Argentine debt ruling, economists appeal to Congress

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.