Argentina was the richest country in Latin America before decades of neoliberal and IMF-imposed economic policies drowned it in debt. A severe crisis in 2001 plunged it into the largest sovereign debt default in history. In 2005, it renegotiated its debt with most of its creditors at a 70% “haircut.” But the opportunist “vulture funds,” which had bought Argentine debt at distressed prices, held out for 100 cents on the dollar.
Paul Singer’s Elliott Management has spent over a decade aggressively trying to force Argentina to pay down nearly $1.3 billion in sovereign debt. Elliott would get about $300 million for bonds that Argentina claims it picked up for $48 million. Where most creditors have accepted payment at a 70% loss, Elliott Management would thus get a 600% return.
In June 2014, the US Supreme Court declined to hear an appeal of a New York court’s order blocking payment to the other creditors until the vulture funds had been paid. That action propelled Argentina into default for the second time in this century – and the eighth time since 1827. On August 7, 2014, Argentina asked the International Court of Justice in the Hague to take action against the United States over the dispute.
Blame has also been laid at the feet of the IMF and the international banking system for failing to come up with a fair resolution mechanism for countries that go bankrupt. And at a more fundamental level, blame lies with a global debt-based monetary scheme that forces bankruptcy on some nations as a mathematical necessity. As in a game of musical chairs, some players must default.
Most money today comes into circulation in the form of bank credit or debt. Debt at interest always grows faster than the money supply, since more is always owed back than was created in the original loan. There is never enough money to go around without adding to the debt burden. As economist Michael Hudson points out, the debt overhang grows exponentially until it becomes impossible to repay. The country is then forced to default.
Better than redesigning the sovereign bankruptcy mechanism might be to redesign the global monetary scheme in a way that avoids the continual need for a bankruptcy mechanism. A government does not need to borrow its money supply from private banks that create it as credit on their books. A sovereign government can issue its own currency, debt-free. But that interesting topic must wait for a follow-up article. Stay tuned.
Thank you, Ellen.
With that, I now reproduce a comment from yesterday that I made before seeing Ellen's post and to a group of MMTers (Modern Money Theory adherents), of which I count myself:
“Debt-Free Money” and “ZIRP Forever,” by Scott Fullwiler.
I'm still digesting.
Scott is close, but the Federal Reserve System seems to have people locked in, in terms of imagination.
I don't want to assume one way or the other about Scott on that (he's a sharp guy) but will simply say that the currency could be designed to not revolve around interest at all.
I'm not advocating central planning here. There could be a high degree of state capitalism without that.
Why do bankers have to be the ones who perform the due diligence on ideas and then reap interest as a result in their institutions that are allowed to be so huge that they merely get their wrists slapped when they blow up ridiculous bubbles that inevitably pop?
Why can't we have community owned and operated non-profit banking only where all the nodes are linked in to the currency issuer as the Treasury with a monetary authority not the Fed but simply a computer system charged by statute (constitutional amendment if necessary) with matching the money supply to real economic productivity rather than private speculation?
In other words, why can't we have 100% public, bottom-up banking: no private commercial banking?
Wouldn't it lead to full employment at living wages with no more booms/busts and no more inflation/deflation worries?
Why do we need the banking elite? Why does the government need to borrow?
What would be wrong with completely transparent, fully democratic banking?
Too socialistic? Not politically doable? Isn't it simply a matter of education?