Twelve Years After
by Sinclair Noe
DOW
+ 135 = 15,326
SPX + 5 = 1689
NAS – 4 = 3725
10 YR YLD - .04 = 2.92%
OIL - .08 = 107.31
GOLD + 2.50 = 1366.80
SILV + .25 = 23.32
SPX + 5 = 1689
NAS – 4 = 3725
10 YR YLD - .04 = 2.92%
OIL - .08 = 107.31
GOLD + 2.50 = 1366.80
SILV + .25 = 23.32
The
war hasn't started..., yet.
The
war with Syria hasn't started yet. We're still at war; troops still
in Afghanistan, slowly exiting; but, we're still at war, 12 years
after.
The
Dow Industrials have climbed for 6 out of the last 7 sessions, which
coincides with the announcement by Obama to seek a Congressional vote
on Syria. The Dow has added over 500 points since then. The price of
oil hit highs for the year in the buildup to war. We've grown averse
to war. Even on Wall Street, the idea of not going to war is a good
thing. Maybe that is something we've learned from the last 12 years.
War is bad; not going to war is good.
And
so last night we listened to the president trying to sell the
necessity of more war, this time in Syria. He called it military
intervention, but whenever you drop bombs on another country, it is
war. I'm still not sure what the objective would be. I'm not sure
what the cost would be, but the cost of the past 12 years has been
much higher than anyone thought at the time. And then, halfway
through the speech last night, we heard the possibility of a
diplomatic solution. Today, diplomatic efforts intensified. France
drafted a resolution for the UN Security Council to have Assad give
up his chemical weapons. Secretary of State John Kerry meets with
Russian foreign minister Sergei Lavrov tomorrow in Geneva
It
will be very difficult to reach a diplomatic deal, and even if that
happens it will be tougher to enforce and verify. The chemical
weapons complex of Syria includes factories, bunkers, storage depots
and thousands of munitions, all of which would have to be inspected
and secured under a diplomatic initiative that President Obama says
he is willing to explore. And there is a civil war in
Syria, which makes things more difficult. We didn't hear many details
last night but a confrontation has been postponed for a while. The
Senate formally ended its consideration of a resolution authorizing
military force against the Syrian government. We'll give peace a
chance.
And
if that doesn't work out, then we'll bomb the hell out of the place,
and it won't be a little pinprick strike. A few
senators have already started work on a bill that would
authorize US military force in Syria if the Security Council can’t
pass a workable resolution, or if Syria fails to comply with it.
So,
that's where we stand, 12 years later.
The
whole thing has a certain, as yet unidentified stench. The
US and France are going to bomb Russia's only Middle East foothold?
What are the odds? Russia was willing to start World War III over
Syria? What are the odds? Someday we'll follow the
money trail and it will all make more sense, or at least some sense.
It's
understandable that we are all very wary of warfare, but we shouldn't
forget that such levels of wariness can be easily used to play with
our minds, and to focus our attention away from other events.
So,
today let's look at something that should be capturing our attention.
There is a great article from Nobel prize winning economist Joseph
Stiglitz. His argument involves a narrow issue, but it looks like a blueprint for future action. We’re seeing a lot of these attempts lately. In that vein, the way the Detroit bankruptcy is handled will in all likelihood have profound ramifications for other municipalities across the US. And this spring’s Cyprus bail-in model is the likely blueprint in Europe’s periphery. If it worked in Cyprus, it'll work in Greece, or Portugal, or Spain. I've cross posted it on my blog:
We need a fair system for restructuring sovereign debt
A
recent decision by a United
States appeals
court threatens to upend global sovereign debt markets. It may even
lead to the US no longer being viewed as a good place to issue
sovereign debt. At the very least, it renders non-viable all debt
restructurings under the standard debt contracts. In the process, a
basic principle of modern capitalism – that when debtors cannot pay
back creditors, a fresh start is needed – has been overturned.
The
trouble began a dozen years ago, when Argentina had
no choice but to devalue its currency and default on its debt. Under
the existing regime, the country had been on a rapid downward spiral
of the kind that has now become familiar in Greece and elsewhere in
Europe. Unemployment was soaring, and austerity, rather than
restoring fiscal balance, simply exacerbated the economic downturn.
Devaluation
and debt restructuring worked. In subsequent years, until the global
financial crisis erupted in 2008, Argentina's annual GDP growth was
8% or higher, one of the fastest rates in the world.
Even
former creditors benefited from this rebound. In a highly innovative
move, Argentina exchanged old debt for new debt – at about 30 cents
on the dollar or a little more – plus a GDP-indexed bond. The more
Argentina grew, the more it paid to its former creditors.
Argentina's
interests and those of its creditors were thus aligned: both wanted
growth. It was the equivalent of a "Chapter 11"
restructuring of American corporate debt, in which debt is swapped
for equity, with bondholders becoming new shareholders.
Debt
restructurings often entail conflicts among different claimants. That
is why, for domestic debt disputes, countries have bankruptcy laws
and courts. But there is no such mechanism to adjudicate
international debt disputes.
Once
upon a time, such contracts were enforced by armed intervention, as
Mexico, Venezuela, Egypt, and a host of other countries learned at
great cost in the nineteenth and early twentieth centuries. After the
Argentine crisis, President George W. Bush's administration vetoed
proposals to create a mechanism for sovereign-debt restructuring. As
a result, there is not even the pretence of attempting fair and
efficient restructurings.
Poor
countries are typically at a huge disadvantage in bargaining with big
multinational lenders, which are usually backed by powerful
home-country governments. Often, debtor countries are squeezed so
hard for payment that they are bankrupt again after a few years.
Economists
applauded Argentina's attempt to avoid this outcome through a deep
restructuring accompanied by the GDP-linked bonds.
But a few "vulture" funds – most notoriously the hedge
fund Elliott Management, headed by the billionaire Paul E. Singer –
saw Argentina's travails as an opportunity to make huge profits at
the expense of the Argentine people. They bought the old bonds at a
fraction of their face value, and then used litigation to try to
force Argentina to pay 100 cents on the dollar.
Americans
have seen how financial firms put their own interests ahead of those
of the country – and the world. The vulture funds have raised greed
to a new level.
Their
litigation strategy took advantage of a standard contractual clause
(called pari
passu)
intended to ensure that all claimants are treated equally.
Incredibly, the US Court of Appeals for the Second Circuit in New
York decided that this meant that if Argentina paid in full what it
owed those who had accepted debt restructuring, it had to pay in full
what it owed to the vultures.
If
this principle prevails, no one would ever accept debt restructuring.
There would never be a fresh start – with all of the unpleasant
consequences that this implies.
In
debt crises, blame tends to fall on the debtors. They borrowed too
much. But the creditors are equally to blame – they lent too much
and imprudently. Indeed, lenders are supposed to be experts on risk
management and assessment, and in that sense, the onus should be on
them. The risk of default or debt restructuring induces creditors to
be more careful in their lending decisions.
The
repercussions of this miscarriage of justice may be felt for a long
time. After all, what developing country with its citizens' long-term
interests in mind will be prepared to issue bonds through the US
financial system, when America's courts – as so many other parts of
its political system – seem to allow financial interests to trump
the public interest?
Countries
would be well advised not to include pari passu clauses in future
debt contracts, at least without specifying more fully what is
intended. Such contracts should also include collective-action
clauses, which make it impossible for vulture funds to hold up debt
restructuring. When a sufficient proportion of creditors agree to a
restructuring plan (in the case of Argentina, the holders of more
than 90% of the country's debt did), the others can be forced to go
along.
The
fact that the International Monetary Fund, the US Department of
Justice, and anti-poverty NGOs all joined in opposing the vulture
funds is revealing. But so, too, is the court's decision, which
evidently assigned little weight to their arguments.
For
those in developing and emerging-market countries who harbor
grievances against the advanced countries, there is now one more
reason for discontent with a brand of globalization that has been
managed to serve rich countries' interests (especially their
financial sectors' interests).
In
the aftermath of the global financial crisis, the United Nations
Commission of Experts on Reforms of the International Monetary and
Financial System urged that we design an efficient and fair system
for the restructuring of sovereign debt. The US court's tendentious,
economically dangerous ruling shows why we need such a system now.
