Screenshot of Argentine President Cristina Fernández during her Monday Jun. 16 televised address to the nation. Credit: TV Pública

By Diana Cariboni
MONTEVIDEO, Jun 17 2014 (IPS)

Argentina finds itself in a strange position since the U.S. Supreme Court rejected its appeal Monday to take a case in which a small group of creditors is suing this country for full repayment: it is on the brink of default even though it is one of the countries in the world that has done the most to dig itself out of debt.

The Supreme Court decision in the case Republic of Argentina v. NML Capital leaves in place a 2012 ruling handed down by the second district court of New York, ordering Buenos Aires to pay bondholders, immediately and in full, some 1.5 billion dollars – an amount that includes interest and penalties.

But it also sets a precedent with respect to all of the unpaid debt in the hands of other speculative bondholders, totalling around 16 billion dollars.

This amount, however, “is equivalent to just three percent of Argentina’s GDP,” economist Ramiro Castiñeira, with the Econométrica consultancy, told IPS.

“It doesn’t make sense for Argentina to default over that amount, when it is one of the countries that has advanced the most in reducing its debt in the past few years,” Castiñeira argued.

Brazil, for example, owes interest payments this year equivalent to five percent of GDP, on top of principal payments amounting to more than 12 percent of GDP, he said.

The problem is that Argentina does not have 16 billion dollars in cash – the equivalent of half of its foreign reserves, which were hit hard by a series of restrictive monetary policies that fuelled capital flight.

Argentine President Cristina Fernández complained about the Supreme Court ruling Monday night, calling it “extortion” while stressing that her country would continue to make repayments to lenders who had agreed on renegotiated settlements.

After Argentina defaulted on its foreign debt in late 2001 during the worst economic crisis in the country’s history, the government made enormous efforts to work its way out of debt, which had reached 160 percent of GDP.

It repaid the World Bank and International Monetary Fund (IMF) in full and restructured the debt held by 92.4 percent of bondholders, at a deep discount, in 2005 and 2010.

The debt shrank to manageable volumes. In late May, Argentina reached an agreement with the Paris Club of creditor nations for repaying overdue debts. And earlier this year, the government agreed on a package to compensate Spanish oil company Repsol for the 2012 nationalisation of its subsidiary YPF.

But the situation produced by the Supreme Court ruling could jeopadise everything achieved so far.

The sentence prohibits banks in New York from making interest and principal payments to creditors that accepted the restructuring unless the New York-based hedge fund NML Capital is paid.

On Jun. 30, Buenos Aires is to pay 532 million dollars for bonds issued under foreign legislation.

To avoid the embargo, payment jurisdicion could be modified by means of a voluntary swap. “The idea might seem tempting, but it is impracticable and would also mean falling into technical default” by changing the parameters set when bonds are issued, Argentine economist Leonardo Stanley, associated with the Centro de Estudios de Estado y Sociedad (CEDES) think tank , told IPS.

Although Fernández’s statement was ambiguous, Stanley’s interpretation is that the president expressed a willingness to pay. That means “negotiations will have to start with the holdouts [creditors who refused the restructuring], which could take place within the context of what the judge handling the case [in New York] is asking for,” he said.

Stanley said: “From here on out the decision is political. Just as it reached agreements recently with Repsol and the Paris Club, the government should sit down and negotiate with Paul Singer,” whose hedge fund, Elliott Management, is the parent company of NML Capital.

The economic impact is inevitable, he added, “although the current government would not necessarily have to deal with it,” as Fernández’s term ends in December 2015. For that reason, “any proposal would have to be made in the legislative sphere,” which would help boost “transparency and credibility,” he said.

In her address to the nation Monday, Fernández said “this case has repercussions for the entire global financial system. [The ruling] validates a business model on a global scale which, if it continues to be reinforced, will produce unimaginable tragedies.”

Eric LeCompte, executive director of the religious anti-poverty organisation Jubilee USA Network, said in a statement that “For heavily indebted countries supporting poor people, this is a devastating blow. These hedge funds are [now] equipped with an instrument that forces struggling economies into submission.”

“Argentina may not have used the best options or strategies,” said Stanley. But the stance taken by the U.S. Supreme Court shows that “despite the institutional crisis, the lobbying power of the financial sector is intact,” he added.

And if countries begin to doubt the benefits of issuing a bond under New York jurisdiction, the ruling “could also hurt that sector, and the United States…which has gone from being the world’s creditor to one of its biggest debtors,” he argued.

Peter Hakim, president emeritus of the Washington-based Inter-American Dialogue think tank, said “Both the U.S. Treasury and the IMF were also concerned about the broader effect of what would be considered an Argentine default, and also worried about the impact on other debt negotiations.

“Remember the U.S. Treasury [along with the IMF], although it did not join the lawsuit, basically supported Argentina’s contention that it should be able to pay the holdouts the same amount as it was paying creditors who had accepted Argentina’s debt restructuring.
“ U.S. relations with Argentina… have improved in recent months as Argentina has pursued a more orthodox and moderate set of economic policies (including efforts to reform its notoriously manipulated economic statistics, repay its Paris Club obligations, settle the claims of Repsol, etc).”

But the immediate future of those ties depends on how Buenos Aires reacts in this case, for which a solution could be possible if the Argentine goverment demonstrates greater flexibility, Hakim said.

“The Fernández government will have to resist the temptation to turn the decision into a domestic political issue,“ he said.

But that seems difficult to do. For decades the management of the country’s debt has been a central factor in economic and political crises. In her speech Monday, Fernández summed up the history of this issue.

The portion of bonds that Singer and his allies are pressing Argentina to pay is illustrative on its own. In 2008, NML Capital purchased the bonds at a nominal price of 370 million dollars. But at the time they were only worth 48 million dollars.

Thirty percent had been issued during the administration of Carlos Menem (1989-1999), when the peso was pegged to the dollar.

The rest were issued during the “megaswap” – a financial operation cooked up in 2001 to give Argentina breathing space by stretching out the government’s principal and interest payments, which backfired and increased the public debt by tens of billions of dollars.

Former president Fernando de la Rúa (1999-2001) and his economy minister Domingo Cavallo were prosecuted for the megaswap and an international arrest warrant was issued for David Mulford, at the time chairman international of the Credit Suisse First Boston bank and former U.S. Treasury official.

Afghanistan’s Kabul Bank is back in the news, with the sentencing of two of its top executives to five years in prison for fraud. But being in the limelight – for good or bad – has been part of the bank’s saga since its inception in 2004.

Billed as “the bank for everyone”, the bank’s advertisements featured on international television channels showcased a lifestyle that few Afghans could resist. It evoked both trust and awe as its ads constantly showed images of houses, cars and even gold bars it purported to give away.

Suddenly, Afghans who had been distrustful of banks took money they had stored in their homes for decades and opened accounts at the financial institution. The aspirational promises quickly drew in more than one million depositors.

But by summer 2010, the rumblings of something amiss at the nation’s first private bank became too loud to ignore.

Indebted and embarrassed

On August 29, 2010, Abdul Qadir Fitrat, then head of Afghanistan’s Central Bank, convened a meeting of Kabul Bank’s shareholders to discuss what had brought an institution seen as an overwhelming success by Afghans and foreigners alike to the verge of collapse.

The bank has since been replaced by the New Kabul Bank, with the government investing more than 800 million dollars. But the fallout of the collapse of the first bank is still being felt.

Nearly three years later, a series of investigations detailed how massive off-book loans, lavish purchases and 114 rubber stamps used for fake companies helped contribute to the embezzlement of more than 900 million dollars from Kabul Bank.

The image of the “bank for everyone” was quickly replaced with one of “crony capitalism” forming a “Ponzi scheme” that affected nearly everyone in the Central Asian nation.

The scandal left Jawed Rassool, an operations manager at a construction company, broke and indebted. The 27-year-old said the media coverage of the corruption soon locked his employer out of access from its accounts. As a result, “I wasn’t paid for four months,” he told Al Jazeera.

“I am not a very wealthy man. I cannot afford not to have money to feed my family for one month, and never four months … I borrowed 7,000 afghanis (136 dollars) to pay for electricity, firewood and other expenses.”

While the bank’s CEO was reported to have gone on shopping sprees at Louis Vuitton and Versace with money from the bank, Rassool languished.

A November 2012 report, published by the Independent Joint Anti-corruption Monitoring and Evaluation Committee (MEC), found that 92 percent of the bank’s loans, or 861 million dollars, were extended to just 19 individuals and businesses.

Seema Ghani, executive director of the MEC, said that along with a loss of faith in the banking industry, the Kabul Bank scandal left many people without essential services.

“Kabul Bank was a trusted institution that millions of Afghans relied on to receive their salaries and secure their savings … The fact that the government stepped in with an 825 million dollar infusion of funds has simply meant the cost of the fraud has been dispersed to all Afghans,” Ghani told Al Jazeera.

Sophisticated smuggling

In interviews with Al Jazeera, researchers, bank officials and journalists said a combination of low capacity, lack of due diligence and political influence allowed the Kabul Bank to perpetrate its fraudulent activities for more than five years.

Kabul Bank also had timing on its side: an influx of international aid, expanded public services and new entrepreneurial businesses after the fall of the Taliban all increased the need for banking services.

This growth in demand for financial services “drastically outstripped the capacity to effectively regulate and supervise the industry, resulting in vulnerabilities that were (further) exploited by participants in the Kabul Bank fraud,” said Ghani.

“The scale and level of sophistication of the scheme in Kabul Bank was quite astonishing,” Martine van Bijlert, co-director of the Afghanistan Analyst Network, told Al Jazeera.

This sophistication included innovative plots to smuggle 861 million dollars into banks in 28 countries. The 2012 report by the MEC cited the use of 10 pilots at Pamir Airways, which the bank had a stake in, who were paid annual salaries of over 300,000 dollars to transport money through the airline’s food trays. These costs, dated from March 2008 to November 2010, were categorised as “pilots of cash delivery”.

A further 66.2 million dollars was used for the purchase of 250 cars and motorcycles, false deposits, and payments to employees either unqualified for their positions or who simply did not work for the bank.

And a 2009 report by the Afghan spy agency found that Kabul Bank funds were being used to build a property portfolio in Dubai whose value was estimated at 151 million dollars.

These details depicted what van Bijlert called “a group of people who found it completely normal that their connections and wealth would earn them (no interest) loans or gifts.” Among those accused of receiving loans are the brothers of Afghan President Hamid Karzai and First Vice President Marshal Fahim.

Protecting itself

Tuesday’s sentencing of Sher Khan Farnoud, the bank’s founder and chairman, and Khalilullah Ferozi, chief executive of the bank, has done little to restore faith in what people see as a corrupt system.

Shamsul Rahman Shams, head of the special tribunal investigating the bank, said Karzai’s and Fahim’s brothers still owe nine million and three million dollars, respectively.

Neither Mahmoud Karzai – the bank’s third-largest shareholder – nor Hassin Fahim has been formally charged with wrongdoing.

“It’s not as simple as the president and vice president protecting their brothers. It’s the system protecting itself,” said van Bijlert.

Nor are they the only ones allegedly involved. Kabul Bank reportedly made contributions to between 30 and 40 members of parliament. “Many people are somehow implicated,” said van Bijlert.

The response to the scandal has been plagued by delayed or inadequate investigations, and reluctance to pursue the routes that money took out of the country and to prosecute those responsible.

This, says van Bijlert, illustrates how the entire process has become “an exercise in containment,” to limit the blame to a carefully chosen group.

This highlights a perception among the general population that the perpetrators and beneficiaries of the Kabul Bank fraud have not been properly investigated and that decisions to indict were not made transparently – a view the MEC shares.

With the bank’s bailout, funded by international donors, amounting to nearly six percent of the nation’s GDP, Dawood Azami, an Afghan Young Global Leader at the World Economic Forum, said “the Kabul Bank crisis should be a big enough shock for the whole governance structure in Afghanistan to wake up and respond to challenges on time.”

But Noorullah Delawari, governor of the Afghan Central Bank, said Kabul Bank is not an entirely unique situation. “The whole world is facing massive banking issues and each country has had difficulty dealing with it.”

Though he agrees with the findings of an audit prepared by the Kroll investigative firm that the bank was “a well-concealed Ponzi scheme,” Delawari says Da Afghanistan Bank is working with a receivership to recover as much of the lost funds as possible.

In an interview with Al Jazeera, Delawari said that within the “next few weeks” the total amount recovered by the receivership would total 225 million dollars, which he cites as a major improvement over his predecessor, Abdul Qadir Fitrat, who fled to the United States in June 2010, saying the investigation was putting his life in danger.

“Only 20 million dollars had been recovered when I came on board” in November 2011, Delawari said.

Still, the sting of the scandal continues to reverberate in Afghanistan and abroad. “Although the public and investors got their money back after it was seized by the authorities, many people think twice before depositing their money in the banks,” said Azami.

For Ahmad Barak, the initial corruption and the mishandling of the subsequent investigation into Kabul Bank are indicative of an unchanging fact of life in modern Afghanistan.

“This is Afghanistan. You are an idiot if you do not steal money.”

* Published under an agreement with Al Jazeera.