Posts Tagged ‘Government debt’

How did U.S. courts get to rule on Argentina?

June 27, 2014

A financial speculator won a decision in U.S. courts against the government of Argentina which could mean years of unemployment, high taxes, cutbacks in public services in that court.

I am mystified about a number of things in this case, including why the U.S. courts have jurisdiction over Argentina, a sovereign country, and how this decision is to be enforced.

Agentina's economic recovery.  Click to enlarge.

Double click to enlarge.

The background is that Argentina defaulted on its government bonds back in 2001.  Between 2005 and 2010, it worked out a deal with bondholders for them to write off about two-thirds of the debt in return for payment of the rest.

This was a good decision from the standpoint of the people of Argentina and, for the bondholders, better than nothing.

But the U.S. courts have negated that deal by ruling that a speculator who bought some of the original bonds for 20 cents on the dollar is entitled to be paid in full.

Default is a serious matter for nations, just as bankruptcy is a serious matter for individuals and corporations, but sometimes it is necessary.

For a head of state or a head of family, it is better to refuse to pay your creditors than to let people who depend on you go hungry.

Government defaults should, like individual bankruptcy, destroy or greatly harm the credit rating of the defaulter or bankrupt.   In practice, this rarely happens as often as it perhaps should.   Banks have so much more money than good ideas for investing it that they soon start lending again to defaulters and bankrupts.

Click to enlarge

Source: New York Times.  Click to enlarge

But how is it that U.S. courts have jurisdiction over a dispute between sovereign country and its creditors, who are based in many countries?  Is it because the payments go through the Bank of New York Mellon, which is in New York City?

How do U.S. courts propose to enforce their decision on a sovereign country.   Does their jurisdiction over New York City banks give them leverage over the whole world banking system?

It seems to me that this decision is a good reason for Argentina and other countries—including the BRIC group, Brazil, Russia, India and China—to create their own payments system outside U.S. jurisdiction.   Another thing I do not understand is why they have not done this already.  Is it because they fear being locked out of the old system in retaliation, before the new system is in place?

What’s needed is an international bankruptcy court, not under control of any government nor of banks, that could.  Its mission would be to resolve disputes between governments and their creditors when national leaders say they are unable to pay in full, in a way that was fair to the lenders without imposing undue hardships on peoples.

Such a court would have authority to free democratic governments of “odious” debts incurred by previous dictatorships.   Yes, that would make lending to dictatorships risky for banks.  It should be.


Supreme Court Dismisses Case Between Argentina and U.S. Vulture Funds by Mark Weisbrot, co-director of the Center for Economic and Policy Research, for US News.  Hat tip for the link to Bill Harvey.

Paul Singer v. Argentina: A Thriller Reaches Its Climax by Ignacio Portes, a Buenos Aires journalist, for Naked Capitalism.

US vulture fund ruling pushes Argentina towards a second bankruptcy by Philip Inman for The Guardian.   [Added 6/28/14]

What if the U.S. defaults on its debts?

October 14, 2013

What will happen if the U.S. government suspends interest payments on its bonds?

The answer is:  Nobody knows and no sensible person wants to find out.

U.S. Treasury bonds are regarded as the world’s most secure investment because the U.S. government is trusted to pay principal and interest without fail.  This is of enormous benefit to Americans, and this advantage is lost if the world comes to regard the U.S. government as just one more government that may or may not pay its obligations.

The least bad consequence is that the United States will have to offer higher interest rates, which will be a burden on U.S. taxpayers for decades and maybe longer.   Another is a freezeup of routine financial transactions in which Treasury bonds are used as collateral.

A worse possible consequence is that the U.S. dollar would cease to be the world’s reserve currency.  American leaders would have much less of a say in international economic policies.  Ordinary Americans would have less buying power even if their nominal paychecks stayed the same.

The worst case scenario is a severe United States and global recession, as the failure of the U.S. to pay its bills ripples through the economy and the U.S. government becomes unable to function.

I hope and believe that it won’t come to this.


Who holds the U.S. government’s IOUs?

October 14, 2013


We like to say that the U.S. government is financed by borrowing from China.  That’s either a metaphor or an exaggeration.  Most of the U.S. government debt is owed to Americans and much of it to government trust funds, but it is true that if Chinese and other foreign investors decided U.S. Treasury bonds were a bad investment, financing the U.S. government would become a lot harder.

Click on Federal Debt Basics by the Government Accountability Office and What a U.S. Default Would Mean for Pensions, China and Social Security by NPR’s Planet Money for an explanation of the chart.

Since the Federal Reserve Board holds $2.1 trillion worth of Treasury bonds, Florida Democratic Rep. Alan Grayson argued that the debt crisis could be postponed if the Fed simply forgave this debt or suspended collecting interest payments.  Click on Bernanke Could End the Debt Limit Crisis for Grayson’s argument.

I think this would work.   I think it would set a bad precedent.   I think it might be worth risking the bad precedent, but I’m pretty sure that the Federal Reserve Board thinks differently.

The real national debt

April 25, 2011

Double click to enlarge.

I just came across an interesting Wikipedia article, with facts and figures indicating that the federal government’s debt, which we hear so much about, is only a part of U.S. indebtedness.  We call the government’s debt the national debt, but it is small compared to the  total debts of financial institutions and of individual Americans.

The green strip on the chart is the federal government’s debt, the yellow strip is the total debt of American households, and the orange strip is the total debt of American financial institutions.

In 1946, the total US debt-to-GDP ratio was 150%, with two-thirds of that held by the federal government. Since 1946, the federal government’s debt-to-GDP ratio has since fallen by nearly half, to 54.8% of GDP in 2009. The debt-to-GDP ratio of the financial sector, by contrast, has increased from 1.35% in 1946 to 109.5% of GDP in 2009. The ratio for households has risen nearly as much, from 15.84% of GDP to 95.4% of GDP.

via Wikipedia.

According to this article, the bulk of the debt held by U.S. financial institutions – $8 trillion worth – consists of government-guaranteed mortgages, which is nearly equal to the federal government’s own debt.  This means the government’s potential liability is nearly double what is reported.  (I can’t get used to quoting figures in trillions of dollars; for me, billions of dollars are an unimaginably large amount.)

What I get from the chart and the accompanying article is that the best way to improve the debt-to-GDP ratio by putting Americans to work on useful things, which will increase the GDP and gives us the means to pay down our debts.

Click on Financial position of the United States to read the full article in all its complexity.  Click on the discussion thread for argument as to the meaning of the figures.

Hat tip to Obsidian Wings.