Offshore finance: more than £12tn siphoned out of emerging countries

Analysis shows £1.3tn of assets from Russia sitting offshore, as David Cameron prepares to host anti-corruption summit.

 

Russian banknotes. A detailed 18-month research project has uncovered a sharp increase in the capital flowing offshore from developing countries, in particular Russia and China. Photograph: Maxim Zmeyev/Reuters


Heather Stewart in The Guardian


More than $12tn (£8tn) has been siphoned out of Russia, China and other emerging economies into the secretive world of offshore finance, new research has revealed, as David Cameron prepares to host world leaders for an anti-corruption summit.

A detailed 18-month research project has uncovered a sharp increase in the capital flowing offshore from developing countries, in particular Russia and China.

David Cameron under pressure to end tax haven secrecy



The analysis, carried out by Columbia University professor James S Henry for the Tax Justice Network, shows that by the end of 2014, $1.3tn of assets from Russia were sitting offshore. The figures, which came from compiling and cross-checking data from global institutions including the International Monetary Fund and the United Nations, follow the Panama Papers revelations of global, systemic tax avoidance.

Chinese citizens have $1.2tn stashed away in tax havens, once estimates for Hong Kong and Macau are included. Malaysia, Thailand, and Indonesia – all of which have seen high-profile corruption scandals in recent years – also come high on the list of the worst-affected countries.

Henry, a former chief economist at consultancy McKinsey, told the Guardian his research underlines the fact that tax-dodging is not the only motivation for using tax havens – criminals and kleptocrats also make prolific use of their services, to keep their wealth secret, and their money safe. He said the list of users of offshore jurisdictions is like the cantina scene in Star Wars, where a motley group of unsavoury intergalactic characters is assembled. Henry said: “It’s like the Star Wars scene: you have the tax dodgers in one corner, the arms dealers in another, the kleptocrats over here. There’s also those using tax havens for money laundering, or fraud.”

Oil-rich countries including Nigeria and Angola feature as key sources of offshore funds, the research finds, as do Brazil and Argentina. Henry said the owners of this hidden capital are often so keen to secure secrecy and avoid their wealth being appropriated back home, that they are willing to accept paltry financial returns rather than investing it in ways that might promote economic development. Charging just 1% tax on this mountain of offshore wealth would yield more than $120bn a year — almost equivalent to the entire $131bn global aid budget.

The TJN is urging Cameron to push for agreement on a series of issues at this week’s summit, including a tougher crackdown on the banks, lawyers and other professionals who facilitate financial secrecy; and an obligation on all politicians to make their personal financial situation transparent.

The prime minister published a summary of his tax affairs last month, after the Panama Papers leaks revealed that his father had set up an investment fund, Blairmore, based in the offshore jurisdiction of Panama.

Henry argued that when senior figures in authoritarian states such as China use tax havens to guard their money safely, they are effectively free-riding on the legal and financial systems of other countries. “All of these felons and kleptocrats are in a way essentially dependent on the rule of law when it comes to protecting their money,” he said.

He said it was not just exotic locations such as the Cayman Islands where money can effectively be hidden, but also some US states, such as Delaware, where it is possible for foreign investors to start up and run a company without making clear its ultimate ownership – something all UK firms will have to do from later this year.

Argentina defaults as debt talks break down

Finance minister Axel Kicillof said Argentina would not be held to ransom by bondholders demanding to be paid in full

• Julia Kollewe and Graeme Wearden
• theguardian.com, Thursday 31 July 2014 11.25 BST

Argentina's economy minister Axel Kicillof speaks to the media at a press conference in New York July 30, 2014. Photograph: CARLO ALLEGRI/REUTERS

Argentina has fallen into default for the second time since 2001 after last-minute talks with "vulture" bondholders in New York failed to produce a deal overnight.

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At a dramatic press conference in New York on Wednesday night, Argentinian finance minister Axel Kicillof declared that Argentina would not be held to ransom by the holdout bondholders, who are demanding to be paid in full on debt which the country defaulted on in 2001.

Kicillof said: "We're not going to sign an agreement that jeopardises the future of all Argentines. Argentines can remain calm because tomorrow will just be another day and the world will keep on spinning."

Shortly before the deadline, Daniel Pollack, the court-appointed mediator, confirmed that the talks had broken down. "Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default."

Earlier, the credit rating firm Standard & Poor's declared that Argentina was now in "selective default". The default comes two months after a US court ruled that Argentina must pay the holdout bondholders in full, saddling it with a bill of more than $1.5bn.

The vast majority (more than 90% of bondholders) agreed to restructure debts in 2005 and 2010, taking a big "haircut" – a reduction of more than 70% in the value of their investments in return for regular interest payments.

Argentina's last default, in late 2001, came after a major political and economic crisis; scores were killed in riots, and both the president and the economy minister resigned. But there was little sign of a panic in global financial markets this time, as the default was widely expected. However, it could add more pain for Argentinians, with the economy already in recession.

Pollack said: "The full consequences of default are not predictable, but they certainly are not positive."

The holdouts – branded "vulture funds" by Argentinian president Cristina Fernández de Kirchner – are US hedge funds spearheaded by the billionaire Paul Singer's NML Capital, an affiliate of Elliott Management, and Aurelius Capital Management.

Steve Ellis, portfolio manager at Fidelity emerging market debt fund, said: "We expect contagion to other markets to be fairly limited. This is a highly technical legal case and a selective default.

"Argentina was isolated from international capital markets for years so we don't expect the default to distort any global capital flows. However, there will be remaining risks around a longer term default which would have negative impacts on the Argentine economy. At this stage, the market will likely price in a delay of payments should the government continue to deposit coupon payments until they can reach a deal with the holdouts in 2015."

Transatlantic Trade and Investment Partnership: Wake up people, we’re being shafted

A global ban on left wing politics

George Monbiot

Remember that referendum about whether we should create a single market with the United States? You know, the one that asked whether corporations should have the power to strike down our laws? No, I don’t either. Mind you, I spent ten minutes looking for my watch the other day, before I realised I was wearing it. Forgetting about the referendum is another sign of ageing. Because there must have been one, mustn’t there? After all that agonising over whether or not we should stay in the European Union(1), the government wouldn’t cede our sovereignty to some shadowy, undemocratic body without consulting us. Would it?

The purpose of the Transatlantic Trade and Investment Partnership is to remove the regulatory differences between the US and European nations. I mentioned it a couple of weeks ago(2). But I left out the most important issue: the remarkable ability it would grant big business to sue the living daylights out of governments which try to defend their citizens. It would allow a secretive panel of corporate lawyers to overrule the will of parliament and destroy our legal protections. Yet the defenders of our sovereignty say nothing.

The mechanism is called investor-state dispute settlement. It’s already being used in many parts of the world to kill regulations protecting people and the living planet.

The Australian government, after massive debates in and out of parliament, decided that cigarettes should be sold in plain packets, marked only with shocking health warnings. The decision was validated by the Australian supreme court. But, using a trade agreement Australia struck with Hong Kong, the tobacco company Philip Morris has asked an offshore tribunal to award it a vast sum in compensation for the loss of what it calls its intellectual property(3).

During its financial crisis, and in response to public anger over rocketing charges, Argentina imposed a freeze on people’s energy and water bills (does this sound familiar?). It was sued by the international utility companies whose vast bills had prompted the government to act. For this and other such crimes, it has been forced to pay out over a billion dollars in compensation(4).

In El Salvador, local communities managed at great cost (three campaigners were murdered) to persuade the government to refuse permission for a vast gold mine which threatened to contaminate their water supplies. A victory for democracy? Not for long perhaps. The Canadian company which sought to dig the mine is now suing El Salvador for $315m – for the loss of its anticipated future profits(5).

In Canada, the courts revoked two patents owned by the US drugs firm Eli Lilly, on the grounds that the company had not produced enough evidence that they had the beneficial effects it claimed. Eli Lilly is now suing the Canadian government for $500m, and demanding that Canada’s patent laws are changed(6).

These companies (and hundreds of others) are using the investor-state dispute rules embedded in trade treaties signed by the countries they are suing. The rules are enforced by panels which have none of the safeguards we expect in our own courts(7,8). The hearings are held in secret. The judges are corporate lawyers, many of whom work for corporations of the kind whose cases they hear. Citizens and communities affected by their decisions have no legal standing. There is no right of appeal on the merits of the case. Yet they can overthrow the sovereignty of parliaments and the rulings of supreme courts.

You don’t believe it? Here’s what one of the judges on these tribunals says about his work. “When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all … Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.”(9)

There are no corresponding rights for citizens. We can’t use these tribunals to demand better protections from corporate greed. As the Democracy Centre says, this is “a privatised justice system for global corporations.”(10)

Even if these suits don’t succeed, they can exert a powerful chilling effect on legislation. One Canadian government official, speaking about the rules introduced by the North American Free Trade Agreement, remarked, “I’ve seen the letters from the New York and DC law firms coming up to the Canadian government on virtually every new environmental regulation and proposition in the last five years. They involved dry-cleaning chemicals, pharmaceuticals, pesticides, patent law. Virtually all of the new initiatives were targeted and most of them never saw the light of day.”(11) Democracy, as a meaningful proposition, is impossible under these circumstances.
This is the system to which we will be subject if the transatlantic treaty goes ahead. The US and the European Commission, both of which have been captured by the corporations they are supposed to regulate, are pressing for investor-state dispute resolution to be included in the agreement.

The Commission justifies this policy by claiming that domestic courts don’t offer corporations sufficient protection because they “might be biased or lack independence.”(12) Which courts is it talking about? Those of the US? Its own member states? It doesn’t say. In fact it fails to produce a single concrete example demonstrating the need for a new, extra-judicial system. It is precisely because our courts are generally not biased or lacking independence that the corporations want to bypass them. The EC seeks to replace open, accountable, sovereign courts with a closed, corrupt system riddled with conflicts of interest and arbitrary powers.
Investor-state rules could be used to smash any attempt to save the NHS from corporate control, to re-regulate the banks, to curb the greed of the energy companies, to renationalise the railways, to leave fossil fuels in the ground. These rules shut down democratic alternatives. They outlaw left-wing politics.

This is why there has been no attempt by our government to inform us about this monstrous assault on democracy, let alone consult us. This is why the Conservatives who huff and puff about sovereignty are silent. Wake up people, we’re being shafted.

We need a fair system for restructuring sovereign debt

If the debt vultures have their way, there will never be a fresh start for indebted countries - and no one will agree to restructuring

• 
• • Joseph Stiglitz
  • theguardian.com, Wednesday 4 September 2013 17.48 BST

If the debt vultures have their way, there will never be a fresh start for indebted countries - and no one will agree to restructuring. Photograph: Joe Petersburger/Getty Images/National Geographic Creative

A recent decision by a United States appeals court threatens to upend global sovereign debt markets. It may even lead to the US no longer being viewed as a good place to issue sovereign debt. At the very least, it renders non-viable all debt restructurings under the standard debt contracts. In the process, a basic principle of modern capitalism – that when debtors cannot pay back creditors, a fresh start is needed – has been overturned.

The trouble began a dozen years ago, when Argentina had no choice but to devalue its currency and default on its debt. Under the existing regime, the country had been on a rapid downward spiral of the kind that has now become familiar in Greece and elsewhere in Europe. Unemployment was soaring, and austerity, rather than restoring fiscal balance, simply exacerbated the economic downturn.

Devaluation and debt restructuring worked. In subsequent years, until the global financial crisis erupted in 2008, Argentina's annual GDP growth was 8% or higher, one of the fastest rates in the world.

Even former creditors benefited from this rebound. In a highly innovative move, Argentina exchanged old debt for new debt – at about 30 cents on the dollar or a little more – plus a GDP-indexed bond. The more Argentina grew, the more it paid to its former creditors.

Argentina's interests and those of its creditors were thus aligned: both wanted growth. It was the equivalent of a "Chapter 11" restructuring of American corporate debt, in which debt is swapped for equity, with bondholders becoming new shareholders.

Debt restructurings often entail conflicts among different claimants. That is why, for domestic debt disputes, countries have bankruptcy laws and courts. But there is no such mechanism to adjudicate international debt disputes.

Once upon a time, such contracts were enforced by armed intervention, as Mexico, Venezuela, Egypt, and a host of other countries learned at great cost in the nineteenth and early twentieth centuries. After the Argentine crisis, President George W. Bush's administration vetoed proposals to create a mechanism for sovereign-debt restructuring. As a result, there is not even the pretence of attempting fair and efficient restructurings.

Poor countries are typically at a huge disadvantage in bargaining with big multinational lenders, which are usually backed by powerful home-country governments. Often, debtor countries are squeezed so hard for payment that they are bankrupt again after a few years.

Economists applauded Argentina's attempt to avoid this outcome through a deep restructuring accompanied by the GDP-linked bonds. But a few "vulture" funds – most notoriously the hedge fund Elliott Management, headed by the billionaire Paul E. Singer – saw Argentina's travails as an opportunity to make huge profits at the expense of the Argentine people. They bought the old bonds at a fraction of their face value, and then used litigation to try to force Argentina to pay 100 cents on the dollar.

Americans have seen how financial firms put their own interests ahead of those of the country – and the world. The vulture funds have raised greed to a new level.

Their litigation strategy took advantage of a standard contractual clause (called pari passu) intended to ensure that all claimants are treated equally. Incredibly, the US Court of Appeals for the Second Circuit in New York decided that this meant that if Argentina paid in full what it owed those who had accepted debt restructuring, it had to pay in full what it owed to the vultures.

If this principle prevails, no one would ever accept debt restructuring. There would never be a fresh start – with all of the unpleasant consequences that this implies.

In debt crises, blame tends to fall on the debtors. They borrowed too much. But the creditors are equally to blame – they lent too much and imprudently. Indeed, lenders are supposed to be experts on risk management and assessment, and in that sense, the onus should be on them. The risk of default or debt restructuring induces creditors to be more careful in their lending decisions.

The repercussions of this miscarriage of justice may be felt for a long time. After all, what developing country with its citizens' long-term interests in mind will be prepared to issue bonds through the US financial system, when America's courts – as so many other parts of its political system – seem to allow financial interests to trump the public interest?

Countries would be well advised not to include pari passu clauses in future debt contracts, at least without specifying more fully what is intended. Such contracts should also include collective-action clauses, which make it impossible for vulture funds to hold up debt restructuring. When a sufficient proportion of creditors agree to a restructuring plan (in the case of Argentina, the holders of more than 90% of the country's debt did), the others can be forced to go along.

The fact that the International Monetary Fund, the US Department of Justice, and anti-poverty NGOs all joined in opposing the vulture funds is revealing. But so, too, is the court's decision, which evidently assigned little weight to their arguments.

For those in developing and emerging-market countries who harbor grievances against the advanced countries, there is now one more reason for discontent with a brand of globalization that has been managed to serve rich countries' interests (especially their financial sectors' interests).

In the aftermath of the global financial crisis, the United Nations Commission of Experts on Reforms of the International Monetary and Financial System urged that we design an efficient and fair system for the restructuring of sovereign debt. The US court's tendentious, economically dangerous ruling shows why we need such a system now.

Think there's no alternative? Latin America has a few

Not only have leaders from Ecuador to Venezuela delivered huge social gains – they keep winning elections too

• 
• • Seumas Milne
  • The Guardian, Tuesday 19 February 2013 22.00 GMT

Given what's been delivered to the majority, it's hardly surprising Latin America's social ­democratic and socialist ­governments keep getting re-elected. Illustration: Belle Mellor

 

Ever since the crash of 2008 exposed the rotten core of a failed economic model, we've been told there are no viable alternatives. As Europe sinks deeper into austerity, governing parties of whatever stripe are routinely rejected by disillusioned voters – only to be replaced by others delivering more welfare cuts, privatisation and inequality.

So what should we make of a part of the world where governments have resolutely turned their back on that model, slashed poverty and inequality, taken back industries and resources from corporate control, massively expanded public services and democratic participation – and keep getting re-elected in fiercely contested elections?

That is what has been happening in Latin America for a decade. The latest political leader to underline the trend is the radical economist Rafael Correa, re-elected as president of Ecuador at the weekend with an increased 57% share of the vote, while Correa's party won an outright majority in parliament.

But Ecuador is now part of a well-established pattern. Last October the much reviled but hugely popular Hugo Chávez, who returned home on Monday after two months of cancer treatment in Cuba, was re-elected president of Venezuela with 55% of the vote after 14 years in power in a ballot far more fraud-proof than those in Britain or the US. That followed the re-election of Bolivia's Evo Morales, Latin America's first indigenous president, in 2009; the election of Lula's nominated successor Dilma Rousseff in Brazil in 2010; and of Cristina Fernandez in Argentina in 2011.

Despite their differences, it's not hard to see why. Latin America was the first to experience the disastrous impact of neoliberal dogma and the first to revolt against it. Correa was originally elected in the wake of an economic collapse so devastating that one in 10 left the country. Since then his "citizen's revolution" has cut poverty by nearly a third and extreme poverty by 45%. Unemployment has been slashed, while social security, free health and education have been rapidly expanded – including free higher education, now a constitutional right – while outsourcing has been outlawed.

And that has been achieved not only by using Ecuador's limited oil wealth to benefit the majority, but by making corporations and the well-off pay their taxes (receipts have almost tripled in six years), raising public investment to 15% of national income, extending public ownership, tough renegotiation of oil contracts and re-regulating the banking system to support development.

Many of the things, in fact, that conventional "free market" orthodoxy insists will lead to ruin, but have instead delivered rapid growth and social progress. Correa's government has also closed the US military base at Manta (he'd reconsider, he said, if the US "let us put a military base in Miami"), expanded gay, disability and indigenous rights and adopted some of the most radical environmental policies in the world. Those include the Yasuni initiative, under which Ecuador waives its right to exploit oil in a uniquely biodiverse part of the Amazon in return for international contributions to renewable energy projects.

But what is happening in Ecuador is only part of a progressive tide that has swept Latin America, as social democratic and radical socialist governments have attacked social and racial inequality, challenged US domination and begun to create genuine regional integration and independence for the first time in 500 years. And given what's already been delivered to the majority, it's hardly surprising they keep getting re-elected.

It says more about the western media (and their elite Latin American counterparts) than governments such as Ecuador's and Venezuela's that they are routinely portrayed as dictatorial. Part of that canard is about US hostility. In the case of Ecuador, it's also been fuelled by fury at Correa's decision to give asylum to WikiLeaks founder Julian Assange, who faces sexual assault allegations in Sweden, over the threat of onward extradition to the US. In reality, the real anti-democratic menace comes from the US's own allies, who launched abortive coups against both Chávez and Correa – and successful ones in Honduras in 2009 and Paraguay last year.

Of course, Latin America's left-leaning governments have no shortage of failings, from corruption to crime. In Ecuador and elsewhere, tensions between the demands of development, the environment and indigenous rights have sharpened. And none of these experiences yet offer any kind of ready-made social or economic alternative model.

There is also a question whether the momentum of continental change can be maintained now that Chávez, who spearheaded it, is expected to stand down in the next few weeks. His anointed successor, the former trade unionist Nicolás Maduro, is in a strong position to win new elections. But neither he nor the charismatic Correa is likely to be able to match Chávez's catalytic regional role.
Latin America's transformation is nevertheless deeply rooted and popular, while a discredited right has little to offer. For the rest of the world, it makes a nonsense of the idea that five years into the crisis nothing can be done but more of the same. True, these are economies and societies at a very different stage of development, and their experiences can't simply be replicated elsewhere. But they have certainly shown there are multiple alternatives to neoliberal masochism – which win elections, too.

Fitch downgrades Argentina and predicts default

Credit rating agency Fitch has downgraded Argentina, which is locked in a court battle in New York over its debt, and said the country would probably default.

Also read Ratings Agencies - The Power of Modern Day Astrologers

Also read How could Greece and Argentina – the new 'debt colonies' – be set free?

Fitch also said that Argentina's economy has slowed sharply this year Photo: AFP

11:55PM GMT 27 Nov 2012

72 Comments

Fitch cut its long-term rating for Argentina to "CC" from "B," a downgrade of five notches, and cut its short-term rating to "C" from "B". A rating of "C" is one step above default, AP reported.

US judge Thomas Griesa of Manhattan federal court last week ordered Argentina to set aside $1.3bn for certain investors in its bonds by December 15, even as Argentina pursues appeals.

Those investors don't want to go along with a debt restructuring that followed an Argentine default in 2002. If Argentina is forced to pay in full, other holders of debt totaling more than $11bn are expected to demand immediate payment as well.

Argentine politicians, even those opposed to President Cristina Fernandez, have nearly unanimously criticized the judge's ruling as threatening the success of the debt relief that enabled Argentina to grow again.

Ratings by agencies like Fitch are used by investors to evaluate the safety of a country's debt. Lower ratings can make it more expensive for countries to borrow money on the bond market, exacerbating their financial problems. 

Argentina is in a deepening recession and is grappling with social unrest. Besides the court case, Fitch cited a "tense and polarized political climate" and public dissatisfaction with high inflation, weak infrastructure and currency.

Fitch also said that Argentina's economy has slowed sharply this year.

Of the two other major rating agencies, Standard & Poor's has a rating of "B-" for Argentina, five steps above default, and Moody's rates it "B3 negative", also five steps above default.

How could Greece and Argentina – the new 'debt colonies' – be set free?

If nations were able to go bankrupt like companies it would benefit everyone, especially society's poorest

• 
• • Ha-Joon Chang
  • The Guardian, Sunday 25 November 2012 19.30 GMT

Protesters wear chains in a protest against Greece's austerity measures. The burden of debt falls mostly on the weaker members of society. Photograph: Aris Messinis/AFP/Getty Images

Colonialism is back. Well, at least according to leading politicians of the two most famous debtor nations. Commenting on the EU's inability to deliver its end of the bargain despite the savage spending cuts Greece had delivered, Alexis Tsipras, the leader of the opposition Syriza party, said last week that his country was becoming a "debt colony". A couple of days later, Hernán Lorenzino, Argentina's economy minister, used the term "judicial colonialism" to denounce the US court ruling that his country has to pay in full a group of "vulture funds" that had held out from the debt restructuring that followed the country's 2002 default.

While their language was deliberately incendiary, these two politicians were making extremely important points. Tsipras was asking why most burdens of adjustment for bad loans have to fall on the debtor country and, within them, mostly on its weaker members. And he is right. As they say, it takes two to tango, so those who condemn Greece for imprudent borrowing should also condemn the imprudent lenders that made it possible.

Lorenzino was asking how we can let one court ruling in a foreign country in favour of one small group of creditors (who bought the debt in the secondary market) derail a painfully engineered process of national recovery. The absurdity of this situation becomes clear when we recall that, partly thanks to the default and subsequent debt restructuring,Argentina, expanding at close to 7% per year, has been the fastest growing Latin American economy between 2003 and 2011.

But there is far more at stake here than the national welfares of Greece and Argentina, important though they are. The Greek debt problem has dragged down not just Greece but the whole eurozone, and with it the world economy. Had the Greek debt been quickly reduced to a manageable level through restructuring, the eurozone would be in a much better shape today. In the Argentinian case, we are risking not just an end to Argentina's recovery but a fresh round of turmoil in the global financial market because of one questionable US court ruling.

Many people argue that, regrettable as they may be, such situations are unavoidable. However, when it comes to debt problems within our borders, we actually don't let the same situation develop. All national bankruptcy laws allow companies with too big a debt problem to declare themselves bankrupt. Once bankruptcy is declared, the debtor company and its creditors are forced to work together to reorganise the company's affairs, under clear rules.

First, a standstill is imposed on debt repayments – for as long as six months in the case of the debtor-friendly American bankruptcy law. Second, subject to the majority (or in some countries a super-majority of two thirds) of them agreeing, creditors are required to accept a debt reduction programme in return for a new company management strategy. This programme could involve outright reduction (or even cancellation) of debts, lowering of interest rates, and extension of the repayment period. Third, lawsuits by individual creditors are banned until there is an agreement, so that individual creditors cannot disrupt the restructuring process. Fourth, the claims of other stakeholders on the company are also taken into account, with wages being typically given "seniority" over debts.

Unfortunately, no mechanism like this exists for countries, which is what has made sovereign debt crises so difficult to manage. Because they don't have any legal protection from creditors in times of trouble, countries typically postpone the necessary restructuring of their economies by piling on more debts in the (usually unfulfilled) hope that the situation will somehow resolve itself. This makes the debt problem bigger than necessary.

What's more, because they cannot officially go bankrupt, countries face a stark choice. Either they default and risk exclusion in the international financial market (although countries can overcome it quickly, as Russia and Malaysia did in the late 1990s) or they have to opt for a de facto default, in which they pretend that they have not defaulted by making full repayments on their existing loans with money borrowed from public bodies, like the International Monetary Fund and the EU, while trying to negotiate debt restructuring.

The problem with this solution is that, in the absence of clear rules, the debt renegotiation process becomes lengthy, and can push the economy into a downward spiral. We have seen this in many Latin American countries in the 1980s, and we are seeing it today in Greece and other eurozone periphery economies.

Meanwhile, the absence of rules equivalent to the protection of wage claims in corporate bankruptcy law means that claims by weaker stakeholders – pensions, unemployment insurance, income supports – are the first to go. This creates social unrest, which then threatens recovery by discouraging investment.

It is not because people condoned defaulting per se that they came to introduce the corporate bankruptcy law. It was because they recognised that in the long run, creditors – and the broader economy, too – are likely to benefit more from reducing the debt burdens of companies in trouble, so that they can get a fresh start, than by letting them disintegrate in a disorderly way.

It is high time that we applied the same principles to countries and introduced a sovereign bankruptcy law.

Austerity has never worked

It's not just about the current economic environment. History shows that slashing budgets always leads to recession

• 
• • Ha-Joon Chang
  • guardian.co.uk, Monday 4 June 2012 22.14 BST

David Cameron and EC president, José Manuel Barroso, at a meeting of EU leaders in Brussels. Photograph: Lionel Bonaventure/AFP/Getty Images

Last week saw a string of bad economic news reports. The eurozone leaders seem unwilling or unable to change from their austerity policies, even as Greece and Spain fall apart and the core eurozone economies contract. Britain watches on as its economy is heading for the third consecutive quarter of contraction, with an unexpectedly sharp fall in manufacturing. Last week's jobs figures confirmed that the US recovery is stuttering. The largest developing economies that have so far provided some support for world demand levels – especially India and Brazil but even China – are slowing down too. Four years after the financial crisis began, many rich capitalist economies have not recovered their pre-crisis output levels.

Even more serious is the unemployment problem. The International Labour Organisation estimates there are 60 million fewer people employed worldwide than if the pre-crisis trend had continued. In countries like Spain and Greece, overall jobless rates are approaching 25%, with youth unemployment over 50%. Even in countries experiencing "milder" unemployment problems, like the US and the UK, between 8% and 10% are out of work. If we include those who have given up looking for jobs or those who are forced to work part-time for want of fulltime opportunities, "real" unemployment could be easily over 15% even in these countries.

The remedies on offer are well known. Reduce budget deficits by cutting spending – especially "unproductive" social welfare spending that reduces growth by making poor people less willing to work. Cut taxes at the top and deregulate business (euphemistically called "cutting red tape") so that the "wealth creators" have greater incentives to invest and generate growth; and make hiring and firing easier.

It is increasingly accepted that these policies are not working in the current environment. But less widespread is the recognition that there is also plenty of historical evidence showing that they have never worked. The same happened during the 1982 developing world debt crisis, the 1994 Mexican crisis, the 1997 Asian crisis, the Brazilian and the Russian crises in 1998, and the Argentinian crisis of 2002. All the crisis-stricken countries were forced (usually by the IMF) to cut spending and run budget surpluses, only to see their economies sink deeper into recession. Going back a bit further, the Great Depression also showed that cutting budget deficits too far and too quickly in the middle of a recession only makes things worse.

As for the need to cut social spending to revive growth, there is no historical evidence to support it either. From 1945 to 1990, per capita income in Europe grew considerably faster than in the US, despite its countries having welfare states on average a third larger than that of the US. Even after 1990, when European growth slowed down, countries like Sweden and Finland, with much larger welfare spending, grew faster than the US.

As for the belief that making life easier for the rich through tax cuts and deregulation is good for investment and growth, we need to remind ourselves that this was tried in many countries after 1980, with very poor results. Compared to the previous three decades of higher taxes and stronger regulation, investment (as a proportion of GDP) and economic growth fell in those countries. Also, the world economy in the 19th century grew much more slowly than in the high-tax, high-regulation era of 1945-80, despite the fact that taxes were much lower (most countries didn't even have income tax) and regulation thinner on the ground.

The argument on hiring and firing is also not grounded in historical evidence. Unemployment rates in the major capitalist economies were between 0% (some years in Switzerland) and 4% from 1945-80, despite increasing labour market regulation. There were more jobless people during the 19th century, when there was effectively no regulation on hiring and firing.

So, if the whole history of capitalism, and not just the experiences of the last few years, shows that the supposed remedies for today's economic crisis are not going to work, what are our political and economic leaders doing? Perhaps they are insane – if we follow Albert Einstein's definition of insanity as "doing the same thing over and over again and expecting different results". But the more likely explanation is that, by pushing these policies against all evidence, our leaders are really telling us that they want to preserve – or even intensify, in areas like welfare policy – the economic system that has served them so well in the past three decades.

For the rest of us, the time has come to choose whether we go along with that agenda or make these leaders change course.

Do we want a society where 50% of young people are kept out of work in order to bring the deficit down from 9% of GDP to 3% in three years? A society in which the rich have to be made richer to work harder (at their supposed jobs of investing and creating wealth) while the poor have to be made poorer in order to work harder? Where a tiny minority (often called the 1% but more like the 0.1% or even 0.01%) control a disproportionate, and increasing, share of everything – not just income and wealth but also political power and influence (through control of the media, thinktanks, and even academia)?

Maybe we do, but these choices need to be made consciously, rather than by default. The time has come to choose the kind of society we want to live in.

Naomi Klein - The Shock Doctrine: The Rise of Disaster Capitalism

Argentina Re-Nationalises an Oil Company

Standard & Poor's puts Argentina on 'negative watch' over YPF nationalisation plan

Standard & Poor's has put a "negative watch" on Argentina's credit rating, citing "rising restrictions to international trade" and "steps to nationalise oil company YPF" as reasons for the move.

Women walk past a poster that reads "CFK - YPF. They're ours, they're Argentine" in Buenos Aires last week. Photo: Reuters

By Fiona Govan, in Madrid

11:03PM BST 23 Apr 2012

41 Comments

 

Despite affirming its "B" credit rating, S&P added that the South American country's recent actions "could exacerbate existing weaknesses in the economy", pointing to high inflation and increasingly rigid government expenditure.

The news came after Spain’s Repsol threatened legal action against any company that attempts to invest in YPF following its expropriation by Argentina last week, as the government expressed determination to “pay nothing at all” in compensation to the Spanish oil company.

The move would discourage external partners from providing the investment YPF needs to exploit vast shale oil deposits discovered within the Latin American country and is the latest attempt by Repsol to fight back against the illegal seizure of its subsidiary.

“We reserve the right to take legal action against any party investing in the YPF and its assets following the unlawful expropriation of the company,” Kristian Rix, a spokesman for Repsol in Madrid, told the Daily Telegraph on Monday.

The Spanish energy company believes billions of dollars are required to develop Argentina’s prospects including at least €25bn a year over the next decade to exploit the Vaca Muerta shale discovery made last year.

Julio De Vido, Argentina’s Planning Minister has already approached Brazil's state-run oil company Pertobras over investment in YPF and plans to contact other foreign oil companies including Exxon, Chevron and ConocoPhilips.

The development comes amid yet more rhetoric from Argentina as government sources insisted the offer of compensation would be “zero pesos”.

Shares in Repsol and Spanish builder Sacyr Vallehermoso, which owns a 10pc stake in the company, fell by 4.7pc and 10.7pc respectively on Monday after government sources quoted in Argentina’s daily newspaper La Nacion said the government was “determined to pay nothing at all to Repsol”.

Antonio Brufau, CEO of Repsol has argued that its YPF stake had a value of $10.5bn.
“They are looking into and finding out everything on the management of Repsol: irregularities, lack of investment, defective technical plans, financial and accounting issues. There is a debt of $9bn,” an unnamed official told the newspaper.

The government is assuming that any legal action processed through international tribunals could take five or six years, confided the source.

Meanwhile, details of the aggressive tactics employed by the government of Cristina Fernandez de Kirchner towards Spanish executives at YPF during the takeover emerged in a briefing issued by Spain’s foreign office to all its embassies fermenting hostilities between the two countries.

Mr de Vido and Axel Kicillof, the deputy economy minister, arrived at company headquarters with armed security guards who used “physical violence and threats” to force Spanish YPF employees from the building giving them five minutes to collect their personal belongings, the internal memo said.

Spanish YPF executives were then “hunted down” for “harsh interrogation” and they and their families sought refuge at the home of a senior executive awaiting repatriation to Spain.

In addition, eyebrows were raised over the state appointment of one of new managers of YPF. Exequiel Espinosa, the head of state oil company Enarsa, was once embroiled in a corruption scandal that threatened to derail Mrs Kirchner’s campaign for presidency in 2007.

Mr Espinosa was one of the Argentine officials on board a plane carrying Guido Antonini, a Venezuelan businessman who was caught landing in Buenos Aires with a suitcase of $800,000 allegedly destined for Mrs Kirchner’s campaign.

The matter forced the resignation of Claudio Uberti, an Argentine government official involved in trade and investment deals with Venezuela and cost Diego Uzcategui, president of Venezuela oil company PDVSA as both were on board the plane.

But Mr Espinosa, who was also one of the eight passengers on the private jet hired by Enarsa, survived the association unscathed.

“He’s a complete Kichnerista crony and now he’s in charge of exploration and production at YPF,” said a source connected to the Latin American energy industry.

Repsol may fight a move by the Eskenazi family to buy back shares in YPF citing a “force majeure” argument to declare the agreement void.

The company could argue that the agreement to buy back Eskenazi shares in the event that Repsol was to lose its majority stake was not applicable in the context of expropriation.

It also emerged on Monday that Argentine officials had searched a property used by Mr Braufau in Buenos Aires, seizing computers and documents apparently without an official court order.

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Argentina's oil grab is timely retort to rampaging capitalism

Cristina Fernández's actions, however clumsy, are part of a worldwide reaction to exploitation by business and the rich

• 
• • Will Hutton
  • The Observer, Sunday 22 April 2012

Cristina Fernández's move was populist and clumsy, but perfectly understandable. Photograph: Daniel Garcia/AFP/Getty Images

Suppose the British government knew that a key shareholder in Centrica, our last great British energy company and owner of British Gas, was to sell its stake to Gazprom, so making Russian state ownership inevitable. I hope that, in this scenario, the government would expand the provision of the Enterprise Act that allows Britain to block takeovers that are against the national interest to include gas and nuclear power. (The act is currently confined to defence, financial services and the media.) I'm pretty certain that Centrica chairman Sir Roger Carr, also president of the CBI, shares the same view. No country can be indifferent to the ownership of strategic assets and thus the use to which they might be put. Its first obligation is to the well-being of its citizens.

The Argentinian government was faced with just this dilemma last week. YPF is its national oil and gas company, which it sold to the Spanish oil company Repsol for $15bn in 1999 as part of its privatisation drive. It has not been a great deal for either party. Argentinian oil and gas production has slumped, exploration for new reserves has been run down and this oil-rich country is now an oil importer, with Repsol accused of looting the company and betraying its obligations.

Repsol's excuse is that Argentinian price controls are absurdly tough. It has wanted to sell its holding for some time and last July finally found a potential buyer: the Chinese state oil company Sinopec. On Monday, fearing that the deal was about to be done, the Argentinian government seized the lion's share of Repsol's stake to get majority control. Better that YPF is owned by the Argentinian government than the Chinese Communist party is their reasoning.

Many governments would have done the same. Ownership matters. Yet Argentina has been roundly condemned – the EU, Spain, Mexico and even Britain have all weighed in. The Economist thunders that President Cristina Fernández's antics must not go unpunished; nationalisation is a sin beyond redemption. The inference is that Repsol should have been allowed freely to dispose of its shares to whichever buyer and at the best price it could achieve. Argentina and its citizens have no right to intervene.

Ms Fernández was certainly high-handed and very arbitrary. She only seized enough shares from Repsol to secure 51% control and has yet to say what the state will pay in compensation; the other shareholders are hapless bystanders with their investment shredded. There is more than a whiff of shameless populism to her actions. But to portray Repsol as an injured innocent whose natural rights have been unfairly suborned is to traduce economic and political reality.

For too long, companies and the rich worldwide, egged on by American Republicans and British Tories, have shamelessly exploited the proposition that there is only one proper relationship between them and society: they do what they want on their own terms. And society must accept this because it is the sole route to "wealth generation". Capital exists above state and society.

Fernández's actions, however clumsy and unfair in their execution, are part of a growing worldwide reaction to the excesses that this proposition has brought. Repsol does not, and did not, have a God-given right to sell control in YPF to whomever it pleases while Argentina's interests can go hang. It exists in a symbiotic relationship with the society in which it trades. The right to trade and to own are privileges that come with reciprocal obligations as the Ownership Commission, which I chaired, argued earlier this year. They cannot exist in a vacuum because companies' actions have profound effects.

Moreover, companies, especially energy companies, need public agencies to help mitigate the risk of undertaking huge investments in a world where the future is unknowable. Across the globe, business and the rich insist on denying these elementary truths. Now they are reaping the whirlwind as a hostile reaction gathers pace worldwide. Capitalism's self-appointed custodians have become its worst enemies.

It is the driving force behind the Occupy Movement. It is why Jean Luc Melénchon, the hard left French presidential candidate, has had such a successful election campaign. It is why so many governments are co-ordinating their investigation into Amazon, the company paying negligible tax on its worldwide profits. It is why President Obama has adopted the Buffet tax on millionaires as a popular part of his re-election campaign. It is why George Osborne felt he had to balance his high-risk reduction in the top rate of income tax to 45%with a passionate declaration of war on the rich evading tax.

The reaction is long overdue and is producing some long-needed corrections. For example, in the last fortnight alone, Goldman Sachs' Lloyd Blankfein, Barclays' Bob Diamond and Citibank's Vikram Pandit have all faced angry shareholders, responding to the new mood, protesting about the extravagance of their bonuses compared to their institutions' paltry performance. They are being forced to accept less. Proportionality in top pay is beginning to be restored, if still a long way off.

But the mood needs to be channelled. Argentina may have done everyone a service by forcibly reminding global business that there are unpleasant consequences for neglecting economic and social responsibilities, but summary nationalisation without compensation is hardly a solid template for the future. It is a harbinger of Chinese-style arbitrary government; a move from crony capitalism to crony statism. It is time to reassert that while capitalism may be a proven route to prosperity, it only works in a complex interdependence with the state and society. There have to be rules at home and abroad to make a desirable world of open borders, free trade and free business work. Taxes have to be paid rather than evaded. Pay has to be proportional to contribution. Labour leader Ed Miliband was roundly and universally criticised as a leftist innocent just seven months ago when he differentiated between good and bad capitalism; now he looks extraordinarily prescient.

If more of his party – especially the shadow cabinet – would rally to his cause, there is a phenomenal political opportunity. The mood is changing. It needs to be channelled: the creation of a new and different compact with business, finance and the rich. It is what electorates across the world want to see. President Fernández, in her gauche way, has tapped into a global mood.

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Argentina's critics are wrong again about renationalising oil

In taking back oil and gas company YPF, Argentina's state is reversing past mistakes. Europe is in no position to be outraged

• 
• • Mark Weisbrot
  • guardian.co.uk, Wednesday 18 April 2012 11.42 BST 
  • 
    

Argentinia's president, Cristina Kirchner, announces that the oil company YPF is subject to expropriation. Photograph: Daniel Garcia/AFP/Getty Images

The Argentinian government's decision to renationalise the oil and gas company YPF has been greeted with howls of outrage, threats, forecasts of rage and ruin, and a rude bit of name-calling in the international press. We have heard all this before.

When the government defaulted on its debt at the end of 2001 and then devalued its currency a few weeks later, it was all doom-mongering in the media. The devaluation would cause inflation to spin out of control, the country would face balance of payments crises from not being able to borrow, the economy would spiral downward into deeper recession. Then, between 2002 and 2011, Argentina's real GDP grew by about 90%, the fastest in the hemisphere. Employment is now at record levels, and both poverty and extreme poverty have been reduced by two-thirds. Social spending, adjusted for inflation, has nearly tripled. All this is probably why Cristina Kirchner was re-elected last October in a landslide victory.

Of course this success story is rarely told, mostly because it involved reversing many of the failed neoliberal policies – that were backed by Washington and its International Monetary Fund – that brought the country to ruin in its worst recession of 1998-2002. Now the government is reversing another failed neoliberal policy of the 1990s: the privatisation of its oil and gas industry, which should never have happened in the first place.

There are sound reasons for this move, and the government will most likely be proved right once again. Repsol, the Spanish oil company that currently owns 57% of Argentina's YPF, hasn't produced enough to keep up with Argentina's rapidly growing economy. From 2004 to 2011, Argentina's oil production has actually declined by almost 20% and gas by 13%, with YPF accounting for much of this. And the company's proven reserves of oil and gas have also fallen substantially over the past few years.

The lagging production is not only a problem for meeting the needs of consumers and businesses, it is also a serious macroeconomic problem. The shortfall in oil and gas production has led to a rapid rise in imports. In 2011 these doubled from the previous year to $9.4bn, thus cancelling out a large part of Argentina's trade surplus. A favourable balance of trade has been very important to Argentina since its default in 2001. Because the government is mostly shut out of borrowing from international financial markets, it needs to be careful about having enough foreign exchange to avoid a balance of payments crisis. This is another reason that it can no longer afford to leave energy production and management to the private sector.

So why the outrage against Argentina's decision to take – through a forced purchase – a controlling interest in what for most of the enterprise's history was the national oil company? Mexico nationalised its oil in 1938, and, like a number of Opec countries, doesn't even allow foreign investment in oil. Most of the world's oil and gas producers, from Saudi Arabia to Norway, have state-owned companies. The privatisations of oil and gas in the 1990s were an aberration; neoliberalism gone wild. Even when Brazil privatised $100bn of state enterprises in the 1990s, the government kept majority control over energy corporation Petrobras.

As Latin America has achieved its "second independence" over the past decade-and-a-half, sovereign control over energy resources has been an important part of the region's economic comeback. Bolivia renationalised its hydrocarbons industry in 2006, and increased hydrocarbon revenue from less than 10% to more than 20% of GDP (the difference would be about two-thirds of current government revenue in the US). Ecuador under Rafael Correa greatly increased its control over oil and its share of private companies' production.

So Argentina is catching up with its neighbours and the world, and reversing past mistakes in this area. As for their detractors, they are in a weak position to be throwing stones. The ratings agencies threatening to downgrade Argentina – should anyone take them seriously after they gave AAA ratings to worthless mortgage-backed junk during the housing bubble, and then pretended that the US government could actually default? And as for the threats from the European Union and the rightwing government of Spain – what have they done right lately, with Europe caught in its second recession in three years, nearly halfway through a lost decade, and with 24% unemployment in Spain?

It is interesting that Argentina has had such remarkable economic success over the past nine years while receiving very little foreign direct investment, and being mostly shunned by international financial markets. According to most of the business press, these are the two most important constituencies that any government should make sure to please. But the Argentinian government has had other priorities. Maybe that's another reason why Argentina gets so much flak.