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'. 

*  http://www.project-syndicate.org/commentary/joseph-e--stiglitz-and-martin-guzman-argue-that-the-country-s-default-will-ultimately-harm-america

** http://cancilleria.gov.ar/userfiles/application_argentina_august_7_2014.pdf

*** http://upsidedownworld.org/main/argentina-archives-32/4980-why-argentina-is-right-to-defy-the-taliban-of-global-finance

 #  http://en.mercopress.com/2014/08/01/world-economists-call-on-us-congress-to-take-action-on-the-argentina-holdouts-rulings?utm_campaign=rss&utm_content=main&utm_medium=rss&utm_source=feed

##  http://triplecrisis.com/the-argentina-debt-case/

###    http://www.theguardian.com/business/economics-blog/2014/aug/07/argentina-debt-crisis-barack-obama-paul-singer-vulture-funds

Latin America, a victim of the supply-driven debt business and demand-driven drug business of US

The Latin American debt crisis caused by the supply-side debt business of US is the theme of the book “Debt and Crisis in Latin America: The Supply Side of the Story” by  Robert Devlin.

The author blames the predatory US bankers as equally responsible for the Latin American debt crisis as much as the reckless and corrupt Latin American governments which were willing victims and had mismanaged their economies. Devlin, an American economist, who works in the Economic Commission for Latin America and Caribbean, has extensive knowledge of both the creditors and debtors. He has done in depth case studies of Peru and Bolivia. His study is focused on the decades of seventies and eighties when large debts had accumulated and lead to crises. The debt crisis combined with the impact of neoliberalistic policies forced on Latin America by the US had made eighties as a “Lost decade” with increase in poverty and inequality.  The governments of the region had to cut down the budget for education, health and poverty alleviation and they were forced to use the export earnings for repayment of external debt. 

According to Devlin, the US bankers had taken the initiative in most cases to lend indiscriminately to some Latin American countries even when there was no clear need for borrowing. The banks went on a spree of loan marketing after they received large petrodollar deposits from OPEC countries in the seventies. The banks sought the markets of developing countries since the profitability in the  domestic US market was generally flat and the depressed  OECD economies had little demand for credit after the oil shock. Also the banks found that they had more freedom in the financing of foreign governments and corporations than in the domestic market which had tight regulations. The bankers proactively encouraged the Latin American countries to issue bonds and marketed them enthusiastically to gullible investors.

The banks chose their victims carefully. They went after those Latin American countries (Brazil, Argentina, Peru, Bolivia, Venezuela, Nicaragua, Chile and Mexico) which were misgoverned by illegitimate military dictators and corrupt caudillo presidents. These characters knew that they were in power only for a short time till the next coup or election and wanted to make the most money in the least time. They borrowed huge amounts knowing that they would not be there when the time for repayment would be due.

One country where the bankers did not succeed until 1980, was Colombia, which had a responsible policy of resisting the  bankers' overtures. The country had gained a reputation in financial circles as the "prickliest" borrower  in the developing world. The frustration of the banks to break into the Colombian market was so much that  the banks made the rare concession of not insisting on the waiver of sovereign immunity  by the government.

Bankers, by profession, are expected to be conservative, risk-conscious and prudent. They are supposed to do rigorous due diligence about the capacity of the borrower to repay. But the big brash US bankers did not care for such professional and traditional norms. They lent money freely for non-productive purposes. For example, in the case of Peru, 49 percent of the lending was to refinance old loans, 28 percent was of free disposition (totally untied), and  only 15 percent was directly linked to projects or capital goods imports.  In Bolivia, 18 percent of the lending went to refinance loans, 43 percent  were of free disposition, and 33 percent were linked to projects or capital goods imports.  The free-disposition loans  gave the freedom for the corrupt rulers to fill their Swiss Bank accounts or use it for personal and family business. 

Questioned on the environment in Lima during the development of the credit cycle in the early 1970s, one local banker remarked, "Foreign bankers wanted to give us the money  before we asked for it." An official from COFIDE, the Peruvian state development bank mandated to contract foreign loans for the public sector, has commented that during the 1970s, "the banks were  eager to lend and would lend for anything." 

Foreign borrowing was the way the Peruvian dictator Velasco maintained his position.  Ministries were the fiefdoms of the generals who headed them. Each  general did whatever he wanted. There was a lot of borrowing for corruption's sake: the generals wanted their kickbacks. They received their percentage from the contract regardless of the merits of  the project, so they borrowed for anything. Generals got rich from  the projects and banks wanted to lend; the merits of the project were  unimportant.

Some banks trapped the debtor countries in ponzi schemes. They made the countries dependent desperately on new loans to pay interest on the old ones and repay the instalment of the principal. 

The big bankers were careful not to take the risk by putting up their own money. They preferred to raise syndicated loans with contributions from dozens of other banks including a number of smaller banks from Europe and Japan. Big banks such as Citibank and Bank of America, who had presence and networking in the debtor countries, took the lead in raising syndicated loans. Typically they would put up ten percent or even less and raise the rest from other banks. The smaller banks in the consortium had less knowledge of the debtor countries and relied on the expertise and contacts of the lead banks. True to the herd mentality, banks did not want to be left out and rushed to join the big syndicated loans.

One immediate advantage for the lead bank was that one-fifth of its own return on the loan came from fees that were paid up front and risk free.  This provided an incentive to churn large loan volumes. Bigger the loan, larger was the fees. In 1973 to 1974 Peru's loan syndications were frequently oversubscribed, meaning that more money was generated and pumped into the country than the government needed.

Secondly, syndication spread the risk among so many other banks. If the client did not behave, the banks would gang up and use their collective strength to bully and bargain. It was also a clever way of political insurance. If the debtor country were to default, the governments of Europe and Japan whose banks were part of the consortium, could be counted on to put political pressure on the debtors. The lenders could also count on the clout of these countries in IMF and World Bank to turn the screws on the debtor country. So, the debtor is trapped and faces punishment and isolation from the entire western capital market. This actually happened in the case of Argentina after the country restructured its debt in 2002 on its own terms defying IMF and the governments of US and Europe. Argentina was thereafter shut from access to all bilateral, multilateral and private finances in the western world.

After the Wall Street bankers killed and took the best part of the meat of the hunt, the vulture funds from US descended on the left over corpses to feast on the left overs. They bought the Latin American bonds for pennies and forced the governments to pay the full value plus interest and made obscenely enormous profits. They did this with help from the US Congress, government and judiciary. For example, NML capital of New York paid 49 million dollars for Argentine bonds worth 832 million dollars. They harassed and blackmailed Argentine government and forced them to pay over a billion dollars as settlement. More on this https://latinamericanaffairs.blogspot.com/search?q=vulture+funds

Many Latin American governments had learnt lessons from the past debt experience and have now become more prudent in taking external debts. But a few continue to repeat the past mistakes. Argentina has been trapped yet again in a debt crisis now, after having come out victorious in the fight against the greedy bank creditors and vulture funds in 2002. 

Drug business

In contrast to the supply-driven debt business, the drug business is demand-driven by the US consumers. Millions of Americans pay billions of dollars for the Latin American supply of cocaine. According to a study by Rand Corporation the business of Cocaine was valued at 28 billion dollars in 2012. This is part of the total US business of over 100 billion dollars Including heroine and other drugs. Here is the share of the stake holders in the drug business according to the Netflix documentary “The business of Drugs”: 

The Colombian coca leaf producer gets 500 dollars for a ton of leaves from which 1 kg of cocaine is made. The Cartels which process them into cocaine get 5000 dollars for a kilo. When it reaches Mexico its value increases to 12,000 dollars. And finally, the American consumer pays 100,000 dollars for a kilo or 100 dollars per gram. This means out of every 100 dollars of cocaine business, the Colombian farmers get just 50 cents while the Colombian cartels get 5 dollars and their Mexican counterparts 7 dollars. This means that 88 dollars out of 100 dollars in cocaine business is within the US itself. So, if the US wants to stop the use of cocaine it has to cut off the 88 dollar link. But the US government covers up this reality and maligns the Colombians and Mexicans. This is not just unfair but egregiously wicked. The US has changed the narrative and mislead the world with its so-called drug war in which Latin America is portrayed as villain, as in the Netflix serial “Narcos”. My blog post on this https://latinamericanaffairs.blogspot.com/search?q=narcos

In any case, if Latin America stops supply, it is not such a big deal for the US consumers. They have other options: heroine, synthetic drugs and opioids from other external as well as internal sources.  

The drug war spawns yet another business for US. The counterdrug funding is $35.7 billion in the US 2021 budget. The US Drug Enforcement Authority (DEA) gives billions of dollars of contracts for supply of surveillance helicopters, aircrafts, patrol boats, x-ray and other equipments to detect cocaine shipments in airports and ports. Besides selling to US ports, airports and DEA, the US government forces these items down the throat of the Latin American governments in the name of drug war cooperation. There is a huge US business lobby with a vested interest in the continuation of the multibillion dollar drug war.

While the drugs come into US from Latin America, there is a reverse trafficking of guns worth millions of dollars into Latin America from US. According to a study of University of San Diego, over 200,000 guns are smuggled from US to Mexico every year. On average, there are more than three US gun dealers for every mile of the 1,970-mile border between the countries. A significant proportion of the US gun sellers depend on the illegal demand from Mexico. It has been reported that over three fourth of the guns used in the fights between the gangs in El Salvador are of US origin. The illegal American guns kill more Latin Americans than the number of Americans killed by cocaine. 

Also there is illegal transfer of billions of cash dollars from US to Latin America in exchange for the drugs. American banks have been caught in the drug money laundering of the Latin Americans

The US government does nothing much about the trafficking of guns and dollars and makes noise only about the drug trafficking. 

Addiction to drugs and debt

Both the drug and debt businesses have resulted in addiction. The Americans have got addicted to Latin American drugs and the US bankers have made the Latin Americans get addicted to debt. 

While there are prospects for the Latin Americans to come out of the debt addiction, there does not seem to be any hope for end of the US addiction to drugs in the near future.



Argentine voters have made smart choices in the elections of 21 October

 Argentine voters have made smart choices in the elections of 21 October
 
Before the elections on 21 October, there was a hype by the anti-left western media that Argentina was going have its own Bolsonaro/Trump by electing Javier Milei, the far right radical anti-establishment candidate as President. But the Argentine voters proved to be smarter. They shocked Javier Milei and his choreographers by humbling him into the second position with 30% votes. Sergio Massa, the leftist candidate of the ruling coalition came first with 37% votes. The centre-right candidate Patricia Bullrich came third with 24%, She is out of contention for the second round of elections to be held on 19 November between Massa and Milei.
 

Argentina is going through yet another cycle of crisis with three digit (138%) inflation, steep currency depreciation, increased poverty and unemployment, shortage of foreign exchange reserves and huge unbearable burden of external debt. Part of the blame lies with the leftist Peronist governments in power for most part of the last two decades.  So, the voters elected the centre-right Mauricio Macri as President in 2015. However, his government also failed to arrest the deterioration of the economy. Macri made it worse by sinking the country in a huge debt trap by taking a 43 billion dollars IMF loan towards the end of his term. These billions were not used for any productive or revenue generating projects. The money simply disappeared, leaving the country with a severe burden of debt. During the Peronist rule between 2003 and 2014 the country was virtually debt free since the Wall Street cartels and their Washington DC accomplices kept Argentina isolated from the international capital markets. They wanted to punish Argentina for its audacious debt structuring on its own in 2002 ignoring IMF, the US Treasury Department and the Wall Street. President Nestor Kirchner pulled off a financial coup by making the creditors (over 93%) agree to receive 30 cents to a dollar. This way he reduced the debt from 90 billion to 30 billion dollars. He and his wife Cristina Fernandez, who succeeded him as President, refused to be blackmailed by the American vulture funds who did not accept the debt restructuring formula and insisted on full payments. So the Wall Street mafia blockaded Argentina from the western financial capital markets. This was a blessing in disguise. Argentina remained free from external debt since there was no one to extend credit except for the Chinese who came to the rescue occasionally with some credit and financial swaps. Argentina struggled but remained free from the curse of external debt, which had caused many crises in the past. But this situation was changed by the pro-US Macri who made a deal with the vulture funds and took the disastrous step of taking in 43 billion loan from IMF. This was irresponsible and unpardonable. This IMF debt of 43 billion dollars has become an unbearable burden for the country which has severe shortage of foreign exchange reserves. This has aggravated the economic crisis of the country. This is the reason why the voters punished Macri and defeated him in the 2019 elections when he sought reelection. His candidate Bullrich was given the same punishment in the 2023 elections. The electors are not yet ready to forgive the grave sin of Macri.
 
Obviously, the country needs a change from the leftist Peronists who have failed in economic management and the rightists who worsened the crisis by adding the the debt burden. It was in this context that the situation was ripe for an outsider. Javier Milei, the Libertarian candidate, was the natural choice at this time of anti-incumbency. Milei, a professional economist, promised a shock treatment and radical free-market reforms. His angry attacks against the political caste which got the country into the mess, resonated with the public. He got the most votes in the primaries held in August this year. This boosted the confidence of Milei who went overboard with extremist statements, crazy outbursts and attacks against those whom he did not like. He derided Pope Francis as “a malignant presence on earth,” “filthy leftist”, “a donkey”, “a jackass” and “a leftist sob”. This has not gone well in the catholic country which is proud of the first Argentine who has become Pope. 
 
Milei proposes to close down the Central Bank, dollarize the economy, shut down 10 of the 18 ministries and cut social expenditure. He has taken disturbing and unrealistic foreign policy positions. He attacks President Lula and admires the disgraced ex-president Bolsonaro. He is critical of Mercosur, the regional economic bloc as well as China, the most important economic partners of Argentina. He considers global warming as a “socialist lie”.
 
The masses struggling with poverty and economic difficulties realized that Milei has no agenda for them. Their situation would only worsen with Milei’s proposal to cut social expenditure. So they have ditched Milei and voted for the leftist candidate Massa, a known devil. In any case, Massa is a pragmatic and moderate leftist unlike the Kirchners who were extremists and confrontational.
 
Milei has got the message of the voters now and is toning down his rhetoric. He has realized the need for support of the moderate centre-right voters. 
 
I believe that Argentina needs a change from the traditional left and right.  An unconventional shock treatment by an outsider would be good at this time. So  Milei is a natural choice. But he needs to moderate himself and become more realistic and pragmatic. Only then he has a chance in the second round of elections on 19 November. 
 
In any case, even Milei gets elected as president he cannot impose his crazy proposals and become a monster like Bolsonaro or Trump.. His party does not have the legislative majority. In the Congressional elections held simultaneously  with the Presidential elections on 21 October, the leftist Peronist coalition has won the maximum seats. They got 34 seats in the House of deputies and 12 in the Senate. Milei’s party got 8 deputies and 8 senators while the centre-right coalition got 24 deputies and 2 senators. With these results, the new (Lower) House of Deputies will have 108 leftists, 38 Libertarians and 93 rightists out of a total of 257. In the Senate of 72 members, the leftists will number 34 while Libertarians will be 8 and rightists 24. So, Milei will need the support of the moderate rightists to pass his legislative reforms. He will have tough time in contending with the Leftist coalition which has the largest number of Deputies and Senators.
 
Milei would also have to live with another reality. The leftist incumbent candidate Axis Kicillof has been reelected as governor of Buenos Aires, the largest province with 17 million people out of the total country’s population of 45 million. There are also several other provinces with leftist governors. 
 
If Milei gets elected as president, the country would get a much-needed shock therapy. At the same time, he would not be allowed to become disastrous like Trump or Bolsonaro since the voters have built firewalls of opposition with their smart voting. It would not be bad either if the leftist Massa wins.  He is mature, balanced, pragmatic and has the much needed political experience of crisis management in recent times. 
 
 

From Coolies to Patrons and Partners: the Chinese paradigm shift in Latin America

Latin America had imported Chinese as Coolies in the second half of the nineteenth century after the abolition of slavery. About a quarter million Chinese coolies were imported by Peru and Cuba between 1847 and 1874. The Peruvian Congress passed a law about the coolie system. It provided a subsidy of 30 pesos to be paid to the shipping company which brought in the coolies from China. The coolies had to be between the ages of 10 and 40 and were obliged to work generally for eight years, after which they were free to go back or be on their own. The Law had provisions for management of the coolie which included teaching of Bible. It specified the number of lashes to punish the coolies for disobedience or indiscipline. In practice, the employers ill-treated and exploited the coolies almost like slaves, auctioning, buying and selling them. 

The Chinese coolies worked in plantations and mines and  were made to dig up the guano pits in Peru and load them in ships for exports to US and Europe. The strong stench of guano droppings were so nauseating that the ships used for transportation could not be used for any other goods and had to be retired. Thousands of the coolies fell sick and died in the miserable conditions of their work. 

In 1874, the Chinese government signed an Agreement with the Government of Peru to enquire into the conditions of the coolies and improve them. The Commission interviewed many coolies who had related their sufferings and misery.

Mexico had imported Chinese coolies to work in the arid areas of north not only as workers but also as barbers and domestic help. After the end of their bondage, the entrepreneurial Chinese started their own businesses and flourished. But this attracted a backlash from the Mexicans who accused the Chinese of “ stealing Mexican jobs and businesses”. The anti-Chinese movement lead to harassment of the Chinese whose shops and houses were burnt.

Panama had imported Chinese coolies to work in their railway and canal project.

Descending from the coolies, today there are over a million people of Chinese living in Latin America. The Latin Americans look down on them and use the expression Cuento Chino ( Chinese tale) which means exaggeration, unbelievable and might be untrue.

The 19th century coolies have now become the twenty first century patrons and partners for Latin America. 

Today, the Chinese have become the single most important investor, creditor and the second largest trading partner for Latin America. The Chinese companies have become owners of the mines where the coolies used to work earlier. The Latin Americans have now realised that Cuento Chino is not a cuento do China… The story of China is not an exaggeration.

China is creating jobs and wealth for the Latin Americans who work hard to provide food to the Chinese people. The Latin Americans dig up deeper in the mines to supply ores and minerals to China and this helps China to continue as the Global manufacturing power. 

China’s investment in Latin America is estimated to be around 120 billion dollars. Brazil has received the bulk of the investment with 61 billion dollars followed by Peru-18 billion, Mexico-6 bn, Argentina-5 bn and Venezuela only 2 billion. 27 billion has gone into mining, 25 bn into oil and 13 billion into electricity sector. The target of investment is 250 billion dollars by 2025, as announced by the Chinese President in 2015 during his visit to Latin America.

The estimated Chinese credit to Latin America is 150 billion dollars. Of this, Venezuela has received 62 billion, Brazil-42 bn, Argentina-18 bn and Ecuador-17 bn. While the earlier credits had flowed into mining and oil, the recent credits are mostly for infrastructure and services.

The China-Latin America trade in 2017 was 257 billion dollars of which Chinese exports were 130 bn and imports 127 bn. The Chinese target is 500 billion dollars by 2025, according to the 2015 announcement by the Chinese President. China has overtaken European Union as the second largest trading partner of Latin America. China is the #1 trade partner for Brazil, Peru and Chile. 

There is a long term win-win complementarity in trade between China and Latin America. The top global exports of Latin America are crude oil, minerals and agro products. China is the leading importer of these items in the world and will continue to be so in the coming years. Latin America is well endowed with oil and minerals and lot of arable land with abundant water reserves. The region has the potential to increase the production and exports of oil and minerals and can increase its agricultural production which can feed another 500 million people outside the region. In contrast, China is losing millions of acres of agricultural land to urbanisation and industrialisation and faces water and pollution problems. So the Chinese see Latin America as a long term source of imports while the Latin Americans can count on China as a long term market for their exports.

In contrast to China, the market of United States for South America has become less important. The US is the principal market for Latin American crude oil exports. But thanks to the shale revolution, the US has become the largest producer of crude in the world now and has drastically reduced imports. The US has no need for so much minerals since the country has shifted its manufacturing to other less expensive countries including China. In the case of agro products the US is a competitor to soybeans and maize exports of Mercosur countries. 

In the 1980s, the US authorites and IMF had imposed the neoliberalistic “ Washington Consensus” policies on the Latin American countries which were transitioning from military dictatorships into democracies. These policies ruined the economies and pushed millions of people into poverty. The Latin Americans bitterly remember this period as the “ Lost Decade”. In contrast, the Latin Americans celebrated the first ten years of the new century as the “ Growth Decade” thanks to the prosperity resulting from the largescale Chinesedemand for commodities and the consequent high prices. The Latin American governments  had used the windfall profits for pro-poor policies with which they have pulled out 70 million people from below poverty lineinto middle class.

The US had exploited Latin America as its “backyard” since the Monroe Doctrine of 1823.  In the name of its “wars on communism, drugs, corruption and immigration’ the US has destabilised the region and undermined democracies and had created and supported military dictatorships. The drug business is a consumer driven business. Millions of Americans pay top dollars to continue their habit of drug consumption. If this is stopped, no outsider will find any profit in supplies. But the US government wrongly blames the producers of coca and the traffickers from Latin America. The US is destroying agricultural fields in Latin America with chemical sprays in the name of eradication of coca plants. On the other hand, the US is responsible for the killings of thousands of Latin Americans every day by the guns smuggled from US. The Latin Americans are frustrated with this hypocrisy and the destructive and negative agenda of US. In contrast, the Chinese agenda for Latin America is constructive and positive. The Chinese construct railways, roads, ports and power stations in the region. Latin America needs massive investment in infrastructure for its development, which China provides.  

While the Washington DC does the political destabilisation of Latin America, the Wall Street and its vulture funds cause havoc in the Latin American markets regularly and systematically. The Wall Street brings in hot money to take advantage of the high interest rates in Latin America periodically and make a quick buck. The money is pulled out suddenly and massively when the interest rate goes up in US or when other aveneues open up for higher profit margins. Such large scale withdrawals cause devaluation and foreign exchange crisis in the countries of the region which have been forced to remove capital controls by the Washington Consensus. 

The Wall Street firms encourage and advise the Latin American governments to issue dollar bonds and oversell them outside the region. When the bond issuing countries have difficulty in servicing the debt, the Wall Street and Washington DC bring in IMF as rescue. The IMF funds are used primarily to pay the creditors while the governments are forced to cut down budgets for social welfare, education and infrastructure. When Argentina rejected the IMF formula and did a successful restructuring on its own in 2002, the Wall Street and Washington DC had excommunicated Argentina from the international capital market and cut off all Fund-Bank resources. The vulture funds which held out against the debt restructuring kept harassing and blackmailing the Argentine government and even threatened to seize the bank accounts of Argentine embassies. They managed to seize  a prestigious Argentine naval vessel in Ghana through a fraudulent local court order. The naval ship was on a world good will tour and its seizure was a grave embarrassment for the country. President Cristina did not travel to US and Europe in the official Argentine plane since there was the risk of seizure of the aircraft by the vulture companies. She had to hire planes for the travels. 

The Chinese had come to the rescue of Argentina, Venezuela, Ecuador and Venezuela when the Washington-Wall Street Fund mafia blocked out international capital when these countries needed the most. The Chinese came to the rescue and provided emergency short term funds and currency swaps. But for the timely and generous Chinese rescue, these countries might have got into serious economic crisis and Venezuela might have collapsed years back.

Trump has been insulting and humiliating Mexicans and Latin Americans with his abuses. To add insult to this injury, the US has criticised El Salvador, Dominican Republic and Panama for their decision to recognise China in place of Taiwan. The US State Department has recalled its ambassadors to the three countries to show its displeasure, threatened aid cut and has advised the other countries in the region (such as Paraguay and Nicaragua) to keep up diplomatic relations with Taiwan. This has bewildered the Latin Americans since the US, UN and over 180 countries of the world have cut off diplomatic relations with Taiwan and recognised China. The Latin Americans see this as yet another attempt to make a fool of them.

Given the historic exploitation and hegemony of US, the Latin Americans welcome China as a relief to counter the US domination, to a limited extent. This is the first time in Latin American history since Monroe Doctrine that an outside power has established a massive presence challenging the US control of the region. The Latin Americans like to play the China card against US to get the best from both. The Latin American presidents who craved to be invited to the White House in the past, now  queue up to make pilgrimage to Beijing with business delegations to promote trade and investment.

Latin America is conscious of the downside and limitations of partnership with China. Firstly, they see it as a purely commercial transactional partner and nothing more. They detest the communist dictatorship of China, having come out of dictatorships themselves after terrible sufferings. They are suspicious of the non-transparent nature of Chinese activities and the overwhelming role of Chinese state companies and financial organisations. There is an enormous cultural and communication gap. They are also hurt by the flooding of less expensive Chinese products which have adversely affected domestic manufacturing sector. 

But the Latin Americans see that China is a manageable risk unlike US whose actions are beyond control. While the US has repeatedly invaded Latin American countries and changed regimes, the Chinese will never dare to do such atrocities in Latin America. The Latin Americans have the option to stop, reduce or reject Chinese credit and investment and manage the Chinese activities smartly. For example when the Chinese  looked around to buy hundreds of thousands of agricultural land, the governments of Brazil, Argentina and Uruguay changed their rules and imposed restrictions on acquisition of agricultural land by foreigners. The Chinese backed out. It may be noted here that these restrictions are only against new investors. They do not affect the ownership of hundreds of thousands of hectares of South American farmland by European and Americans who had invested before the new restrictions.

The Latin Americans would love to see an end to the unipolar world and welcome the rise of other powers to challenge US and minimise the harm and domination of US. At the same time, they would also like to reduce their overdependence on China and diversify their economic partnerships. In this context, they welcome more trade, investment and involvement of India in the region. 

Unfortunately, India has no plan, vision or trade target for Latin America, despite the emergence of the region as a large market for its exports and the region’s contribution to India’s energy and food security through supply of petroleum, vegetable oil and pulses.  

India’s credit to the region is just under 200 million dollars in contrast to the 150 billion Chinese credit. India’s total trade with Latin America is just about the same as China’s trade with Chile which is 36 billion dollars. The Latin Americans hope that India would wake up and take advantage of the opportunities for business in the large and growing middle-income market of Latin America with 620 million people.

India could set a target of 25 billion dollars of export (from 12 billion in 2017), investment (from the current 13 billion) and credit of 5 billion ( from 200 million so far) by the year 2025. This could be announced during the visit of Prime Minister Modi to Buenos Aires in November 2018 for the G-20 summit.

The Wire published an edited version of this article in 

https://thewire.in/world/china-latin-america-trade-india-us