The unravelling of the global financial system

by John Quiggin on July 19, 2014

I have a piece in The National Interest, looking at various recent events including the latest round of the Argentinian debt crisis, in which a New York court ruled in favor of a group of ‘vulture’ investors, led by a New York billionaire, and the agreement of the US Department of Justice and Citibank, involving a financial settlement to avoid a lawsuit over bad mortgage deals and CDOs in the pre-crisis period.

My central observation is that while legal forms are being observed, these are obviously political processes, with outcomes reflecting relative political power rather than any kind of neutral application of the law. So, the international financial system is part of international power politics: it matters a lot that Citibank is a US bank, while BNP Paribas is French and so on. This is very different from the picture of a global, as opposed to international, financial system. Suhc a systemt, independent of, and standing in judgement on, national governments seemed to be emerging in the 1990s, but broke down in the financial crisis, when banks ran to their national governments for support.

As an illustration, I found this ad put out by the ‘vultures’. Try interchanging “US” and “Argentina” throughout and assuming an adverse judgement by an Argentinian court against the US government.




Sasha Clarkson 07.19.14 at 10:08 am

American Task Force Argentina???????

Are they going to invade? US financial activities seem more and more like a modern reflection of the loan and extortion tactics used by ancient Roman equites and Senators, backed by the power of the Roman state to enforce extraterritorial judgements. (Eg Brutus and Ariobarzanes III of Cappadocia.)


Salem 07.19.14 at 11:01 am

If the US government issued bonds under Argentinian law, I’d expect them to comply with Argentinian law. The US government doesn’t want to comply with Argentinian law, so they don’t promise to obey Argentinian law ahead of time. Yes, what’s sauce for the goose is sauce for the gander, but the US simply doesn’t behave like that, so it’s unlikely to come up.

The Argentinian government promised to obey US law. They borrowed money on much more favourable terms because of that. Now, they are trying to tear up those agreements. When you write that “Obviously, if the nationalities were reversed” things would be different, you are simply begging the question.


otto 07.19.14 at 12:27 pm

“Obviously, if the nationalities were reversed, with foreign ‘vultures’ upsetting a debt-restructuring agreement negotiated by, say, a U.S. city, within the U.S. political process, the Appeals court would have given the investors short shrift. Had the court somehow managed to decide in favor of the foreign party, the Supreme Court would certainly not have let the judgment stand.”

I am inclined to agree with the article but I wonder if there is any real evidence to support the “obviously” and “certainly” in these sentences.


Mario 07.19.14 at 12:28 pm

What a beautiful ad. This type of imperial arrogance is typical for the US, and they quite often manage to mess up their own interests because of things like this. Such an ad weakens the political position of anyone on the Argentinian side who is of the opinion that the ruling in question should be obeyed. Not that their position was strong to begin with.

The Argentinian government promised to obey US law.

Notably, there isn’t a hint of that in this advertising. It’s more like “how DARE the lowly Argentinians tell an US JUDGE (!!!) that he can go %$#@ himself?”. They write that Argentina should obey US laws as if it were the most natural thing in the world. Pretty amazing.


Mario 07.19.14 at 12:43 pm


P O'Neill 07.19.14 at 3:22 pm

JQ, in the NA article you write

The reemergence of financial crisis in 1997 produced a deep recession in Argentina that ultimately led to the collapse of the currency board, and of the governing class that had produced it. The populist, arguably demagogic, government of Nestor Kirchner (later succeeded by his wife Cristina) defaulted on Argentina’s foreign debt, and successfully (or so it seemed) negotiated a resolution with the International Monetary Fund and the “Paris club” of international lenders. It is this agreement that has been upset by the judgment in favor of the “vultures.”

While at some high level these things are all linked in the form that you argue, strictly speaking the Paris Club and IMF issues are completely separate from the restructured bonds being disputed by vultures in US courts. The Paris Club only just settled with Argentina in May (the previous one being in 1992), and that settlement mainly concerned junta debt from the 1970s and 1980s — arguably in fact odious debt, but that’s another story. Meanwhile the IMF was engaged in Argentina throughout 1990s and early 2000s, with major associated controversy for the IMF and Argentina and a deep allergy of the government in Argentina to any further role for the IMF. But that again has no direct connection with the NY-law bonds, which are not owed to governments or multilateral creditors like the IMF.


Oxbird 07.19.14 at 3:49 pm

That politics is at work in these matters is hardly cause for surprise. In numerous respects, the way governments have protected the interests of financial institutions at great cost to the public has been shameful. As you note, the results clearly reflect political power and there is little reason to expect that the results of reforms being implemented will make necessary corrections. As for Argentina, it knowingly negotiated the terms of the agreements under which it borrowed. It was a known risk that if the agreements did not specify that all would be bound once a specified majority agreed to terms, there could be holdouts. Consideration has been given, and doubtless more will be given in light of the current litigation, to agreements that will by their terms bind all. Likely this will raise borrowing costs somewhat but that is a matter for the parties to determine given how they weigh the risks.

Holdouts can take their chances in many situations under U.S. law; bankruptcies and class actions are but two examples.

What I find of interest is that financial parties (particularly including those who get fees from facilitating sovereign loans), are often against eliminating the risk that will be holdouts because it is not in their interest as transactional fee earners to raise borrowing costs. While I am not sure it is quite comparable, similar dynamics are I expect at work in student loan markets in the U.S. to the great detriment of many student borrowers. Borrowers are typically barred from accessing bankruptcy remedies, the argument being that if they could, it would raise student borrowing costs. Curiously, that argument seems to have little force in the commercial world where bankruptcy is a generally available remedy notwithstanding the impact on borrowing costs.


john c. halasz 07.19.14 at 4:44 pm


mud man 07.19.14 at 7:41 pm

Otto @3, we may get a chance to find out. I looked a bit to see who’s holding Detroit paper … ees how you say eet? … and I see that Beijing Poly International Auction Company wants the court to order the city to borrow $1 billion from them against the art collection. For one thing.

Mario thanks … so the vultures aren’t even the people who suffered the loss when Argentina defaulted. They just want to be compensated against the lending banks failure to do good due diligence about risks. Because they can. We really need to get some virtue back into law as per Chris’ OP.


ifthethunderdontgetya™³²®© 07.19.14 at 9:08 pm

@3: The majesty of the law!

When the tasseled loafer is on the wrong foot, other things happen.

1) The people with all the money get their people to change the law.

2) The people with all the money get their people to ignore the law.

3) And if somehow a little guy wins, what happens? Right.

We have a legal system in this country. It has very little to do with justice.


ifthethunderdontgetya™³²®© 07.19.14 at 9:09 pm

Sorry, this was a resply to Salem, comment the second.

The people in responsible have been sacked.


John Quiggin 07.20.14 at 12:18 am

@2 Did you read the original article

The willingness of members of Argentina’s political class to trust the U.S. financial system, rather than each other was demonstrated most dramatically by the establishment of a currency board tying the Argentine peso to the U.S. dollar. In these circumstances, the idea that there was some risk of political favoritism in allowing disputes regarding debt to be resolved in U.S. courts did not even occur to most people.

The point of including the poster was exactly the one made by Mario.

“The US simply doesn’t behave like that”

Go ask Antigua


Rakesh 07.20.14 at 5:09 am


Brett 07.20.14 at 6:29 am

I think they should just default on it completely Ecuador-style, and then suffer through it for a few years before trying again. It seems to be working out for Ecuador, at least – while there was a period where nobody but the Chinese would lend them any money, that seems to be changing. Investors are so desperate for high-yielding bonds that they’ll go for it even in spite of the risk.


Salem 07.20.14 at 8:29 am

@12: Yes, I read it. You didn’t even begin to demonstrate that Argentina v NML Capital was influenced by “political favoritism”, let alone that it was wrongly decided.

And no, the US doesn’t behave like that. The US doesn’t borrow under other countries’ laws, or indeed promise to obey other countries’ laws in any way.

As for Mario’s point: it’s an advert, with extremely limited space. No, it doesn’t mention that Argentina promised to obey US law. It also doesn’t mention the name of the case, the fact that this is a case of Argentina refusing to pay its debts, the legal reasons why Blackman’s comments were so ill-advised and shocking, or any number of highly relevant facts. I count 128 words total in that advert, including footnotes, logos, and everything else. It’s not intended to be a summary of the case, just bringing to light some of the most egregious conduct. Which I think it does, very successfully.


Collin Street 07.20.14 at 8:32 am

Salem: a key part of learning new things is a proper appreciation that the things you currently believe to be true may not be true.

More pithilly, looking for things you got right won’t help you spot the bits you got wrong.


ZM 07.20.14 at 9:42 am


“And no, the US doesn’t behave like that. The US doesn’t borrow under other countries’ laws, or indeed promise to obey other countries’ laws in any way.”

But the US government and departments act around the world in ways to try to make other countries follow US laws or alternatively even against US home laws and what everyday US citizens would want to further elite US interests. Thus is an example I found about Henry Kissinger’s dealings with Argentina. Maybe if such things had not happened Argentina would not have become indebted under these conditions or at all.

“Washington, August 27, 2004 – A newly declassified document obtained by the National Security Archive shows that amidst vast human rights violations by Argentina’s security forces in June 1976, Secretary of State Henry Kissinger told Argentine Foreign Minister Admiral Cesar Augusto Guzzetti:

“If there are things that have to be done, you should do them quickly. But you should get back quickly to normal procedures.”

Kissinger’s comment is part of a 13-page Memorandum of Conversation reporting on a June 10 meeting between Secretary Kissinger and Argentine Admiral Guzzetti in Santiago, Chile.

After a series of pleasantries, Guzzetti went into the substance of the meeting by stating: “Our main problem in Argentina is terrorism. It is the first priority of the current government that took office on March 24. There are two aspects to the solution. The first is to ensure the internal security of the country; the second is to solve the most urgent economic problems over the coming 6 to 12 months. Argentina needs United States understanding and support….”

Replying to Guzzetti’s report on the situation, Secretary Kissinger said: “We have followed events in Argentina closely. We wish the new government well. We wish it will succeed. We will do what we can to help it succeed.”

At a time when the international community, the U.S. media, universities, and scientific institutions, the U.S. Congress, and even the U.S. Embassy in Argentina were clamoring about the indiscriminate human rights violations against scientists, labor leaders, students, and politicians by the Argentine military, Secretary Kissinger told Guzzetti: “We are aware you are in a difficult period. It is a curious time, when political, criminal, and terrorist activities tend to merge without any clear separation. We understand you must establish authority.”

Only two weeks earlier, on May 28, Ambassador Robert Hill had presented a U.S. demarche on human rights to Admiral Guzzetti. The Embassy was deeply concerned about the kidnapping and torture of three American women, among them the Fulbright coordinator for Argentina, Elida Messina, and the wave of attacks against political refugees from the Southern Cone. In contrast to Hill’s efforts, according to the memorandum of conversation Secretary Kissinger told Guzzetti:”In the United States we have strong domestic pressures to do something on human rights… We want you to succeed. We do not want to harrass [sic] you. I will do what I can….”

Another document recently unearthed by the National Security Archive and posted for the first time here, shows that on July 9, 1976, Secretary Kissinger was explicitly briefed on the rampant repression taking place in Argentina: “Their theory is that they can use the Chilean method,” Kissinger’s top aide on Latin America Harry Shlaudeman informed him, “that is, to terrorize the opposition – even killing priests and nuns and others.”….”


Collin Street 07.20.14 at 11:08 am

> I think they should just default on it completely Ecuador-style

That leads to some incentive problems wrt getting people to accept haircuts.

The legal problem seems to be that there doesn’t seem to be any way for argentina to escape debts-it-can’t-pay, since through some inexplicable oversight noone in the US ever thought to write a US-domestic-law process for handling foreign sovereign insolvencies… I know there are processes for handling US local-government insolvencies, but US local governments aren’t sovereign. Perhaps an indian tribe? There surely has to be a process for those.


J Thomas 07.20.14 at 12:46 pm

How did we handle this sort of thing before the New World Order where the USA was definitively on top?


Mario 07.20.14 at 9:52 pm

It’s not intended to be a summary of the case, just bringing to light some of the most egregious conduct. Which I think it does, very successfully.

You know, assuming that Argentina has to submit to US laws is pretty egregious in my book. And if you had been following the case, you would know it is not by far as clear cut as you suggest.

But even if it were: it is common legal understanding (in a civilized context) that there are contracts that by their very nature are illegal. You cannot, in a civilized context, sell your children into slavery. Similarly, the legal representatives of a country cannot sign away its sovereignty in a meaningful way. A legal system that attempts to enforce such contracts discredits itself, as this one just has done. The statements of Jonathan Blackman were a clear and very pertinent warning to a court that was about to overstep its boundaries. And that court, way too full of itself, just went ahead and did something very stupid.


engels 07.21.14 at 4:39 pm

It’s time for Argentina to… Stop Disrespecting U.S. Courts



Ginger Yellow 07.21.14 at 6:40 pm

The legal problem seems to be that there doesn’t seem to be any way for argentina to escape debts-it-can’t-pay, since through some inexplicable oversight noone in the US ever thought to write a US-domestic-law process for handling foreign sovereign insolvencies

It’s not so much that as that in this particular case, there’s a pretty much idiosyncratic clause in the New York law contracts governing the debt that makes any restructuring effectively unenforceable against holdouts. The sovereign aspect makes it more complicated to enforce once the case goes against the government (eg Elliott Advisors once got a court order to impound an Argentinian naval vessel), but the terms of the debt in theory provide for its own restructuring.


CJColucci 07.23.14 at 4:51 pm

I haven’t studied the legal issues, so I have no opinion on them. I don’t care to get into the political issues real imagined. What I want to know is what’s the point of this ad? Who is it supposed to persuade, and to do what?


CJColucci 07.23.14 at 4:52 pm

Left the “or” out between “real” and “imagined.”


Ogden Wernstrom 07.23.14 at 10:41 pm

Can we crowdfund some advertisements to run in the same publication(s) as that one? Since they’re sure to have audiences with a high level of respect for the law and the courts, I think we could try something like this:

Would You Tell a Judge That You’re Going to Break the Law?

That’s What Cliven Bundy Did.

For years, Cliven Bundy has stiffed the Bureau of Land Management and U.S. taxpayers for more than a million dollars.

With U.S. courts closing in on this massive violation of U.S. law, Bundy tells the press and taxpayers that he flat out does not respect America’s laws or courts.

We definitely don’t recognize [the BLM director’s] jurisdiction or authority, his arresting power or policing power in any way.

…I don’t recognize the United States government as even existing…


As stated by the editorial staff of The Salt Lake City Tribune:

When some manage to avoid justice by extralegal means, the rule of law is weakened for all Americans.

It’s Time for Welfare Cowboy Cliven Bundy to Obey America’s Laws and Stop Disrespecting America’s Courts.


Ogden Wernstrom 07.23.14 at 10:41 pm

Apologies: Blockquote-close fail.


dax 07.25.14 at 9:40 am

And then there’s FATCA…


John Quiggin 07.25.14 at 10:15 am

And “GATCA”. The global financial system has turned out to be, in large measure, a tax rort, and now governments are being forced by fiscal exigency to unwind it.

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