If you’re like me, you’ve probably been trying for weeks to figure out what the heck that Greek euro crisis is all about. And every time you thought you were getting close, they went and changed the script on you.
Personally, I thought I had it sorted out after Greece’s July 5 referendum on the European Union bailout offer. Greece was so deep in debt that it couldn’t keep up with the payments. The EU, the main lender, wanted steep budget cuts before it poured in more euros. The Greek voters’ response: ease up, or we might just stop using euros altogether and start printing our own money.
It didn’t seem that complicated.
In the days since then, though, a whole second line of discussion has popped up. Smart pundits in news outlets like Bloomberg, The Financial Times, BBC and The New York Times (here and here) have been saying that if you really want to understand what’s going on in Greece, you have to look at the debt crisis in Argentina.
And to understand Argentina’s debt crisis, according to Argentine President Cristina Fernandez de Kirchner, you need to read Shakespeare’s “The Merchant of Venice.”
That’s right: the play about Shylock, the bloodthirsty Jewish moneylender. “No, don’t laugh,” Kirchner tweeted the other day, in response to the predictable outcry. “Usury and bloodsuckers have been immortalized in the greatest literature for centuries.”
Kirchner seems to agree with the pundits that the two countries’ crises have a lot in common. She believes they’re both fighting the same good fight against predatory international financiers — she likes to call them “vulture funds” — who prey on weaker nations’ economies. The Greeks’ vote to defy their creditors, she tweeted, was a “victory for democracy and dignity.”
She may be confusing great literature with fact. We’re talking fiction vs. non-fiction. They’re two different things.
For one thing, Greece isn’t actually fighting with predatory lenders seeking to profit from other people’s misery. It’s fighting with the European Union, which is trying to figure out how to get its most insolvent member-state out of a hole. Argentina, on the other hand, is actually fighting with a group of financial firms that are known in the industry as vulture funds. Kirchner didn’t invent the term.
The firms don’t like the label; they prefer to be called “distressed securities funds.” But the name fits. They specialize in buying up second-hand bonds that are selling at a discount — less than their face value — because they’re issued by countries with troubled financial histories that might not repay. Then they go to court and try to make them pay back the full face value.
And since the issuing countries tend to have shaky economies and high rates of poverty, which is why their loans are risky in the first place, forcing them to pay in full essentially means making them squeeze their beset populations even further than they’re already squeezed, figuratively picking their bones clean. Hence the term “vulture funds.”
Looked at literally, then, the analogy Kirchner drew to Shakespeare’s Shylock has a certain logic: the lender squeezing the impecunious debtor for a pound of his own flesh. On the other hand, that particular medieval reference raises the ugly specter of anti-Semitism. Argentina’s Jewish community, the world’s sixth-largest and one of the more nervous, is said to be furious. The Anti-Defamation League in New York said in a statement that it was “deeply concerned” at her “promoting anti-Semitic stereotypes” and “sending a message to Argentina’s youth that Jews are somehow connected to the economic woes of her country.”
Kirchner already has a soiled reputation after her non-prosecution pact with the Iranian officials suspected of the 1994 bombing of the AMIA building, headquarters of the country’s main Jewish organizations. It was the world’s deadliest anti-Jewish attack since World War II and Argentina’s deadliest-ever terror incident. The perpetrators have never been caught. And the suspicious death in January of Alberto Nisman, the investigating prosecutor who was accusing her of a coverup, only makes the local community more nervous.
Argentina’s debt crisis began 17 years ago. The last most of us heard, it was settled sometime in the 2000s. When it began, in 1998, the world economy seemed to be in global free-fall. The trouble started in Thailand in 1997, when a real estate bubble burst, investors fled the country and the currency collapsed. Markets throughout East Asia followed suit: Investors fled and currencies collapsed. Then Russia caught the contagion, and then Brazil. After that came Argentina.
Argentina was different, though, because its currency couldn’t collapse. The government had pegged the peso to the dollar back in 1991, in what they thought was a clever move to guarantee stability. When the crisis hit they couldn’t devalue, so instead of inflation, what they got was a complete freeze and a deep, four-year depression. Finally, in 2001, after a series of government collapses, rampant poverty and severe rioting, Argentina de-pegged the peso and let it drop to its real value. At the same time, it defaulted on $81 billion in government debt. What followed was a quick economic revival.
That, by the way, is another big difference between the Argentine and Greek crises. Greece can’t simply de-peg its currency and let it float down to its real worth in order to get the economy moving again, because it doesn’t have its own currency anymore. It has the euro. If it were to drop the euro and go back to the drachma, as many observers now think it will, the move could undermine investor confidence in the euro and throw the entire 19-country Eurozone into crisis.
Moreover, Greece might not experience a quick recovery like Argentina did after 2002. Argentina is a world leader in wheat, beef and other commodities. Greece’s main income generators are fishing, which is limited by EU over-fishing rules; petroleum refining, which depends on its ability to import crude oil, and tourism, which suffers when tourists are scared off.
Argentina was able to bounce back economically once its own finances recovered. In 2005 it started negotiating with its creditors, mostly U.S., Canadian and European banks and hedge funds, to restructure all that debt and begin repaying. Most creditors agreed to swap their outstanding bonds for new ones worth about 30 cents on the dollar. By 2010, more than 90% of the creditors had accepted the swaps.
But the crisis didn’t go away. The reason is that a small group of creditors hasn’t accepted the restructuring. To be precise, three New York financial firms haven’t accepted the swap. They’re joined by a handful of individual bondholders. They went to a federal court in New York to sue for full payment of their bonds’ value. And in an enormously controversial decision that has ominous implications for other debtor nations, the court upheld their suit and forbade Argentina to continue paying the other bondholders — the ones that accepted the restructuring — until it pays the holdouts. For a while Argentina tried to channel payments through a New York bank, but the judge stopped that. Now nobody is getting paid.
The Argentina case went all the way up to the U.S. Supreme Court, but the justices refused to intervene. The ruling by the New York federal judge, an 84-year-old Nixon appointee named Thomas Griesa, is therefore the law of the land. And since there’s no international conventions governing the orderly management of sovereign debt crises — an international equivalent of bankruptcy law — it’s also the law of nations. For now, at least.
The implications for future sovereign debt crises — cases where countries can’t repay their bonds and need to renegotiate — are frightening. Griesa’s ruling empowers vulture funds to scoop up risky bonds and overturn efforts to rescue troubled economies, more or less at will.
It’s worth getting to know the three holdout firms. Their names are NML Capital, Aurelius Capital Management and Blue Angel Capital.
NML Capital is a Cayman Islands-based subsidiary of Elliott Management Corporation, which runs a multibillion-dollar group of hedge funds. Its founder and chairman is Paul Singer, one of the nation’s top Republican donors and a member of the boards of Harvard Medical School, the Republican Jewish Coalition and Commentary Magazine. He’s also a major donor to gay rights and marriage equality causes.
The website of his Paul E. Singer Foundation notes that Elliott Management was once described by the New York Times as “one of the most revered” hedge fund managers on Wall Street. The foundation itself works to “strengthen our American democracy and democracies around the world” by promoting research in “free-market economics, the rule of law, U.S. national security and the future of Israel, as well as LGBT equality and health-care delivery innovation.”
A lot of other news outlets happily identify Singer in headlines quite simply by the label “vulture.” Among them are the left-wing Mother Jones, the right-wing New York Post, Bloomberg and the British Independent. The Wall Street Journal, in a 2014 article about the Argentina dispute, said Singer’s Elliott Management “pioneered the strategy in the late 1990s when it refused an offer by Peru to restructure some of its debts into new bonds. The fund fought the Andean nation in a New York state court, ultimately winning a $58 million judgment in 2000.”
The second holdout, Aurelius Capital, is owned by Mark Brodsky, a former top employee of Singer’s.
The third holdout, Blue Angel Capital, is a hedge fund run by Thomas Kempner Jr. He’s a scion of the Loeb family, one of the last families from the old community of patrician German-American Jews known as Our Crowd that still operates its own major financial firm. Kempner’s great-grandfather, Carl Loeb, came from Germany to New York in 1893. In 1931 he founded Carl Loeb & Co., which in a series of mergers became Loeb Rhoades, then Shearson Loeb Roades, then Shearson American Express. Today the family operates a spinoff of the main firm, Loeb Partners Corporation, with Thomas Jr.’s brother James at the helm.
Thomas Jr.’s firm, Davidson Kempner, which owns Blue Angel Capital, is said to have no connection to the family business.
Incidentally, they’re no relation to the other Loebs, sometimes known as the Real Loebs, descendants of Abraham Loeb. He came from Germany in 1849 and founded the Wall Street house known as Kuhn Loeb. In its heyday it was bigger and more influential than Carl Loeb’s family firm. Kuhn Loeb eventually merged into another Our Crowd firm, Lehman Brothers, whose collapse in September 2008 (long after the original families had left the business) precipitated the financial crisis that swept the globe that year. The current crisis is much, much smaller than that one. So far, anyway.
Jonathan Jeremy “J.J.” Goldberg is editor-at-large of the Forward, where he served as editor in chief for seven years (2000-2007).