Thursday, November 13, 2014

Rouseff re-election: lower expectations


The reelection of President Dilma Rouseff means continuation of the slow growth of the Brazilian economy and a lower likelihood of much-needed, major political and economic reforms. India should lower its expectations on a global partnership with Brazil in the short term
President Dilma Rouseff won the second round of Brazil’s elections held on 26 October with 51.64 % votes, beating rival Aecio Neves who received 48.36%. Her win was the outcome of the increased vote share from the 15 poor states of North and North East Brazil, as against the affluent 11 states in the South and the Federal District of Brasila which voted for the centre-right Neves. The masses who have benefitted from the pro-poor policies of the Rouseff government, the historic low unemployment rate ( 4.9% in September 2014) and the increase in wages in recent years, were convinced by Rouseff’s  message, “You are better off today than you were a dozen years ago because of what we have done. Count on us to continue working for you. Don’t trust your future to anyone else or you risk losing everything.”
Those who thought wishfully that the Left is fading in Latin America, should think again. In this election, for the first time in the history of Brazil, a Communist (Brazilian Communist Party PCdoB) candidate, Flavio Dino, was elected as state governor in Maranhao, the poor northern state with a population of 6 million. The state was the pocket borough of the oligarchical family of Sarney which ruled the state for the last five decades. Dino won in the first round itself, with an impressive 63.5% as against his rightist rival who got just 33.6 %.
Responding to the polarisation of the voters and to the criticism of the opposition, Rouseff declared in her victory speech that she would be a much better president than she had been up until then. She pledged to open more space for dialogue with all sections of society to deal with the country’s problems – which are enormous.  Brazil’s stagnant economy has been in a technical recession since August this year; plus there is high inflation, low investment, high cost of production, poor infrastructure and inadequate public services.
Despite her promises, Rouseff’s ability to bring about major reforms is severely constrained by her narrow victory. Her party has just 70 Deputies of 513 in the lower house of the Congress, and 12 of the total of 81 senators in the Senate. Coalition-building will be a problem because the major parties including the Workers Party have lost seats, even as the actual number of parties in the lower house has increased from 22 to twenty-eight. Rouseff needs to work harder and offer greater incentives to partners and other parties, to pass the difficult bills and reforms that have already been difficult to legislate, triggering mass protests last year. She must also now face the unfolding corruption scandal in Petrobras, which might decimate some of her own, and other party leaders.
But unlike the Indians who have now elected a majority government led by Indian Prime Minister Narendra Modi, and expect him to deliver on reforms, the Brazilians are not optimistic. The country’s low growth is expected to continue over the next few years, much to the dismay of the Brazilian industry which supported the pro-business Aeceio Neves. The poor, however, do expect an improvement in their lives, as the social policies of the government of Rouseff’s Workers Party, continue.
Rouseff’s low key approach to foreign policy will also continue. Mercosur and  South America will be her priority,  along with South-South cooperation. Neves would have prioritised the U.S. and Europe, although Brazil’s combined trade with China and within Latin America is more than its total trade with the U.S. and the EU.
For India, Neves might not have been an enthusiastic partner, and in that sense, Rouseff’s reelection is better for India. Brazil is a strategic partner for India in the pursuit of global aspirations, in multilateral fora as well as in groups such as IBSA, BRICS and G-20. But given the lack of interest of Rouseff in foreign affairs, don’t expect a significant strengthening of the partnership or any new, major joint initiatives in the next four years.
India then, should lower its expectations from Brazil. The country’s economy is already in a slow growth mode, and is relatively closed. This is reflective in the bilateral trade, which has already declined in 2013 to $9.48 billion from $10.62 billion in 2012. According to a ECLAC (Economic Commission for Latin America and Caribbean) report issued in October, Brazil’s global imports will likely drop by 3.2% in 2014. But India should look at the long term picture; Brazil with its large market, rich resources, vibrant democracy and regional leadership will inevitably emerge as a global player. It is just a matter of some more time.

Wednesday, October 22, 2014

Evo Morales reelected for the third term as President of Bolivia


The reelection of Evo Morales as Bolivia's President in the recent elections is a recognition of his success in emancipating the poor indigenous people of the country and economic management of the country. It is also a an inspiration and matter of pride for the indigenous people of the whole of Latin America as well that of the world.


Evo Morales reelected for the third term as President of Bolivia

President Evo Morales swept the elections with over 60% of the votes, easily defeating his nearest rival  Samuel Doria Medina who got just 25% in the elections held on 12 October. His party Movement for Socialism (MAS) got more than two thirds majority in the Congress. Morales had won with 53.7% votes in 2005 and with 64.2% in 2009. He is the first President who has won in the first round with such a large majority in the last forty years.

There are many explanations for the success of Morales, who has become the longest-serving Bolivian President. But the simplest is the fact that he is from the poor native indigenous community while his main opponent is a rich white businessman. The indigenous people form 60% of the Bolivian population and they are the poorest. The whites form 15% of the population and are well-off. What is surprising is that despite being the majority in the population, the natives were completely marginalized and discriminated politically and economically for the last five centuries by the people of European-origin. It was Evo Morales who ended this historic domination by becoming the first indigenous President. 

After coming to power in 2006, Evo Morales set about correcting the injustice by putting the indigenous people on the top of his agenda and improved their lives. He has changed the constitution which institutionalizes the empowerment of the indigenous people recognising their traditions and culture. 

It was due to Evo Morales that the number of people below poverty line has come down by 32% from 2000 to 2012. A report*of UNDP has put Bolivia as the most successful in reducing poverty in the last decade in Latin America.

Although the west has labelled him as a radical leftist, Morales has managed the economy prudently and pragmatically. He has financed his pro-poor programmes with the increase in revenue from exports, taxes and better financial management. He has ensured fiscal surplus every year since 2006. The GDP of Bolivia has grown an average of five percent from 2006 to 2013**. It grew by 6.8% in 2013 and is projected to grow by 5.5% in 2014 and 5% in 2015. The foreign exchange reserves have increased from about 3 billion dollars in 2006 to 14 billion in May 2014. The inflation of the country which in the eighties had touched five digits has been brought down to 6-7%. The lending rate is a decent 7 % in contrast to the double digit rates in Brazil, Argentina and Chile. External debt has been controlled and kept at 7.7 billion dollars without any significant increase from the 6.2 billion figure of 2006. Financial Times of 15 October*** has said, ' Mr Morales may well be Latin America's most successful socialist presidents ever'.

Bolivia has never had such a long period of political stability and economic growth as it has experienced in the last eight years under President Morales. The country which is the poorest in South America had been notorious for coups and political instability. 36 of the 83 governments in the past had lasted a year or less. Between 2001 and 2005 there were five Presidents.

Understandably, the white politicians and businessmen have not reconciled to the democratic logic of a President elected from the majority of the population. They have been plotting along with obvious outside support to destabilize Morales' government in the last eight years. The rich province of Santa Cruz, along with a few others, even tried separation from La Paz. But Morales has survived due to the solid support of the indigenous people and to the support given by the South American Union UNASUR

The United States is unhappy with the coca leaf worshipping Morales who has stopped the forced eradication of coca farms in the country and calls himself as the 'worst nightmare of US'. One of the US ambassadors had campaigned against Morales in the previous elections and he retaliated by expelling him and closing the offices of the US Drug Enforcement Agency office and US Aid. Morales stood upto even Lula and the mighty Petrobras and managed to get a higher price for the gas exported to Brazil. 

He has been campaigning for the global recognition of the legal rights of people in his country to grow coca which is considered as a sacred plant and consumed by Bolivians like betel leaves and tea in India. The UN Narcotics Control Agency, with the support of the cocaine consuming countries, have been against his move.

Morales comes from a poor family and rose as a  leader of the coca-cultivators union. He continues to live as a simple person with, of course, the Latino passion for football. Even now he plays football as member of a Bolivian team.

Bolivia was in the spotlight in India when Naveen Jindal went there announcing a two billion dollar investment in the El Mutun iron ore project. Unfortunately it was a failure due to faults on both the sides. India's trade with Bolivia is not significant but there is good scope to increase exports.

The victory of Evo Morales is not only cherished by the native Bolivians but it is also an inspiration and matter of pride for the forty million indigenous people of Latin America as well as those in the rest of the world. Last month Morales was the guest of honor at the international conference of the indigenous peoples of the world organized by the United Nations in New York.



 **    http://www.cepal.org/publicaciones/xml/1/53391/EconomicSurvey2014Brief.pdf

Friday, October 10, 2014

Brazilian Presidential elections on 5 October extend to a second round on 26 October


Since none of the candidates got the required fifty percent majority in the Brazilian Presidential elections held on 5 October, there will be a second round on 26 October between the centre-left President Dilma Rouseff and centre-right Aecio Neves. As of now polls predict Dilma win but the Braziian electorate is known for giving surprises.


Brazilian Presidential elections on 5 October extend to a second round on 26 October

President Dilma Rouseff got 41.59 percent of votes while her rivals Aecio Neves got 33.55 % and Marina Silva 21.32%. According to the Brazilian electoral law if the leading candidate does not get 50%, there has to be a second round of elections between the top two candidates. So, Dilma and Neves will fight in the second round to be held on 26 October.

The results are somewhat close to the opinion polls held last week although Neves got more than what was predicted. Till a week back Neves was trailing in the third position and overtook Marina only in the last week. In early September, Marina Silva was predicted to win in the second round with her double digit lead over Dilma. But in the last one month Marina was discredited by the aggressive negative campaign of the Dilma machinery which exposed the contradiction between the pro-big business approach of Marina and her claim to be on the side of the poor people. The personal attacks made especially by Lula had hurt Marina more severely. Marina was seen as having compromised her idealism and environmental activism for getting the votes of business and religious groups. Marina failed to defend or clarify her positions effectively and paid the price. Before the sudden surge of Marina last month, Dilma was comfortably leading ahead of her rivals and was widely expected to get reelected in the second round if not in the first. 

President Dilma is happy to have the centre-right Neves as the opponent rather than Marina who would have encroached on her vote bank of the poor. Now it is a clear fight between the business-friendly Neves and Dilma who will claim to represent the masses. Recognising the fact that about 60% had voted against her, Dilma said, ' My second term will be better than my first. I clearly understand the message from the streets and from the ballot box'. She will scare the poor people with the message that Neves might scrap the pro-poor programmes like Bolsa Familia. Dilma is encouraged by the fact that her Workers Party candidate has become the governor of Minas Gerais, the home state of  Neves beating the candidate of his Social Democratic Party. But Dilma's Workers Party has lost to Neves's party her home state of Rio Grand do Sol as well as Sao Bernardo do Campo, the home of Lula and where he founded the Workers Party. Dilma is also on weaker ground on the poor performance of the economy, her unpopular interventionist policies and the corruption scandals which have tainted the image of her Workers Party.

Neves has got a tremendous confidence boost by the fact that he got just 8% less votes than that of Dilma. He needs to work on the beneficiaries of the poverty alleviation programmes of the government of President Dilma that he would also care for them. Although Marina has not openly announced her endorsement of any candidate, she seemed to be inclined towards Aecio when she said, " Brazil clearly showed it does not agree with what is out there ". The candidature of Neves is quite strong given his background as the two term successful governor of Minas Gerais the second most populous state in Brazil. He left office in 2010 with more than 90 percent approval rating. He is the grand son of Tancredo Neves who was chosen as the first post-dictatorship civilian President in 1985 but died before taking over the office. His Social Democratic Party, which ruled Brazil before Dilma's Workers Party until 2002, has a solid national network and campaign machinery. 

As of now President Dilma is expected to get reelected in the second round on 26 October. But the Brazilian voters might change their mind in the next three weeks. If Dilma is reelected she will continue her low key approach to foreign policy and to partnership with India. Neves is likely to take more interest in foreign affairs. He has never visited  India although his state Minas Gerais has been active in business with India. 

Thursday, September 11, 2014

Ambush of President Dilma's reelection bid by Amazon activist Marina Silva


President Dilma Rouseff's four year work for reelection has been ambushed in just two weeks by  the Amazon activist Marina Silva who is now predicted to win in the October elections. If elected, Marina is likely to continue the pro-poor policies of the current government. But she will be more proactive in foreign policy than Dilma. PM Modi will find Marina less stiffer and more enthusiastic than Dilma in bilateral partnership and cooperation in global issues.


Ambush of President Dilma's reelection bid by Amazon activist Marina Silva

President Dilma Rouseff was comfortably ensconced in her Planalto palace in Brasilia waiting to get reelected in the October elections. Even after the massive street protests and the shocking defeat of the Brazilian team in the World Cup, she was leading in the opinion polls to win against Aecio Neves, the candidate of the centre-right Social Democratic Party and Eduardo Campos of the Socialist Party. This was until 20 August, when the Socialist Party had put up Marina Silva as Presidential candidate in place of Campos who died in a plane crash the week before. Two opinion polls, released in the first week of September, have predicted that Marina would win with a 7% lead over Dilma in the second round of the elections.The Dilma camp which had been systematically preparing for reelection with confidence for the last four years has been shocked by this ambush from the Amazon-born activist.

The prospect of Marina's win has come as a boon to the middle class which had protested in the last two years against poor public services, rise in prices and the corruption scandals involving the Workers' Party (PT) of Dilma. Marina is perceived as a principled anti-establishment outsider by the protestors. Marina's clean image contrasts her from Dilma's PT whose top leaders have been convicted on corruption charges. Marina's humble origin resonates with the poor people.The business community, which resented the I-know-everything attitude and inaccessibility of Dilma, has quickly latched on to the winning camp of Marina. They believe in her transformation from an idealist activist to a pragmatic political leader. Marina has declared that she will be a one-time President and will not seek reelection. This is a clever message to the supporters of Lula who has announced his own candidature for 2018. Marina has thus gained the support of the poor, the middle-class and the business dipping into the vote banks of Dilma and Neves

Marina's personal life story is compelling and similar to Lula's spectacular rise from poverty to presidency. She was born in a poor rubber tapping community in a village in the Amazonian state of Acre. She was one of the eleven children born to her parents who died leaving her as orphan at the age of 16. She learnt to read as a teenager when she was raised by nuns. She survived malaria, hepatitis and other diseases. She joined the rubber tappers' union and worked with the famous Chico Mendes whose movement worked for the protection of the Amazon from the deforestation interests.  She joined PT in 1986 and was elected as deputy in the State Assembly in 1990 and as Federal Senator in 1994. She became the Minister of Environment in President Lula's cabinet in the period 2003-8. But she resigned from the cabinet when her passionate environmentalism collided with vested interests and she lost the support of Lula.

Marina fought the 2010 elections as candidate of Green Party and came in the third place with an impressive 19.3 % of votes. Later she tried to create a party of her own called as the Sustainability Network but it did not work out. In 2013, she joined the Socialist Party and agreed to be the vice-presidential candidate with Campos. 

If elected, Marina is likely to  continue the Inclusive social policies of the current government, since she is also a leftist like Lula and Dilma. But she might give more space to the private sector business which felt stifled by the Dilma administration. The Brazilian stock and bond markets have already started bullish run anticipating Marina's win.

Brazilian foreign policy remained passive in the last four years since Dilma took very little interest in external affairs. But Marina is committed  to raise the profile of Brazil. She gives importance to regional integration, South-South cooperation, improvement of relations with US, signing of trade agreement with Europe and innovative Brazilian leadership initiatives in global climate change policies. She is likely to be less vocal in supporting Iran, Cuba and Venezuela. 

Prime Minister Modi might find Marina a bit less stiffer and more enthusiastic than Dilma in strengthening the bilateral strategic partnership and cooperation in IBSA, BRICS as well as in multilateral fora. 

Thursday, September 04, 2014

Poverty reduction and politics in Latin America


The credit for significant poverty reduction achieved in the last decade in Latin America goes to the pro-poor policies of the leftist governments who have been elected and reelected in recent years. In keeping with this trend, the Left is expected to be voted back to power in the October elections to be held in Brazil, Uruguay and Bolivia.The emancipation of millions of people from poverty is good news for the Indian companies exporting goods affordable to the new middle class in the region.

Poverty reduction and politics in Latin America 

More than 56 million people have been lifted out of poverty in Latin America in the period 2000-2012, according to a 26 August report* of the United Nations Development Programme (UNDP) based on data for 18 countries (Cuba and Haiti have not been covered) of the region accounting for 90% of the total population. The poverty level (under 4 $ a day) fell from 42 % to 25 % and the number of poor reduced to 134 million in 2012. The middle class ( 10-50 $ per day) which rose from 21 % to 34% reached 181 million. Between the middle class and the poor there were 200 million who earned  4 to 10 $ a day. 
Boliviahas achieved the greatest poverty reduction by 32.2%, followed by Peru with 26.3%, Venezuela -22.7%, Ecuador 21.9%, Brazil 18.6%, Panama-18.2%, Argentina-14.2%, Chile -13.1%, Costa Rica- 11.8% and Colombia- 10.6%.  In three countries, poverty levels have gone up. These are Guatemala 6.8%, Dominican Republic-0.7% and Honduras-0.5%. 
The credit for poverty reduction should be given primarily to the pro-poor policies of the left-of-centre governments in the region. This is evident from the fact that the top five countries with the highest poverty reduction have leftist governments. It is highlighted strikingly even more clearly in the contrast between Bolivia and Guatemala; the former has achieved the highest poverty reduction with a leftist government while Guatemala has seen increase in poverty with its rightist governments.The Bolivian success should be attributed entirely to Evo Morales, the first native Indian elected as President of the country in the 200 -year history of the country. The Indians, who form sixty percent of the Bolivian population and the bulk of the poor, never got the attention of the conservative European descendant rulers. It was Evo Morales who focussed on the poor Indians as a priority for his government. But the Guatemalan Indians who also form 60% of the population continue to be marginalized by the conservative governments of European descent. When a leftist President Arbanz tried to protect the poor with some progressive policies in 1954, the United Fruit company and CIA engineered a coup and installed right wing dictatorship. The current democratically elected President is Otto Perez Molina, a retired army General. It is no surprise that Guatemala has the highest proportion (63.1%) of poor in the whole region.
Uruguay has the highest proportion ( 60.2%) of middle class but its population is just 3.4 million. In the top four biggest markets, the middle class constitute 34.8% in Brazil, 26.4% in Mexico, 54.4% in Argentina and 26.8% in Colombia.
The success of poverty alleviation is the reason why Leftists have been elected and reelected in many countries of the region. At present, ten countries of Latin America have Leftist governments. These are: Chile, Brazil, Bolivia, Uruguay, Peru, Ecuador, Venezuela, Nicaragua, El Salvador and Cuba ( unelected).
The Conservatives were defeated in the last elections in Chile and Mexico. In Chile, the conservatives who came to power in 2010 after two decades of centre-left governments lost to the Left in the December 2013 elections. In Mexico, the left-of-centre Instituitional Revolutionary Party (PRI) defeated the conservative PAN party which was in power for two terms till 2012.
At present only four countries have conservative governments: Colombia, Honduras, Paraguay and Guatemala. In Colombia, the Left has been given a bad name by the FARC guerrillas who have misused their original Marxist-Leninist ideology and got into drug trafficking, kidnappings and terrorism. In Honduras and Paraguay the conservatives came to power through questionable routes. In Honduras, the Leftist President Manuel Zelaya was overthrown in a coup in 2009 with indirect US support. The coupsters ensured the conservative victory in the elections in 2010 and 2013. In Paraguay, there was a Congressional coup by the conservatives in 2012 who forced the Leftist President Fernando Lugo out of office. The oligarchs of the country conspired together and have reestablished centre-right governments since then.
Given the link between poverty alleviation and politics, it is no surprise that the Left is expected to retain power in the elections to be held in Brazil, Bolivia and Uruguay in October this year .
The emancipation of people from poverty and the enlargement of middle class in Latin America is an encouraging news for Indian companies which export medicines, two and three wheelers, cell phones, clothes, and other goods affordable for the low income groups. 

Friday, August 22, 2014

Washington, New York and the Argentine default

The Argentines blame the ' Washington Consensus' for the real default in 2001 and the New York judiciary and vulture funds for the artificial default on 31 July. The arbitrary court order and the unethical extreme greed of the vulture funds are challenges not just to Argentina; they endanger the global debt restructuring system and contradict the domestic laws of United States. The US President and the Congress  can save Argentina from the pain and put an end to the extortionary tactics of vulture funds as a redemption for the original sins of the 'Washington Consensus'


Washington, New York and the Argentine default 

'Argentina has defaulted', screamed the headlines in financial newspapers on 31 July. But it was not an accurate report. Argentina did not default. It was forced into default by a New York southern district court judge Thomas Griesa. The Argentine government had deposited the payment of 539 million dollars on 26 June ahead of the due date, in a bank in New York to be transferred to the 92.4% bond holders. But Judge Griesa had blocked the transfer of the money. He would not allow this payment to the 92.4 % of the bond holders until and unless Argentina paid the outrageous amount demanded by the vulture funds who hold just 1.6% of the bonds.  So it is an artificial default situation created by Judge Griesa. Joseph Stiglitz, the Nobel Laureate and Martin Guzman from Columbia University call it* as " Griesafault ".  Standard and Poor labels it as 'selective default' while Fitch has categorized it as 'restricted default'. 

The Argentines blame the "Washington Consensus" for having caused the socioeconomic problems of Argentina in the eighties and nineties which eventually lead to Argentina's first default in this century in December 2001. Some even go further and say that the support of Washington DC to the Argentine military dictatorship (whose crimes include incurring unnecessary and irresponsible external debt) was the root of the problem of default. Now they accuse the New York judge for the second default.

Facts of the case


After the December 2001 default on its debt of  82 billion dollars, the Argentine government restructured the debt through agreements in 2005 and 2010 with 92.4 % of the bond holders under which the latter received 'exchange bonds' giving them about 30 cents for a dollar of the old bond. These exchange bond holders have been receiving their interest payments punctually and seen the value of their bonds rise. The remaining 7% of the bond (value 4 bn dollars) holders did not agree to the debt swap. Among this holdouts, the vulture funds hold 1.6% of the bonds worth 1.3 billion dollars. NML Capital, the lead vulture fund sued the Argentine government demanding full payment. Judge Griesa ruled in their favor in November 2012. Argentine appeal in a higher court was rejected and later the US Supreme Court refused even to hear the Argentine appeal. Judge Griesa then forced the Argentine government to negotiate with the vulture funds under Daniel Pollack, a New York lawyer appointed by him as mediator. The negotiations failed since the Argentine  government could not agree to the outlandish demand of the vulture funds and the latter rejected the Argentine offer of payment on the same terms as paid to 92.4% of the bond holders. The deadline of 30 July passed without the payment, resulting in a default situation, although the Argentina has the money and willingness to pay. Judge Griesa has simply put a gun on the head of Argentina saying, 'pay the predators or go bust'


Argentina has now taken the matter to the International Court of Justice, complaining** that the decision of the US judiciary is arbitrary, abusive and beyond its jurisdiction besides ignoring the sovereign immunity of Argentina and hindering the sovereign debt restructuring process. But this would not help if the United States does not consent to the jurisdiction of ICJ on this matter. 


Five fundamental questions


While the wise old ( 83 years) judge and the greedy vulture funds have some sound technical and legal arguments, the case defies logic, common sense and natural justice. It threatens the sovereignty of Argentina and the global system and practice of debt restructuring besides contradicting the basic principles of free markets. It needs to be seen in a larger context with all the facts behind the case. To start with, let us ask five fundamental questions.

1 Did the Argentine government actually borrow money from the vulture funds which have sued Argentina?  No. Neither the vulture funds lent any money nor did the Argentine government borrow from them. The vulture funds bought the bonds cheaply in the secondary market after the default in 2001. They paid 49 million dollars for bonds worth 832 million dollars. NML did not ask the Argentine government nor did it go through American judiciary before it purchased the bonds, knowing fully well the risk. Why should any judiciary be involved now to arrange profit on the commercial purchase? The judiciary should simply let the market forces play freely . They should ask the vulture funds to sell their bonds in the market from where they bought. This would be perfect justice in the land of free market.

2 Did Argentina refuse to pay the vulture funds? No. The Argentine government offered to pay them on the same terms as they paid the 92.4 % of the bond holders. This would give a handsome profit to the vulture funds on their investment. But they want an unreasonable and different treatment. They want an outrageous 1.63 billion dollars which means a return of 1608 %. Some might consider this demand as immoral and unethical but it is business as usual for Paul Singer, the chief of NML and his other fellow vulture friends. They specialize in buying distress debt at rock-bottom prices and then try to collect ransom by litigation and blackmailing.  Argentina is not their first victim. They have already exploited some African and Latin American countries and their last victim was Greece. Jerome Roos of the ROAR magazine calls*** the vulture funds as the 'Taliban of global finance'

3 Have the 92.4 % of bond holders lost out terribly after having accepted 30 cents to a dollar swap? No not at all. They are happy with the value of their exchange bonds which is around 89 cents to a dollar. Since these are GDP-indexed bonds, they have received good returns with the high growth of Argentina since 2003. The interest which they get is high since Argentina is only one of the three countries in the world offering bond yields above ten percent. More importantly Argentina makes interest payments punctually.

4 Will the vulture funds suffer loss due to the Argentine default? No. In fact they might even gain since they own a large quantity of  credit default swaps (CDS) against Argentine bonds, creating a further incentive to not only trigger a default against Argentina; but also to undermine the value of the bonds themselves, as the CDS would pay out at a higher rate if the defaulted bonds decline to extremely low values.

5 Can the Argentine government pay the vulture funds the amount demanded by them? No self-respecting government can give in to such blatant blackmail. Moreover such payment will open a Pandora's Box and the 92.4 % bond holders would also want a similar full payment pushing Argentina into another real default causing avoidable suffering for the Argentine people. Martin Wolf of Financial Times ( 24 June 2014 ) says, ' if Argentina is forced to pay the holdouts in full, the price will be borne by Argentines. This is extortion backed by the US judiciary'. Asking Argentina to make full payment to the 1.6% bondholders while 92.4% have been paid one third of the full value is mockery of justice and undemocratic. Blocking the payment to 92.4% unless and until payment is made to 1.6% is punishment of the majority for appeasing a small minority?

Vulture funds harass Argentina

The vulture funds have been harassing the Argentine government for the last several years by threatening to seize Argentine assets and Central Bank reserves abroad. In October 2012, the vulture funds got a historic Argentine naval sailing vessel seized in Ghana through a local court order. Argentina took the case to the international tribunal for the law of the sea which asked Ghana to release the ship on the ground that the impounding of the ship was "a source of conflict that may endanger friendly relations among states". The incident was a terrible embarrassment for Argentina.

The vulture funds tried to confiscate Argentine assets including those of diplomatic missions  in US, UK, Belgium, Germany, France and Switzerland. Argentina was forced to fight in the courts of these countries to protect its assets.

Even now the Argentine President does not travel in the official plane to US or some other countries where there are risks of seizure of the aircraft by the vulture funds. The President charters planes for such trips.  

The vulture funds are now trying to unearth dirt against the Argentine leaders in order to use them to blackmail as they did in the case of Congo. They have warned, ' the worst is yet to come'.


Argentina has done well on its own after the 2001 default



It should be highlighted here that Argentina had done the successful restructuring of its debt in 2005 and 2010 on its own without the involvement of IMF or any other external rescuer, demonstrating to the world that restructuring could be done without the painful and humiliating austerity conditions of IMF.


It is even more commendable that Argentina recovered from the debt crisis very quickly, resumed economic growth and paid off a significant amount of debt. It repaid its 9.5 billion dollars debt in full to the IMF in January 2006 at one go and has also settled many other external debts. It has brought down its public debt from 166% of GDP in 2002 to 44% in 2013. In May 2014 it signed an agreement with the Paris Club to settle the debt of 9.7 billion dollars. It has been servicing the restructured debt scrupulously paying interest to the exchange bond holders punctually. This has generated a confidence in the market because of which the price of Argentine bonds are holding at 89 cents to a dollar even after the default on 31 July.

Argentina achieved an impressive growth rate of 8.8 % in 2003, a year after the debt crisis and economic collapse. It grew over 8.5% annually from 2004 to 2007. Even after the global financial crisis, the economy grew by 9.2% in 2010. No doubt, Argentina's recovery and growth were helped by the high commodity prices. Despite being cut off from the global credit market for over a decade, Argentina has done not so badly. In contrast, Greece which was bailed out with 110 billion Euros by Eurozone countries and IMF in 2010 is still in negative economic growth with high unemployment and continued suffering by the population due to the severe austerity conditions.

New York verdict contradicts US domestic law

The American court verdict against Argentina contradicts the domestic law of US which allows individuals and companies as well as cities and counties to declare bankruptcy under Chapter 11 and 9 to ensure orderly survival when debts cannot be repaid in full. The reasoning behind this American law is that no credit system can function or has ever functioned with zero default. This possibility of default is embedded into credit contracts through the interest rate, with spreads operating as the market estimate of the probability of a default. So those who are seen as less likely to be able to repay are forced to pay higher interest rates, in both formal and informal credit transactions. A creditor who has been demanding and receiving a higher interest rate based on this probability cannot then demand full repayment as a right, since the contract reflected that very likelihood. So the ruling actually negates the basic principles upon which all credit markets function##. According to Stiglitz and Guzman*" Griesa’s ruling encourages usurious behavior, threatens the functioning of international financial markets, and defies a basic tenet of modern capitalism: insolvent debtors need a fresh start".


Implications for the world


Judge Griesa's decision favoring the vuture funds has provided a potentially dangerous precedent for future debt restructuring of other countries. It is because of this reason that even IMF and the World Bank have expressed concerns that the NML case could endanger the debt restructuring they oversee around the world. Brazil, France and Mexico filed amicus briefs with the US supreme court in March this year arguing that the ruling against Argentina would endanger the sovereign debt markets. Argentina's position in the case has also been supported by Latin American regional groups such as Mercosur, UNASUR, CELAC and OAS besides G-77 and China.


Some US bankers and economists have also cautioned about the adverse implications of Judge Griesa's decision for the global financial system. In a letter# addressed to the US Congress on 31 July, over 100 economists have expressed concern that the court judgement against Argentina could cause unnecessary damage to the international financial system. The letter has called for a legislative solution pointing out the examples of UK and Belgium which have passed legislations preventing such litigations by holdouts. 


Argentina needs alternative credit sources

Judge Griesa's decision has come at a wrong time for Argentina. The Argentine economy has deteriorated since 2007 with high inflation, currency devaluation and shortage of forex reserves among other problems. Judge Griesa and the vulture funds have compounded the economic problems of the country by creating more uncertainties and challenges. The artificial default situation means that Argentina will continue to be locked out of the global financial markets although the country badly needs external funds to finance its development projects. 


Argentina has to look out for non-western financial sources. They have been offered thirteen billion dollars of credit as well as currency swap facility by the Chinese President during his visit in July this year. May be Argentina could become the first customer for the New Development Bank created by BRICS last month. 


The larger issues

The vulture funds vs Argentina case is not just a legal issue about a few billion dollars. It is about the sovereignty of a country, the economic situation of 42 million people and the future of debt structuring for other countries. It is also about the credibility of United States financial and judiciary system.  Stiglitz and Guzman have a warning*, 'The US financial system, already practiced at exploiting poor Americans, has extended its efforts globally. Sovereign borrowers will not – and should not – trust the fairness and competence of the US judiciary'. 


Let us not forget that the extreme and reckless greed of a few had caused the financial crisis for US and the world in 2009. The people and the government of US have paid a high price as a consequence. Such tragedy could be avoided for Argentina and other countries.


Back to Washington DC


The second default of Argentina in this century caused by the New York courts and vulture funds could still be rolled back in Washington DC with Presidential discretion. Greg Palast, who has done investigative reports for BBC, Guardian and Al jazeera, says### President Obama could intervene in the Argentine case in the same way as President Bush prevented the seizure of the US property of Democratic Republic of Congo by the same Paul Singer. But a long term solution lies in the hands of the US Congress which could enact legislation as done in UK and Belgium to prevent the predatory and unethical litigations by vulture funds. It will be a redemption for the sins of ' Washington Consensus'. 










Thursday, August 14, 2014

Federalism – the experience of Brazil


Brazil follows a more decentralised federalism and gives special importance to the municipalities. Port Alegre city's pioneering and successful  'participatory budgeting' is a role model for the world. India could learn from the positive and negative aspects of the Brazilian system.

Federalism – the experience of Brazil


Brazil is one of the largest federal states in the world and one of the oldest, dating from 1889. The country started off with  a unitary central authority as a colony and later as a monarchy when it became independent from Portugal in 1824. It was turned into a federation as it became a republic in 1889 . Since then, it has oscillated between centralizing military dictators and authoritarian regimes and decentralizing liberal governments. When democracy was restored in 1985 after two decades of the last military dictatorship, Brazil became a federal republic under the constitution of 1988, the seventh since independence.

Empowerment of municipalities

The Brazilian federalism is unique since it has recognized and included municipalities as integral entities of the federal structure. The municipalities are invested with some of the traditional powers usually granted to states in federalism. The Brazilian municipalities enjoy independent and coequal status unlike in other federal countries where the states control the local bodies.

Brazil is a federation of 26 states and the 5564 municipalities plus the federal district of Brasilia. The states have their own constitution while the Municipalities have 'organic laws' .

The municipalities, whose populations range from a few thousand to many millions, have considerable autonomous powers and resources.The World Bank in its 1990 report ' The new fiscal federalism in Brazil" has commented that the municipalities have more money than they need while the federal government's revenues fall short of its spending needs. The municipalities are empowered to take decisions in many important areas, such as territorial management, land development, environment, local taxation and industrialization.

How federalism works

Brazil is an example of a more 'robust federalism' in comparison to other federal countries of the world in the extent of decentralization. Few federal countries give such a large share of the total tax revenue to the states and municipalities. The state governors have lot of power and clout  vis-a vis the federal government in certain tax and expenditure functions. After having suffered from the centralized military dictatorship in the past, those who drafted the 1988 constitution seems to have opted for decentralization which creates more powerful local leaders to balance any strong and ambitious president. Governors and mayors of wealthy states and cities compete with the federal president for power and resources. In fact, one of the federal presidents Itamar Franco, who was President of Brazil in 1992-95 later became the governor of the state of Minas Gerais in 1999-2003 and kept challenging his successor in Brasilia.

It should also be noted that another larger objective of such greater decentralization is to bring the government closer to the people. This has served well the young democracy of Brazil.

The Brazilian structure is also described as Cooperative Federalism since the management of the distribution of powers and responsibilities of the federal system is based on the assumption of cooperation between the three federal entities. 

The bicameral national legislature also reflects the federal spirit of the constitution. Each state, big or small, is represented equally by  3 senators elected directly from the states. The number of seats in the Chamber of Deputies is distributed according to the population in each state. In order to balance the larger and smaller states there is a stipulation that the states should have a minimum of 8 Deputies and maximum of 70.

Brazil could afford to be decentralized so much since its population of 200 million speak just one language and follow one religion and the country does not face any centrifugal forces.

Challenges

Although the Brazilian federal system has served the country well so far, it is still a work in progress and is far from mature since it is just thirty years old. There are many challenges and flaws some of which are highlighted below. 

The excessive emphasis on decentralization in the model of cooperative federalism without defined distribution of responsibilities is a source of tensions. When states or municipalities do not carry out their responsibilities, there is no adequate mechanism for the federal authorities to remedy the situation. 

The structure of the revenue-sharing system is unbalanced and is being challenged frequently and in any case it has not helped adequately to deal with regional and income disparities.

Because of the large clout given to states and municipalities, the political parties have got fragmented and the national parties have become like a federation of state parties and the Congress 'an assembly of states'. The federal legislators give more importance to local interests than national concerns, hobbling and complicating the federal government's functioning and priorities. 

Relevance of Brazilian experience for India

India cannot afford to be as decentralized as Brazil's federation given the  vast Indian diversity of languages, religions, ethnic groups and more importantly separatist history and tendencies. Prime Minister Modi, who advocates a 'cooperative federalism' can learn from the downside of Brazil's excessive decentralization. 

India could study the empowerment of Brazilian municipalities and especially the "participatory budgeting" system successfully pioneered by the Municipality of Port Alegre, which had captured the imagination of Aam Admi party's Arvind Kejriwal. About 50, 000 citizens out of the total population of 1.5 million inhabitants of the city participate in the budget allocation of the 200 million dollar annual fund for construction and services. 

The Indian Ministry of External affairs could learn from the Brazilian foreign ministry's interaction with regional authorities. They have six offices in the major cities and regions of Brazil as two way communication points with state and municipal authorities as well as with civil society. These are headed mostly by ambassador-level officers. The foreign ministry takes the views of the local leaders on board on issues of regional integration such as Mercosur and external trade. MEA has recently opened offices in some cities of India but these are headed by junior level officers and are not able to serve a larger bridging role like the Brazilian diplomats do.