The World Financial Cup
Photo Credit: via youtube
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If there were poetic justice in the world, Argentina would have beaten Germany in the last three minutes of play instead of vice versa. Germany represents everything that's wrong with the world financial system. Argentina is the epic case of countries whose economies are screwed by policies championed by Germany -- and unfortunately by the United States as well.
Let me explain.
When financial abuses crashed the global economic system in 2007-2008, there were two urgent needs. One was drastic reform to prevent the collapse from wreaking further havoc on the world's most damaged economies. The other was to clean up the banking system so that these abuses would not keep happening.
The United States managed very partial reforms. At least we had a Federal Reserve that understood the need to stimulate the economy with very low interest rates. And until Republicans took control of Congress in 2010, we had a president who appreciated the need for some public investment as fiscal stimulus. The stimulus proved too small, the administration embraced budget austerity too early in the cycle, leading to an agonizing slow recovery.
But compared to Germany, the U.S. has performed brilliantly. The German government, as enforcer of Euro-austerity, has demanded belt-tightening by the hardest hit of Europe's economies -- Greece, Portugal, Spain, Ireland -- pushing them deeper into depression and needlessly prolonging the crisis.
These economies are small compared to the EU as a whole. Had Germany chosen a different course, the EU and its central bank could have easily exchanged national government bonds under attack by speculators for Euro bonds. But Chancellor Angela Merkel treated the entire policy challenge not as an exercise in macro-economics but as a morality play. Fiscal sinners had to be punished, with appropriate human sacrifice.
As a consequence of prolonged austerity policies imposed by Germany, when Europe needed nothing so much as oxygen, the continent remains mired in deep recession; every country, that is, but Germany.
How could Germany, as the center of Europe, escape fate that Mrs. Merkel has imposed on her neighbors? For starters, Germany is an export powerhouse. And the euro, overvalued in the case of Greece or Portugal, is undervalued for Germany.
So Chancellor Merkel is Europe's Typhoid Mary. The rest of the continent sickens, contaminated by bad policy made in Berlin, while Germany, the carrier, thrives.
These are the people who gave the world the term, schadenfreude -- joy at someone else's misfortune.
Which brings us to Argentina. In effect, Argentina is the Greece of South America. In the western hemisphere, the enforcer of punishment is not Germany but the United States -- specifically the U.S. Supreme Court.
Argentina experienced a debt crisis early in the last decade, and negotiated an agreement with most of its foreign bondholders to accept payment at about 70 cents on the dollar. This sort of discount is standard practice in a bankruptcy.
However, while corporations can use bankruptcy law to renegotiate their debts, there is no bankruptcy law for countries. That's why Germany was able to keep Greece in a kind of debtors' prison.
When Argentina negotiated debt relief with most of its creditors, a few hedge funds (known in the trade as "vulture funds") bought up deeply discounted Argentine debt and then sued in the U.S. courts to collect at 100 cents on the dollar. Not only that, but the funds asked the courts to find any other creditor who took less than full payment in contempt of court.
The case worked its way through the appeals process, and last month the Supreme Court refused to hear an appeal from a lower court case that found for the vulture funds. Specifically two hedge funds, Elliott Management and Aurelius Capital Management, which hold only about 1.35 billion out of Argentina's more than $80 billion in debt, are now able to force a default on the nation's entire debt, possibly by the end of this month.
It's not clear what will happen if the Argentines try to defy global financial markets and the U.S. courts. What is clear, however, is that the legal and political system is stacked in favor of global speculators and that governments in Washington and Berlin do their bidding.