This essay is part of the series “A Vision of Debt Justice” of Progressive International’s Debt Justice Blueprint.
So far, this collection has largely focused on the experience of the debtor: the hardships and indignities, the cycles of poverty in which debt ensnarls the debtor. But there are two sides to every debt relationship — and for the last few years, one side has profited handsomely from the explosion of sovereign debt among the world’s developing nations. This essay tells that story — and proposes a new chapter for it, in which debtors’ burdens no longer feed the creditors’ greed.
We begin this story in Argentina. It is the story of private sector creditors and intermediaries and how they use former employees to play both sides through what is known as the "revolving door".
Debt securities are a necessary evil for many countries as they are often the only gateway to the financial world. The big banks trading them make millions of dollars from these operations and there is simply no way to escape them, no way to get private financing if not through their involvement.
Since 2016, Deutsche Bank, one of the largest European banks, has been one of the main debt underwriters for the Argentine government - headed by Mauricio Macri until 2019. It made its debut in the country with the placement of $16.5 billion to pay the debt claimed by vulture funds. These vulture funds included Elliot Management’s NML Capital, which earned an overall profitability of 1270% through this deal (and that’s without taking legal advisors’ fees into account which were also paid by Argentina (Guzmán, 2016).
In total, the German bank placed $32.25 billion of Argentine debt in the international financial markets, during this period, earning approximately $10 million in commission. The list of profiteers does not end there, however, because in the Argentina of unbridled debt there was room for everyone. Banco Santander comes in second place and HSBC, JP Morgan and BBVA complete the list of banks who lapped up the business Argentina offered them.
The reality had been that Deutsche Bank could rely on its former employees to defend its interests from within the very heart of the Argentine government. On 25 January 2016, Santiago Bausili was appointed Secretary of Finance and tasked with negotiating the country’s acquisition of debt. This was the day after he left his job at Deutsche Bank. In his new job at the Ministry of Finance he would go on to seek funding that would guarantee his former employers large commissions. Despite being an Argentine government official, as Secretary of Finance, Deutsche Bank continued to pay Bausili royalties of more than $100,000 for the shares he held. This is prohibited by Argentine ethics law but that didn’t stop them. Deutsche Bank then went on to secure big business placing Argentine debt while Santiago Bausili was serving as one of the main negotiators of that acquired debt. A clear example of the “revolving door” working as intended.
Of course, Bausili was not the only "Trojan horse'' within the Argentine government working on profitable deals for the intermediary banks. The employment trajectories of the individuals called upon to lead this mega-debt process was a striking institutional feature of the debt cycle that began in December 2015.
Argentina's reinsertion into the financial markets was driven by former managers of investment funds and international banks such as Deutsche Bank and JP Morgan, among other well-known entities. The authorities of the Central Bank of Argentina had similar career trajectories. This is not an issue reserved for public officials in the economic and financial arena, but rather a recruitment criterion for public officials that cuts across all areas of national government, with three out of ten of Senior public officials having held a managerial position in the private sector at one time or another. A survey of civil servants' career paths shows that "the link between economic and political elites acquired distinctive quantitative and qualitative features. The novelty did not lie in the existence of the phenomenon itself, but in its magnitude, reach, and visibility. The degree of exposure to conflicts of interest is high and permeates the entire government". This is a clear and resounding example of state capture by the elites of the financial system, a common practice in many Latin American and Caribbean countries, the "revolving door" or "the amphibians" as they are called in Brazil.
While conflicts of interest do not necessarily constitute a crime under Argentine law, Santiago Bausili and others officials were involved in various scandals directly linked to their private sector careers. The Paradise Papers exposed in November 2017 that Luis Caputo, then Finance Minister, was a shareholder in a web of offshore companies registered in the Cayman Islands and Delaware, which he failed to mention when he was sworn in as a public official. In fact, the Panama Papers reveal that by the end of 2017 one hundred percent of senior officials at the then Ministry of Finance were using financial and tax havens for the management of their personal and business finances.
The role of civil servants operating within government on behalf of their former employers, private banks, and potential lenders such as investment funds, results in the proliferation of big business contracts and huge expenditures for government through commissions that end up being financed by the public coffers.
The latest available data shows that Argentina paid $63.1 million in commissions for intermediation services in its operations. The break down of these commission payments for external debt placement by entity for the period 2016- 2018 is as follows: HSBC $11.8 million, Deutsche Bank $10.9 million, Citi $9.4 million, Santander $8.1 million, JP Morgan $7 million, BBVA $5.9 million, UBS $2.8 million, Credit Suisse $2.5 million, BNP Paribas $1.6 million, BofA Merrill Lynch $0.9 million, Morgan Stanley $0.9 million, Nomura $0.2 million.
Debt is a very profitable business for banks, large financial companies, and large auditing companies. Debt is not made available for the development of Latin American countries, debt is a business and therefore needs to be granted or renegotiated in infinite restructurings that will involve infinite commissions, audits, etc.
Argentina's return to the system of global private and multilateral borrowing also presented a challenge in terms of debt management. It is worth noting that the documentation presented by the Ministry of Finance during the renegotiation of the Stand-By agreement with the IMF once again exposed the lack of a public debt strategy. The declared objective of the Financial Programme presented in September 2018 was not to promote a strategy of sustainable economic growth that would improve the living conditions of the majority, but to guarantee the financing of debt maturities. In the words of the Ministry of Finance (2018): "the new agreement reached with the IMF would allow us to make practically no placements in the market in the remainder of 2018 and in the whole of 2019... which gives us greater financial flexibility. With this financial programme we would only have to return to net market placements in 2020". The objective of the officials (who were former bank employees) was not to promote improvement projects in key sectors of the economy via debt that would genuinely supply the dollars needed to repay the commitments made. The aim instead was to get into debt and flee to tax havens, leaving the country with the burden of interest as a death sentence.
This assessment of the experience in Argentina reveals some ideas aimed at preventing this episode from turning into a socio-economic crisis with irreversible consequences for the country’s production capabilities and distribution of income. These ideas range from recovering mechanisms for the administration and regulation of the exchange market, like those in place in most countries in the region, all the way to designing mechanisms that facilitate debt restructuring — in accordance with the country’s real capacity to recover a sustainable growth path – which, in turn, would guarantee repayment to genuine creditors.
Other recommendations focus on closing the “revolving door” that has exerted so much control over the debt relationship. These include regulating the entry, transit, and exit of public officials by means of precise laws and codes; enacting strict codes regulating conduct in the exercise of public office to minimise the risks generated by abstract conflict of interest situations; strengthening control and evaluation bodies for both governmental and non-governmental cases; and establishing sanctions for code breaches.
But beyond these policy recommendations, the story of Argentina’s “Trojan Horses” suggests a key principle for the global movement to ‘Fight the Debt.’ Resistance cannot be restricted to the debtors’ refusal to pay debts — legitimate or not. On the contrary, we must pay careful attention to the ways in which the financial system creates an entire class of winners on the other end of the debt relationship, many of whom are empowered with the mandate to protect the people from which they quietly profit. And then, in Argentina as everywhere else, we can begin to dismantle this revolving door, to strip away the privileges of the creditor class to gain unscrupulously from communities’ devastating loss, and to say loud and clear across the planet: Our debt is not your profit.
Adrian Falco is a member of the Progressive International Debt Justice Collective. Adrian is a member of the Latin American Network for Economic and Social Justice (LATINDADD) and current Secretary of the Latin American and Caribbean Fiscal Justice Network.
We live in a world of debt. The depth and breadth of global “debtification” is difficult to overstate. It is the primary contention of this collection that all these disparate dynamics — hedge funds raking in pandemic profits, students struggling to afford an education, micro-borrowers on the brink of bankruptcy — are different manifestations of the same basic structural mechanism at the heart of the global financial system: the endless cycle of privatized gains and socialized losses. Simply put, the rich get richer, while the poor, by design, remain poor.
The goal of this Collective is the goal of progressive movements around the world, to end that cycle. Read the full Debt Justice Blueprint here. If you’re interested in engaging with us, please write to Varsha Gandikota-Nellutla at [email protected]
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