Treasure Islands - Nicholas Shaxson [88]
The economist Michael Hudson describes how he was hired in 1989 by a Boston money management firm to organize a sovereign debt fund investing in the government bonds of developing nations.33 Huge risk premiums then meant that Argentine and Brazilian dollar bonds were yielding almost 45 percent, while Mexican bonds were yielding 25 percent. In its first year the fund, incorporated in the Netherlands Antilles, became the world’s second best performing fund of its kind.
Hudson found out what was happening. “The biggest investors were political insiders who had bought into the fund knowing that their central banks would pay their dollar debts despite the high risk premiums,” he said. Some of the biggest investors were people in top positions in central banks and presidencies. “We realized who has all the Yankee dollar claims on Latin America,” he said. “It was local oligarchies with offshore accounts. The dollar debt of Argentina in the early 1990s was owed mainly to Argentineans operating out of offshore banking centers. The major beneficiaries of foreign debt service were their own flight-capitalists, not bondholders in North America and Europe.”
This kind of simple trick is routinely practiced by so-called “vulture funds.” Wealthy foreign investors buy up distressed sovereign debt at pennies on the dollar—typically at a 90 percent discount—then reap vast profits when those debts are repaid in full. The trick is to make sure that influential local government officials are secretly part of the investor group buying the discounted debt—ensuring that these local investors will do battle inside the developing country governments to make sure the debts get paid. Their involvement, of course, is hidden behind a shield of offshore secrecy, so an impoverished nation’s citizens need never find out about the wealth that has been stolen from them or how the investors did it.
Economists have not ignored these issues entirely, but they almost always break them down into discrete, country-level local problems that only blame corrupt local elites. These matter, of course, but such analyses obscure what all the disasters have in common: offshore.
And when offshore erosion has been considered, it has been taken as an inconvenience, to be addressed with Band-Aids. As one IMF report put it: “Offshore banking has most certainly been a factor in the Asian financial crisis. A special effort is therefore needed to help emerging economies . . . to avert financial crises through dissemination of internationally accepted prudential and supervisory standards.”34
The IMF is arguing here in an illogical circle. By helping local elites effectively place themselves above the law and creating new temptations to mischief, the offshore system entirely neuters the chance of prudent regulation and supervision that is needed to protect those countries against that very same offshore system. Imagine if those elites had to keep their money bottled up at home, or at least account for their wealth, pay appropriate taxes on it, and submit to appropriate laws. Very soon they would understand why good government is directly in their interest.
Perhaps the saddest part of all this is that it should have been obvious to anybody who gave it a moment’s thought.
The stories in this chapter have been mostly about illicit financial flows drained from developing countries and into tax havens, undermining incentives for local elites to strive for better government by allowing them to remove themselves from the problems of their home countries, building safe offshore stashes that insulate and protect them against the turmoil and poverty that surrounds them. There is one more element to consider that is related to, but not the same as, the illicit offshore money. That element is tax.
Tax is the most sustainable,