More than 100 economists have called on Congress in a letter to take action to mitigate the harmful consequences of the Argentine debt ruling taken by Judge Griesa of the US District Court for the Southern District of New York.
The economists, including Nobel laureate Robert Solow, Dani Rodrik and Branko Milanovic, warn of the fallout from the debt ruling that requires Argentina to pay holdout creditors at the same time as the other creditors.
The consequences could be damaging not only to Argentina, but also for the international financial system, as well as US economic interests.
Argentina is not allowed to make payments to 93% of its foreign bondholders because of a decision made in a court in New York.
Update, August 22, 2014: Argentina’s President has put forward a bill to Congress to change the jurisdiction of restructured debt to Buenos Aires, effectively skirting the US court’s ruling. New York Court Judge Griesa says the plan is illegal.
Court decision “wrong and damaging”
Mark Weisbrot, economist and Co-Director of the Center for Economic and Policy Research, said:
“It’s a widely shared opinion among economists that the court’s attempt to force Argentina into a default that nobody – not the debtor nor more than 90 percent of creditors – wants, is wrong and damaging.”
The letter warns lawmakers that the court’s decision could “torpedo an existing agreement with those bondholders who chose to negotiate.”
Sovereign governments do not have the option of declaring bankruptcy, the letter cautions.
The 100 economists wrote:
“The court’s ruling would severely hamper the ability of creditors and debtors to conclude an orderly restructuring should a sovereign debt crisis occur. This could have a significant negative impact on the functioning of international financial markets, as the International Monetary Fund has repeatedly warned.”
A moral hazard created
Judge Griesa’s decision creates a moral hazard, the economists say, because investors will now be allowed “to obtain full repayment, no matter how risky the initial investment.”
The holdouts bought Argentine bonds on the secondary market after default, in most cases for less than one fifth of their value.
“While these actors could have accepted the restructuring and still made a very large profit, they instead have fought a decade-long legal battle, seeking exorbitant profits in excess of 1,000 percent and creating financial uncertainty along the way,” the letter says.
They warn that recent developments will have an impact on the United States and its status as a financial hub of the global economy.
World may see US as an unreliable financial center
Most of the emerging economies’ debts are issued under the jurisdiction of New York law, and utilize financial institutions based in New York. However, after Judge Griesa’s ruling, sovereign governments are likely to seek other locations to issue debt, they warn.
The letter states that “Britain and Belgium, for example, have already passed legislation aimed at preventing this type of behavior from holdout creditors.”
The court has also placed restrictions on New York banks, preventing them from distributing regularly scheduled payments of the restructured bonds. A number of banks are already being sued by investors, which creates growing uncertainty surrounding American-base financial institutions.
Argentina says it is willing to negotiate, and has reached agreements recently with the **Paris Club, as well as claims by investors worldwide.
** The Paris Club, based in Paris, France, comprises representatives from 22 mainly creditor nations (countries that lend money to other countries. The Club’s aim is to help debtor nations reorganize themselves when they have problems repaying the money they borrowed.
The letter concludes “We hope that you will look for legislative solutions to prevent this court decision, or similar rulings, from causing unnecessary harm.”
The letter was signed by the following economists:
A. Erinc Yeldan, Yasar University
Alexandra Bernasek, Colorado State University
Alicia Puyana, Facultad Latinoamercana de Ciencias Sociales
Amitava Dutt, University of Notre Dame
Andreas Hoth
Andrew Allimadi, United Nations, Department of Economics and Social Affairs
Andrew Fischer, International Institute of Social Studies
Andrew Kohen, James Madison University
Ann Markusen, University of Minnesota
Antonella Palumbo, Roma Tre University
Antonio Savoia, University of Manchester
Anwar Shaikh, New School for Social Research
Arthur MacEwan, University of Massachusetts Boston
Ben Zipperer, University of Massachusetts, Amherst
Branko Milanovic, Luxembourg Income Study Center, the Graduate Center CUNY, former Lead Economist in the World Bank’s research department
Brendan Cushing – Daniels, Gettysburg College
Bunu Goso Umara
Carlo D’Ippoliti, University of Rome
Carlos A. Carrasco, University of the Basque Country
Carlos Oya, University of London
Charles Revier, Colorado State University
Cheryl Maranto, Marquette University
Chiwuike Uba, African Heritage Institution
Chris Georges, Hamilton College
Chris Tilly, University of California, Los Angeles
Conrad Herold, Hofstra University
Cyrus Bina, University of Minnesota (Morris Campus)
Dani Rodrik, Albert O. Hirschman Professor in the school of Social Sciences at the Institute for Advanced Study in Princeton, New Jersey
David Gold, New School University
David Legge, La Trobe University
David Rosnick, Center for Economic and Policy Research
David Weiman, Barnard College
Dean Baker, Center for Economic and Policy Research
Dimitri B. Papadimitriou, Levy Economics Institute of Bard College
Dirk Ehnts, University of Oldenburg
Eduardo Strachman
Eileen Applebaum, Center for Economic and Policy Research
Elaine McCrate, University of Vermont
Elissa Braunstein, Colorado State University
Erhan Yildirim, Cukurova University
Ezequiel Tacsir, United Nations University
Frank Thompson, University of Michigan
Gabriele Koehler
Gar Alperovitz, University of Maryland
Gerald Epstein, University of Massachusetts, Amherst
Gunseli Berik, University of Utah
Gustavo Indart, University of Toronto
Hannah McKinney, Kalamazoo College
Henry Levin, Columbia University
Irene van Staveren, International Institute of Social Studies
J K Kapler, University of Massachusetts Boston
Jairo Alonso Bautista, Universidad Santo Tomas
James Stanfield
Jayati Ghosh, JNU New Delhi and Ideas
Jeff Madrick, The Century Foundation
Jeffrey Faux, Economic Policy Institute
Jeffrey Frankel, Harvard Kennedy School
Jim Campen, Americans for Fairness in Lending
John Roemer, Yale University
John Schmitt, Center for Economic and Policy Research
John Willoughby, American University
Jorge BUZAGLO, University of Goteburg
Jose Antonio Ocampo, Columbia University
Joseph Joyce, Wellesley College
Joseph Ricciardi, Babson College
Josh Bivens, Economic Policy Institute
Julie Mattahei, Wellesley College
Kannan Srinivasan
Kathleen McAfee, San Fransisco State University
Kevin Gallagher, Boston University
Kimberly Christensen, SUNY/Purchase College
Korkut Boratav, Turkish Social Science Association
Kyung-Sup Chang, Seoul National University
Larry Mishel, Economic Policy Institute
Lawal Tosin
Leanne Ussher, Queens College, CUNY
Leonardo Asta, Università degli Studi di Padova
Leopoldo Rodriguez, Portland State University
Lorenzo Pellegrini, International Institute of Social Studies
Lucia Pittaluga Fonseca, Universidad de la República (Uruguay)
Luiz M Niemeyer, Pontifical Catholic University of São Paulo
Machiko Nissanke, SOAS University of London
Mah hui Lim, South Centre
Malcolm Robinson, Thomas More College
Manfred Nitsch, Free University of Berlin
Marco Palacios, El Colegio de México
María Florencia Granato, Corporación Andina de Fomento
Mariano Arana, Universidad Nacional de General Sarmiento
Mario Tonveronachi, University of Siena
Mark Paul, University of Massachusetts Amherst
Mark Price, Keystone Research Center
Mark Weisbrot, Center for Economic and Policy Research
Martin Hart-Landsberg, Lewis and Clark
Martin Khor, South Centre
Massoud Fazeli, Hofstra University
Matías Vernengo, Bucknell University
Michael Cohen, New School for Social Research
Michael Murray, Bates College
Mritiunjoy Mohanty, Indian Institute of Management
Neva Goodwin, Tufts University
Nicolás Moncaut
Nikoi Kote-Nikoi
Omar Dahi, Hampshire College
P. Sai-wing Ho, University of Denver
Peter Bohmer, The Evergreen State College
Peter Dorman, Evergreen State College
Philipp Temme, Free University of Berlin
Pramila Krishnan, University of Cambridge
Renee Prendergast, Queen’s University- Belfast
Reza Ghorashi, Richard Stockton College
Robert Lynch, Washington College
Robert Solow, Nobel laureate in Economics, 1987, MIT Professor of Economics, emeritus
Roberto Frenkel, CEDES Argentina
Rodrigo Lopez-Pablos
Rolph van der Hoeven, International Institute of Social Studies
Sergio Cesaratto, University of Siena
Stepphanie Seguino, University of Vermont
Susan Ettner, University of California, Los Angeles
Thomas Michl, Colgate University
Thomas Weisskopf, University of Michigan
Tracy Mott, University of Denver
Venkatesh Athreya, Bharathidasan University
William Barclay, Chicago Political Economy Group
William K. Tabb, Queens College
William Milberg, New School for Social Research
Yavuz Yasar, University of Denver.