by Theodore Dalrymple (January 2013)
Who is more to blame, asked the seventeenth century Mexican nun, Sor Juana Ines de la Cruz: he who sins for pay or he who pays for sin? It is not an easy question to answer.
One does not generally look to the Financial Times for answers to moral dilemmas or conundrums, but yesterday (as I write this) there was an article in it by an Argentine banker who had once also been a director of the Bank of England, that tries to answer a cognate problem. His article was about a new crisis that threatens to destabilise the world banking system further, if such a thing were possible.
As far as I understand it – which may not be very far, for I am no financial expert – Argentina issued bonds under US law upon which, early in this century, it defaulted, having been unable (or unwilling), not for the first time in its history, to meet its obligations. Most creditors accepted a loss, writing off a large part of the debt in return for partial repayment, on the great moral principle that part of something is better than the whole of nothing. But some creditors, notably two ‘vulture’ funds, did not accept this deal and held out for repayment in full, which hitherto Argentina has refused.
A court in New York has now ordered that the Argentine government must pay what it owes to these funds which did not accept the write-down. If it fails to comply with the order, it will have defaulted yet again; such a default might result in a new financial panic.
The writer in the FT argues as follows: the risk of default associated with the original Argentine bonds was written into them by the high rate of interest which they bore, and that therefore the bond-holders have no moral right to complain when the bonds were in fact defaulted upon. That, after all, was what the risk was; the bondholders took a gamble and it did not altogether pay off. It makes no more (moral) sense for the bondholders to complain than for a gambler to complain that the horse upon which he staked a lot of money did not win the race. If betting were always to win, it would not be betting.
Clearly there is something in this. If I know you to be an habitual spendthrift, a person who has repeatedly reneged on debts, but I nevertheless lend you money, whether from softheartedness or in the hope of interest payments, I shall be entitled to limited sympathy when you fail to pay up. An outsider would say, and rightly say, that I had been foolish, however dishonourable you, the borrower, had been.
The situation with sovereign debt is, of course, much more complex and morally ambiguous. There is first the difficulty of the distinction between an inability to pay and a refusal to pay. By inability is meant an inability to pay while maintaining, approximately, present levels of individual consumption of the population, for example of those who had no part in borrowing the money, may not have had a part in or any benefit from the spending of it, and may not even have voted for the government that borrowed or defaulted, or both. To insist that they, who may be very numerous, pay the debts of those who contracted them is to insist upon collective responsibility, a very doubtful form of moral reasoning.
On the other hand, many people may have benefited from the loans without either approving them or realising that they were so benefiting from them. If the result of the loans was to raise aggregate demand in such a way that they prospered, even if only relatively and for a short time, then they do bear some moral responsibility for repayment, albeit a responsibility that they did not personally contract or agree to. But it also goes almost without saying that, in a modern economy, it would not necessarily be easy to distinguish between those who benefited from the loans and those who did not; there would be every gradation between those who benefited mightily and those who did not benefit at all, or even who were actually harmed by them. Thus there is, in practice, little alternative to some version of collective responsibility.
An example exists of successful repayment of foreign loans despite what most countries would have called an inability to repay them: Romania under the late Nicolae Ceausescu. People had barely enough to eat for many years, and lived under the direst conditions, but Romania emerged foreign debt-free because Ceausescu unilaterally made this the country’s economic priority. It is not a model that any minimally democratic state could follow.
The Argentinian writer in the FT did not appeal, as he so easily might have done, to the populist-nationalist argument heard in Argentina, that the American court was indulging in form of legal imperialism. Populist nationalism has done untold damage to Argentina since the ascent to power of Juan Domingo Perón nearly seventy years ago, damage that has proved almost impossible for the country, despite its vast potential, to repair.
Instead, the writer suggested that if the court judgment were allowed to stand the consequence would be that no restructuring of unpayable debts would ever be possible (and no one seriously expects Argentina to repay its $100 billion in full); that a few creditors could hold out successfully against the majority who were prepared for pragmatic reasons to accept writedowns; that this would mean that such pragmatic creditors would cease to exist, for no one would willingly accept lesser repayments than were their more stubborn or determined co-creditors; and that this in turn would mean that countries would be prevented by their debts from borrowing money for ever, or at least until those debts had been repaid in the very distant future. It would mean, in effect, that countries would not be able to engage in the productive activity of which they were capable, and which offered some hope of profit to future creditors. The whole world would suffer as a result; it would be as if the world had cut off its nose to spite its face.
This is a purely utilitarian argument: it is better on the whole for humanity to force creditors to accept losses than to allow those same creditors to inhibit overall economic activity, and thus the prosperity of millions, in pursuit of their right to be repaid in full. We cannot let the heavens fall so that their debts might be repaid.
I think we can all see the force of this. None of us would be prepared to undergo very much hardship for the sake of turning someone else’s bad debt into a performing debt.
On the other hand – there is always another hand – it is obvious that allowing people to borrow large sums of money and then write them off is not altogether an incentive to prudence or probity. If everybody could renounce his debts the moment he found it too inconvenient to repay them, the person who repays rather than defaults comes to seem naïve or foolish rather than upright. It would become normal practice to borrow without the slightest intention ever of repaying or meeting obligations. This too would constrict credit.
The only solution is prudence on the part both of borrowers and lenders (assuming that Polonius’s advice to be neither a borrower nor a lender since loan oft loses both itself and friend is the counsel of an impossible perfection, and therefore not of a perfection at all). Our conclusion is not very exciting but, as Bertrand Russell I think it was, once said, there is no reason to suppose that the truth, when found, will be interesting. And so we come back to Sor Juan’s question, which of the parties to a sinful or imprudent transaction is the more responsible?
Such questions arise with ever-greater frequency these days, not because the world has become more complex but because economic conditions are such that people are more inclined now than they were a few years ago to see the economy as a zero-sum game; for where people are not confident that wealth in general will increase, they hang on to what they have all the more jealously. My crumb is snatched from your mouth, and vice versa.
While the Argentinian bond crisis was developing, Hewlett-Packard was engaged in a war of words with the software company, Autonomy. Only a short time after it bought Autonomy for $11 billion H-P had to mark down its assets by $8.8 billion because Autonomy failed to produce the results that it, H-P, had hoped for and expected.
H-P alleged that Autonomy had misled it over its sales and revenues, and there is probably an element of truth in this allegation. However, the extent of the fraud (if that is what it was) was very a small by comparison with the size of the writedown. H-P was, in effect, trying to blame others for its own bad business decision.
This is not the first time, apparently, that the company has overpaid for companies. Moreover (and here I speak as a non-businessman who has to hand over his tax form to an accountant because I could not fill it myself even if I wanted to), one might have expected, prima facie, that even a company as large as H-P would look pretty thoroughly into the affairs of a company before buying it for $11 billion. If deception there was, it was surely not too much to expect H-P to have uncovered it. And H-P’s financial and legal advisers, one imagines, were paid not ungenerously to look into Autonomy’s affairs.
Finally, I would have expected H-P to exercise even greater caution than usual in purchasing a company whose value was so clearly linked to the creative personnel who worked for it. Remove those people – and they soon removed themselves by going elsewhere – and the company would be worth little more than a carton of orange juice without the orange juice.
So even if Autonomy behaved fraudulently it is likely that H-P was grossly negligent. To pay more than double, and perhaps five times, what a company is worth, when you have had your fingers burnt before in a similar way, and to more or less the same extent, looks – again, prima facie - like incompetence on an almost heroic scale. As Lady Bracknell would have put it, to lose $8 billion, Mr Hewlett-Packard, may be regarded as a misfortune; to lose $8 billion twice looks like carelessness.
There is only one way of sorting out the ambiguities of responsibility in the modern world: lawyers. John Stuart Mill once defined a physical object as the permanent possibility of sensation; nowadays, a corporation is the permanent possibility of a lawsuit. How the lawyers must be rubbing their hands with glee at the H-P-Autonomy imbroglio, with so many possibilities of suits and counter-suits!
It has already begun, of course. Some shareholders in H-P are suing their own company in a class action for lack of due diligence in overestimating the value of Autonomy and for having inflated its (H-P’s) financial prospects as a result of having acquired it. In effect, the litigants accuse H-P of the same kind of accounting practices as H-P accused Autonomy of having used. It matters not whether H-P was acting fraudulently or negligently, the shareholders blame it for the recent halving of its share price. Presumably the shareholders must hope for a bigger settlement than what they will lose by the further decline of the share price that will occur if their class action is successful. When real economic activity falters, rent-seeking rushes in to fill the gap.
H-P, of course, will sue Autonomy, or rather the beneficiaries of the sale of Autonomy; but those beneficiaries will almost certainly mount a vigorous defence, the founder of the company not being a man to give in easily. Indeed, it is not impossible that he, or they, will launch a counter-suit. And H-P will also be able to sue its advisers who so signally failed to detect shortcomings in Autonomy’s accounts.
Once we had ethics that guided our actions in advance; now we have lawsuits to tell us what we should have done.
Theodore Dalrymple's latest book is Farewell Fear.
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