Who should pay: the elderly or foreign investors?

After the 2001 financial crisis 2001 Argentina privatized essential parts of its infrastructure. Photo: Yacyretá dam, Misiones, Argentina.
Article as analysis
Argentina hopes to economize US$6 billion through the pension reform adopted in December 2017. Its debts to foreign investors amount to 8.65 billion. Another 11 billion must be paid to vulture funds.

When molotov cocktails also started flying in Buenos Aires on December 19th along with stones, the police responded with water cannon, rubber bullets and tear gas. A month of demonstrations and strikes was not enough to dissuade President Mauricio Macri from pressing ahead with his controversial pension reform. Not only does it entail raising the retirement age, it also partly decouples pensions from inflation. And this even though with 20 per cent annual inflation, many pensioners cannot make ends meet and the purchasing power of wage earners is steadily dwindling; the official poverty rate is 28.6 per cent. The power struggle between the liberal President and the centre-left Peronists and trade unions is being fought on the streets of Buenos Aires with an intensity and a level of police repression not witnessed in the country since the 2001 financial crisis.

It is the stated goal of the government elected in 2015 to bring down the budget deficit by US$6 billion from its 2016 level of US$31 billion, through cost-cutting measures. But is attacking pensions the best path to that end? To answer this rhetorical question, it is worth comparing this amount with the astronomical sums owed by Argentina to foreign investors.

Financial crisis, state of emergency and avalanche of lawsuits

To understand the causes of the 2001 crisis that brought the country to its knees, we must go back to the early 1990s. Argentina was then groaning under the weight of a horrendous debt burden. In response, the country privatized numerous state-owned enterprises, leaving them mostly in the hands of foreign investors that were lured to the country through some 50 investment protection agreements (IPAs). But the strategy ran aground, and the turnaround failed; in December 2001, Argentina was obliged to declare state bankruptcy. The new President Duhalde declared a state of emergency and ended the over 10 year-long 1:1 parity between the Argentine peso and the United States dollar; the value of the Argentine currency immediately plummeted, making imports unaffordable. Duhalde froze prices and forced foreign investors to settle in pesos. They however insisted on the dollar or the peso exchange rate at which they had made their investments. For Argentine customers this would have meant price increases of 200, 300 or even 400 per cent for numerous services, which would have been untenable given the runaway inflation and escalating unemployment.

To protest against the measures brought in, foreign investors filed a record number of 60 Investor-State Dispute Settlement (ISDS) lawsuits against the Argentine Government. The remarkable thing was that many of these suits concerned public service enterprises, including those providing such basic services as water, electricity and gas supplies.

Attracting investments. But at what price?

Since his election in December 2015, President Mauricio Macri has done much to bring foreign investors back to Argentina. He has removed capital controls, devalued the peso, lowered corporation tax and cut red tape. He is currently working on the liberalization of labour legislation, which could trigger fresh protests on the streets of Buenos Aires. For a long time now there has been no further talk of returning to the peso/dollar parity – one dollar currently costs 20 pesos.

The ISDS lawsuits confronting Argentina – nine are still pending and new ones could undoubtedly be filed – raise numerous questions: state sovereignty is curtailed in times of major economic dislocations – such as those represented by a financial crisis, a currency devaluation or the plummeting world market price of a commodity. The associated risks should therefore be part of a foreign investor's commercial risk, which must be factored in. It should not be possible, through the conduit of international law, to dump them on the State that has been host to the investment.

The fact that there were 19 rulings against and only five in favour of Argentina shows that this principle was followed only in the smallest number of cases. The country's obligations to a foreign investor manifestly take precedence over its obligation to its own people to ensure basic supplies and respect for human rights.


US$11 billion for «vulture funds»

ia. In addition to the US$8.65 billion which Argentina was ordered to pay by arbitral tribunals, there was a further 11 billion which in February and March 2016, Argentina stated its readiness to pay to speculative hedge funds («vulture funds»). This had been preceded by a scandalous, almost endless legal tug-of-war: in 2005 and 2010, the Kirchner Governments managed to agree on debt restructuring with 93 per cent of creditors. They had agreed to renounce 70 per cent of their claims. No agreement could be reached with the 7 per cent of creditors whose funds were managed by speculative US funds. These funds had turned to a New York court, which insisted that Argentina fully honours its debt instruments. It is noteworthy that they had bought those instruments at a knockdown price: what had cost them just US$80 million in the early 1980s was now worth 2,000 million to them – this is how the money rolls in when speculators hit the jackpot. Argentina could return to international financial markets only by declaring its readiness to pay. But at what cost!