By Adam Bitely –
Last week, Hal Scott, a professor of international finance at the Harvard School of Law, brought to light that the Obama administration is making troubling moves in regard to their acceptance of sovereign default.
With bailouts of the EU from the U.S. swirling about, creditors should be concerned that they will never see a cent paid back. Need evidence? Just look at the case involving Argentina.
Scott, writing at Forbes, stated that:
Argentina has emerged as the world’s most egregious serial defaulter, jilting bondholders six times in its modern history. Its most opprobrious default occurred in 2001 to the tune of $81 billion. This is by far the largest sovereign debt default in global financial history.
When restructuring its debt in 2005, Argentina offered creditors a take-it-or-leave-it deal: 25 cents on the dollar. It did this despite having the capacity to pay much more. Today, Argentina trumpets the fact that it has over $54 billion in reserves.
Over the last decade, the Argentine central bank has become a pawn of the government. It has squirreled reserves away in the Bank of International Settlements (BIS) in Switzerland, the bank for central banks, in an effort to evade the enforcement of lawful judgments issued by New York courts. Multiple governors of Argentina’s central bank openly criticized the Argentine government for its growing infringement on central bank independence.
Argentina has defaulted on its debt and creditors are entitled to be paid. They have rightly sought relief in the courts. U.S. creditors won a significant victory earlier this year when they successfully seized $105 million of reserves purportedly held by the Argentine central bank at the Federal Reserve Bank of New York. Those funds had been blocked since 2005, but until this year Argentina had succeeded in delaying their disbursement.
The situation in Argentina should be setting off warning bells worldwide. If creditors are ripped off, the whole central banking scheme ends. The contracts between the creditors and the central banks should be recognized, and not tossed to the side. And that means governments should not be getting in the way of things by manipulating the law to prevent paybacks to creditors–as is the case with Argentine government meddling with their central bank.
Countries that gamble with other people’s money have nothing to lose when they can simply default and walk away from their debts. This type of action need not be tolerated. When creditors take to the court room to retrieve what is rightfully theirs, government should not intervene to stop the cases, as is the case with the U.S. government. As Scott noted, the Obama administration sided with the Argentine government against the U.S. creditors that were being robbed. The contracts must be upheld, and the Obama administration cannot stand in the way of that.
Central banks have been unable to stave off economic disasters worldwide. Since the Federal Reserve was created in 1913, the Fed has undoubtedly done more harm than good. With creditors being ripped off, the system is found to be more corrupt than most thought.
As Gerald O’Driscoll noted in the WSJ last Friday when asking why we need a central bank:
Meanwhile, the economy suffers because none of the Fed’s policies will fix the banking system. The failure to fix the banks, not a nonexistent deflation threat, is what calls into mind Japan’s lost decade of the 1990s. Banks with large, unrecognized losses will not make new loans while losses from the old ones grow.
The entire central banking scheme is nuts. Governments nullify contracts and fail to pay back creditors through defaults. This cannot happen if people are supposed to have confidence in the system.
