Last week brought dreams and nightmares for the government. The news on the Paris Club deal had a positive reception from all sides of the political and press divide, albeit for different reasons. Then came the news about the vice-president’s judicial woes. In a way, back to normal Argentina: dream for some and nightmare for others.

Shoehorned between both items, came Putin’s invitation to share the July 15 BRICS’ summit with the leaders of its member countries: Brazil, Russia, India, China and South Africa, in Fortaleza, Brazil. The message triggered Cristina Fernández de Kirchner’s tweeted enthusiasm as well as that of her chief-of-staff. The latter devoted a first (and long) section of his May 29 morning press conference to celebrate the invitation and offer a detailed inventory of the BRICS group’s strengths, even before mentioning Kicillof’s Paris Club deeds.

True, BRICS’ shares of world trade (15%) GDP (25%), and investment (20%) are significant. Add to that 43% of the world’s population and the figures become even more impressive.

But there is a sobering caveat as well as some questions worth asking. The caveat is that, being invited to an exclusive club’s annual dinner, is not necessarily an offer of membership. Some comments from government followers seem to ignore this, despite the Russian Foreign Minister’s own words. News agencies report that he told a press conference that “as far as the possible expansion of BRICS is concerned, this issue requires consensus in this organization. So far, no ideas have been voiced about planning further expansion.”

But, to paraphrase CFK’s tweet, these invitations are not about “tea and cakes” but about business. So this begs the question about what kind of business. On 29 May, Russia signed with Belarus and Kazakhstan a treaty creating the Eurasian Economic Union. Once it has been ratified, it will come into force on January 1, 2015. It is a market of 170 million people and 2.7 trillion dollars. And will guarantee free transit of goods, services, capital and workers. It is clearly business and non political. What role does Russia envisage for its BRICS partners — and possible new members — in this game? If one has to go by Héctor Timerman’s words, Argentine access will come through the Kazakhstan window, by partnering up with this country to help it become the food supplier of the new union. Does the fact that the announcement of the BRICS invitation and the discussions with Kazakhstan came almost at the same time a mere coincidence and consequence of the Foreign Minister’s itinerary?

Or perhaps, the real “business” reason for the invitation is that it is another step in Russia’s efforts to strengthen links with Argentina. There seems to be a generalized consensus that Russia wants to increase its presence in Latin America as part of its eternal (?) competition with the US. True, this is not the cold war any more. But it is not less true that there are some very serious political differences between both sides. The Ukrainian-Crimea issue is the latest but not the only one. In this context, the question of the commitments involved in a possible Argentine membership of BRICS begs asking. There are some issues on which, everybody would agree, it is better to have the US government’s support. The Supreme Court is one of them, and there are others. Words like capital markets, rating agencies and — God forbid — IMF and World Bank immediately come to mind.

So listen to this one: last Friday an (unidentified) senior Brazilian official told Reuters that the five BRICS nations will invest 100 billion US dollars in a new multilateral bank that could start lending in two years. This would be announced at the July 15 Summit. Given the Argentine government’s well known views about the IMF another quote from the same source will sound as music: “The bank will look into the finances of borrowers, but never intervene in their economic affairs.” And the fact that the same official added that “any country can join the bank with a US$100,000 share” in order to obtain loans at lower than market costs will obviously make the July 15 “tea and cakes” absolutely delicious. Especially because the BRICS countries have been trying unsuccessfully to put together this financial institution over the last two years. Perhaps it now comes to happen.

There is a final question which might sound quite petty. How do our Brazilian brothers feel about Putin inviting CFK? Obviously there is nothing wrong with that, and there is no reason to expect a turf war between Russia and Brazil about inviting Argentina or between the latter and Brazil about Cristina attending a BRICS meeting. In any case, it would be desirable that there are no waves between the two biggest members of Mercosur. Especially not at a time when bilateral trade issues are getting so complicated. The situation of the Argentine car industry is a good reminder of that. And speaking about reminders: perhaps the July 15 summit in Fortaleza reminds those in charge of the Mercosur summits that the last one is six months overdue. And there is no shortage of issues to discuss.

@andresfederman

CREDITS: BUENOS AIRES HERALD