By: David A. Smith
[Continued from yesterday’s Part 1.]
As we saw in yesterday’s Part 1, in complex systems like cities, government, and housing, success looks easy only after the fact, and invites tinkering with the finely balanced elements of that success.
See? Nothing to it!
Indeed, many there are who believe that bounty exists for their personal deployment, and who are then infuriated when the bounty disappears, such as Kristina Fernandez de Kirchner, Argentina’s erstwhile President whose eight year run to ruin only recently came to an end (in part because of the unthanked self-interest of financial investors) because she never listened to The rime of the Argent manager: Part 1, Now wherefore stopp’st thou me?:
“Why blogg’st thou me?” asks the helpless reader, paralyzed from clicking away
Argument: Driven by storms to the cold Country
At the very end of February occurred a remarkable event, reported erroneously in The New York Times (February 29, 2016):
Argentina has agreed to pay $4.65 billion to four hedge funds in a deal that could put an end to more than a decade of mudslinging and legal attacks that had cut the country off from global financial markets.
Though the Times’s phrasing is not actually false, it so jumbles effect and cause, martyring the perpetrator and smearing the righteous, that I will largely set it aside as a source of analysis, in favor of the measured accuracy of the Economist (print issue of March 5, 2016):
A deal with holdout bondholders is expensive, but worth it
Penance is seldom cheap.
And that phrase took me back, and back, and back … to the original albatross.
Argentina’s capital-markets ostracism, like the Mariner’s albatross, was inflicted in vengeance for a callous act of aggression, in Argentina’s case the unilateral default on its obligations, reported in Part 2, And I had done a hellish thing,
With its currency pegged to the dollar and the Brazilian real floating (depreciating) and thus becoming much more competitive, Argentina’s economy stagnated into a Greece-like permanent-deficit.
Previous AHI posts on Argentina’s defaulted bonds
Part III: I shot the albatross
That led to a bank run (sound familiar, Europe?, then a nationwide freeze on capital (the Corralito; sound familiar, Cyprus?), and a fiscal crisis – including defaulting on $93 billion of sovereign loans.
As always happens with sinking borrowers (whether Greece, Jefferson County, AL, or Puerto Rico), as the debtor’s fortunes dropped, many initial investors sold out at a loss to more risk-tolerant buyers, many of them hedge funds.
“Pricing in anticipated default”
When Argentina defaulted, it was facing creditors ready for default and ready to collect on their collateral anyhow:
In December 2001, the Argentine government, facing economic collapse, ceased paying its external debt. NML Capital, Ltd. (NML), a holder of Argentine bonds, filed suit in the Southern District of New York to collect on its bonds.
Though merely a district court, the Southern District of New York is globally famous, as it’s the court for Wall Street, and therefore the court for US capital markets.
The New York court’s judgment knocked Argentina out of US markets, and gave the claimants a bounty license to pursue Argentinian assets anywhere in the world, which they did with comic effect and impressive financial consequences, covered in Part 3, Nor any drop to drink, Part 4, And I blessed them unaware, resulting eventually in Cristina’s loss in the 2015 elections and the ascendancy of a reformer who does understand, reported in Part 5, To him my tale I teach:
As yesterday’s post ended, the Argent ship of state had replaced its economically mad captain, charted a course back to the more temperature political climes, and repented (legislatively, anyhow) of its previous seizures.
The previous holders of those bonds had sold them in despair, after Argentina had defaulted on the bonds and told its creditors it would only pay a deeply discounted recovery.
Once the laws have been scrapped, the government hopes to raise up to $15 billion through a bond issue, which it will use to pay the creditors. Some analysts doubt that the market can absorb such a large sum. But Argentina’s finance secretary, Luis Caputo, is bullish. “All the banks we’ve spoken with are confident that we can raise the money we need in the market,” he said.
Though Ms. Kirchner Fernandez never understood the connection, others did, and fortunately one of them is now Argentina’s president:
[President Macri] attacked the Kirchner administration for refusing to settle the issue, adding that by letting the dispute fester, interest had accumulated and investors had lost confidence.
“I am silently condemning you.”
“No, I am silently condemning you.”
“This is a giant step forward in this long-running litigation,” Daniel A. Pollack, the court-appointed mediator, said on Monday, adding that Argentina’s decision to settle was “nothing short of heroic”.
Pace the Times, the investors weren’t contesting the government’s debt obligations, they were contesting the government’s unilateral cancellation of its own obligations, which cancellation it kept rationalizing with ex post facto laws:
The injunction will not be lifted until Argentina repeals two laws that block agreements with the holdouts.
 The (Padlock Law), enacted in 2005 during the first round of debt restructuring, was intended to prevent Argentina from offering holdouts a better deal than that accepted by holders of restructured bonds.
 The (Sovereign Payment Law) of 2014 was a failed attempt to circumvent Mr Griesa’s injunction by re-routing payments to bondholders who had accepted a deal through Argentina or France.
Evidently the Times deserves to be buttonholed like the Mariner’s wedding-guest.
If Argentina’s present is the beginning of recovery, it may well be that Argentina’s recent past is in fact Chain’s future:
AHI posts on China’s urbanization and capital
August 23, 2010: Gleefully running up the debts, 2 parts, SOEs and development
October 28, 2011: A little learning is a dangerous thing, 2 parts, hukou and schools
July 29, 2012: I’m shocked, shocked, kickbacks in property development
August 26, 2012: Suburb stuffing, 2 parts, new ghost high-rise townks
To judge by China’s recent suppression of news, we may be seeing the early stages of The fall of China Mae: Part 1, Choose any number that fits:
When they start lying about economic data, short them.
– Smith’s Rule of Emerging-Market Investment
(Written March, 2016, backdated to June, 2007)
It looks so straightforward in hindsight
In January, 2008, I wrote a two-part blog post, Who’s next?, suggesting that Fannie Mae was overextended and due for a market correction. Though I believed my own prophecy, I never acted on it, because it was (at the time) not merely contrarian but virtually unthinkable.
Sources used in this post
Ms. Stevenson-Yang at 3:00-28:15, 51:45-57:45, 1:08:30-1:10:45, 1:16:40-1:19:00
Wall Street Journal (January 28, 2016; orange font)
In September, 2012, after four or five years of intermittently posting on China, I concluded a six-part on China’s urbanization and housing with the penultimate installment Between observation and doctrine, report doctrine:
Three premises that are breaking down (published September, 2012)
That approach is applicable in China today, where news about the economy is treated as a state secret, and propaganda is the only truth permitted, so that Part 2, Data disappears when it becomes negative, and Part 3, Everybody laughs at the official statistics:
China’s capitalism has been corrupt from inception; the symbiosis among state-owned banks, state-owned development companies, and municipalities profiting from high-rise land development. The evidence for is so massive that it may be regarded as completely proven.
As Anne Stevenson-Yang perceptively spotted, China’s rush to urbanization, fueled by state-owned enterprises developing property for their own financial liquidity, has destroyed China’s rural cryptobiotica.
The newly disenfranchised are now rootless, botanically and economically, and that can make them a mobile mass for a demagogue.
Whenever I write about imminent failure, I feel Cassandra’s ethical dilemma: on the one hand, I would like them to heed my advice, while on the other I am so narcissistically furious they are ignoring it I almost wish them to get smacked by reality.
Corruption is a double-edged sword: to make money in China, you must become corrupt because you engage with corrupt elected and appointed officials, but if the wheel turns then they expose your corruption to conceal theirs.
That has echoes of Fannie Mae, which contributed politically to the campaign of more 85% of the Members of Congress, all of whom came to see it as mom and apple pie.
What, us worry?
When that happens, you take your money out of the country, in anticipation of taking yourselves out of the country.
And yourselves, dear readers, out of this blog post and back to work.
AHI posts on global financial markets
June 26, 2006: Fannie Mae, the implied story, 7 parts, HUD OFA report
June 30, 2006: Part 5, Smoothing earnings with financial tricks, Gaming earnings
January 22, 2008: Who’s next?, 2 parts, Fannie Mae’s thin capital ratios
May 6, 2008: Catastrophe is a precondition to fundamental reform, 2 parts, US meltdown
December 4, 2012: Innumeracy precedes insolvency, 4 parts, San Bernardino bankrupt
October 7, 2013: The demise of deposit insurance, Russia investing in Cyprus
September 3, 2015: House and country, 9 parts, Russian oligarchs buying London