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Buenos Aires

When Osvaldo Guglielmino was appointed attorney general of Argentina in August 2004, he inadvertently walked into the eye of a storm. Within months of taking the job, he was facing 32 lawsuits, all filed by foreign investors and their corporations, and by 2007, nearly a dozen more had piled on. By the end of his tenure in 2010, he was staring down 47 lawsuits, collectively demanding more than $80 billion dollars in damages—a sum roughly equivalent to ten times Argentina’s total sovereign reserves in 2002. All 47 lawsuits were filed under investor-state dispute settlement, or ISDS.

Having spent the previous 13 years as a judge in a federal court, Guglielmino knew the geography of Argentine law like the back of his hand. But ISDS? “It was a mystery,” he told me recently, leaning onto his elbows in the office of his small law firm, perched just off the 12-lane thoroughfare that slices through the center of Buenos Aires. “We had no experience with it. No one did.”

By the end of 2004, Guglielmino and his small team, based out of the Argentine Treasury, had learned the basics. They knew that the corporations’ claims would unfold before a private, supranational tribunal. They knew that instead of the normal trappings of a court, with a judge or jury, ISDS tribunals would be manned by three private citizens, who would gather in some ad hoc conference room on the other side of the world. But as for the tricks of the trade—like how to appoint the right arbitrator or decipher how the arbitrators were likely to rule—the Argentines were in the dark. ISDS was simply too new. The lawsuits against their country represented half of all of the claims that had ever been brought against any country worldwide.

Within weeks of taking the job, Guglielmino sent up a distress flare. He begged Néstor Kirchner, who was then the president of Argentina, to hire an American law firm that had experience with ISDS. But Kirchner said the government didn’t have enough money for that, so Guglielmino set off on his own. He began by prowling local universities and law firms, and asking friends for the names of their smartest former students, professors, and colleagues—anyone who knew anything about international law. “I had 29-year-olds, 30-year-olds with no experience,” he recalled.

While the specific details of each case were different, nearly two dozen shared the same broad strokes. In each of those, a foreign investor or corporation, usually from the U.S. or Europe, offered a version of the same argument: Before, during, and after Argentina’s massive financial crisis in 2002, the government had pursued policies that violated the country’s obligations under its international investment treaties. As a result, the corporations’ balance sheets had suffered. They were filing ISDS claims because they wanted Argentina to compensate them for their lost profits.

Guglielmino and his scrappy new team believed that the corporations’ arguments were laughable. Were the impoverished taxpayers in Argentina really going to be forced to pay compensation to multinational corporations that were hardly the biggest losers from the financial crisis? “We learned quickly,” Guglielmino said. “We had to—the country depended on it.” But the more they studied the rules, the less clear it was that they would win.

Guglielmino was born into a middle-class family in Pehuajó, a small city three and a half hours northwest of Buenos Aires. His father taught literature, his mother art. He and his younger brother, who died of a congenital illness as a teenager, grew up in a stable home, but came of age in the 1960s and ’70s, an era of political tumult and violence in Argentina.

As a college student, Guglielmino joined the Peronist Youth Organization, a movement that fought to bring Juan Perón, the erstwhile president of Argentina, back from exile. In the early ’70s, Perón served a brief, nine-month-long second term before his death in office plunged the nation into what is remembered as the Dirty War, a period of horrific state terrorism that left tens of thousands of left-wing activists and sympathizers dead. Throughout his life, Guglielmino remained committed to Peronism, a uniquely Argentine and ideologically diverse political movement best described as nationalist populism. But he rejected its many extreme left- and right-wing forms. To him, Peronism is “capitalism with social mobility,” he says.

As a person, Guglielmino is warm but watchful, as if always ready to parry a blow. He pays close attention when people are talking and leaps to his feet when he gets excited. He harbors a deep faith in humanity’s ability to do right unto each other and laments what he sees as modern governmental and legal rules that have been exploited by a small group of powerbrokers willing to use their leverage to enrich themselves.

Twenty-five years ago, Guglielmino, still a young lawyer in his 30s, was appointed to a federal judgeship, where his decisions occasionally landed in the papers. In one ruling, he refused to allow a building that had been used as a prison during the Dirty War to be demolished. It was, he declared, a powerful symbol of the country’s unsavory legacy that must be preserved. But for the most part, Guglielmino stayed in his lane. Untrained in economics and with no experience abroad, he didn’t second-guess Argentina’s foray into global financial markets in the ’90s or question former president Carlos Menem’s predilection for signing investment treaties. “I didn’t have the slightest idea that in those years the bilateral investment treaties were being signed,” he said, “and much less that they were giving up jurisdiction in favor of supranational courts.”

When Guglielmino was first appointed to the position of attorney general in August 2004, Argentina was still fragile from its financial collapse two years earlier. Roving bands of piqueteros, or protesters, were still barricading avenues in the capital, and huge swaths of the population were still living on the streets. In the 1990s, he had watched as one Peronist president, Menem, pushed the country’s economy into overdrive, and had risen to attorney general as another Peronist president, Kirchner, attempted to save it. He was not feeling confident in the political party he had been a member of since he was young.

“I don’t know if I am a Peronist,” he told reporters when he was appointed, but he steeled himself for the job. “But I am a patriot,” he said.

Argentina’s legal troubles in the 2000s trace their roots at least as far back as 1989, when Menem, a charismatic politician whose hairline and prominent nose called to mind an impish Richard Nixon, was elected president. Menem ran his presidential campaign on a Peronist platform, but once in office, he embraced the neoliberal economic theory known as the Washington Consensus that was sweeping Latin America at the time. Championed by the World Bank and the International Monetary Fund, the promise of the Washington Consensus was simple: If governments would embrace free trade, privatize their economies, and dismantle barriers to foreign investment, then peace and prosperity would follow.

In his first few years in power, Menem launched an ambitious effort to strip away all financial regulation, privatize nearly all state-owned industries, and rebrand Argentina to the international investment community. With IMF cheerleaders often just offstage, foreign investors, shuttled in from New York and London for glitzy tours of the countryside, were eager to believe. Over the course of the ’90s, U.S. and European banks, investors, hedge funds, and corporations snapped up $186.7 billion in Argentine bonds and purchased the country’s oil fields, its airline, and its water, electricity, sewage, telephone, and gas utilities.

The boom was driven in part by Menem’s embrace of what’s known as the convertibility law, which established a fixed exchange rate with the U.S. dollar—one Argentine peso converted to one U.S. dollar. It was also driven by Menem’s willingness to commit to sweetheart contracts and powerful investment treaties that bound Argentina to a narrow set of acceptable future actions. Many contracts, for example, included the promise that Argentina would maintain a “stable investment climate”—a line designed to assuage investors’ skepticism that a country with a 150-year history of financial fecklessness had indeed reformed. If the country failed to maintain that “stable investment climate,” foreign investors could sue it outside of its own courts.

Throughout the ’90s, Menem’s plan seemed to be working. The Argentine economy grew at an average rate of 6 percent a year, with almost no inflation, blocks of Buenos Aires’s beaux arts buildings were cleaned and refurbished, and street cafés were filled with young women who had money to spend on leather coats. In 1998, at the annual IMF and World Bank meeting in Washington, President Bill Clinton and IMF chief Michel Camdessus congratulated Menem for his accomplishments. “Capitalism was the religion,” recalled Guglielmino. “Adam Smith was the high priest.”

But the flush times wouldn’t last. Just a few months after the IMF celebration, Argentina’s exports began to slump, tax revenue declined, debt piled up, and the country slipped into a four-year-long recession. As financial crises rippled through the Asian and Russian markets and tipped into Brazil, Argentina’s balance sheets began to bleed. Under normal circumstances, Argentina might have weakened the peso to make its exports cheaper and to lessen the burden of its loans, but, bound to the dollar by the convertibility law, it was stuck. In an attempt to keep enough cash around to pay its debts, the government instituted extreme austerity measures, begged international bondholders to cut the country some slack on repayment, and asked the IMF for help. Nothing worked.

In 2001, when Menem’s second term ended and the opposition candidate from the Radical Party, Fernando de la Rúa, took power, the economy continued its relentless decline. Argentines, familiar with the signs of impending ruin, began withdrawing their money from the banks. Over the course of one month in the summer of 2001, they withdrew $5 billion, 7 percent of the total deposits in the country, and in the final days of November 2001, they pulled out $3.6 billion more. Panicked, the ministry of finance imposed a cap on the amount that people could withdraw from their accounts, but the move instead sparked fury. On December 19, a warm, austral summer day, crowds of men and women, angry that they could not access the money in their own bank accounts, swamped the streets, banged pots and pans and defied a federal curfew to cries of que se vayan todos—kick them all out! That night, the protests turned violent and 16 people died in clashes with police. The next day, de la Rúa resigned.

In the following weeks, the National Congress, abiding by the line of succession, appointed a series of new presidents, each of whom clattered through Casa Rosada, the Argentine White House, like balls through a pinball machine. After de la Rúa, there was Ramón Puerta. Then Adolfo Rodríguez Saá. Then Eduardo Camaño. Meanwhile, the lawlessness continued. A mob broke into Congress, destroyed furniture, and lit the curtains on fire. Protesters broke into supermarkets, scaled walls, and police stopped showing up for work. Families moved their beds away from the windows. Fathers slept with guns in their hands. By the end of the month, 30 people had died in violence in the streets. Guglielmino remembers those two weeks as an existential crisis. He recalls the German sociologist Max Weber defining a state by its monopoly on power, and by those terms the Argentine government had collapsed. “The streets of Buenos Aires had no police,” he said. “The state didn’t exist.”

On January 2, 2002, Congress appointed Eduardo Duhalde to become the fifth president of Argentina in less than two weeks. Unlike the others, he held on to power. Within days of taking office, it was clear to him and other lawmakers that they didn’t have much of a choice. The convertibility law seemed unsustainable. The debt was crushing. If they didn’t do something about it, they worried they would condemn their society to slow-motion collapse. On January 6, Duhalde pushed through what became known as the emergency law “[i]n order to guarantee the operation of the National State in accordance with available resources.” The law dropped an economic bomb: It suspended the convertibility law, halted all utility price hikes, and put a moratorium on the enforcement of contracts until further notice. The consequences were immediate.

By unhitching the Argentine economy from the U.S. dollar, the law triggered a sovereign default on $81 billion in financial paper. The peso plummeted in value by nearly 40 percent overnight. The GDP shrank by 11 percent, banks teetered on the edge of insolvency, and the average income, which had peaked at $8,500 in the 1990s, withered to $2,800. More than half the population fell below the poverty line, and an estimated 1.2 million people moved onto the streets, where they earned the name cartoneros after the cardboard boxes they slept in. A 59-year-old woman who could not get her dollars out of her account set herself on fire in the lobby of her bank. On a highway a few hours north of Buenos Aires, a mob of hungry men and women with kitchen knives descended on a cattle truck that had overturned on the highway, slaughtering 22 Angus steers. Blood coated the asphalt.

A year later, in May 2003, the economy was still in tatters when a new president, the Peronist Néstor Kirchner, succeeded Duhalde. Kirchner passed more political reforms in an effort, as he put it, to buttress economic recovery “with its republican form of government intact.” By 2004, the peso began to stabilize. Unemployment ticked down. The economy was rebounding at last.

That’s when the lawsuits started to roll in.

Four U.S. energy corporations were among the first to file ISDS claims against Argentina. CMS, Enron, Sempra, and LG&E had bought into the Argentine gas sector in the 1990s, at the height of Menem’s privatization craze. All four had signed contracts with the government that, among other things, allowed them to calculate their Argentine customers’ gas bills in U.S. dollars, and to adjust them twice a year to keep pace with the U.S. price index. That meant that the amount they could collect in bills each month from their customers would not only remain stable, but also likely increase. It also meant that they didn’t have to worry about the Argentine peso fluctuating or devaluing. On its face, it seemed like a pretty sweet deal. And, for years, it was.

But Argentina’s slow descent into economic chaos in the late ’90s and early 2000s changed everything. With unemployment rising and its debts ballooning, the government moved to suspend the gas companies’ automatic tariff increases. (In 2002, those earlier moves were institutionalized when President Duhalde’s emergency law not only unpegged the peso from the dollar, but froze utility rates at their January 2002 levels, and forbid the companies from keeping up with the U.S. price index). In 2003, when President Kirchner attempted to raise gas and electricity rates to abide by the original contracts, his efforts were blocked by court injunctions and protests. Argentines who’d lost their jobs and incomes in the economic crisis were in no mood to pay more for gas. At that point, unemployment was still topping 20 percent.

To some Argentine lawmakers, the government’s action was clearly an attempt to serve the public good. They had worried that without intervention, Argentines would not be able to afford their gas bills. But to the corporations, it was an act of discrimination. CMS, Enron, Sempra, and LG&E saw the government’s move not only as breach of contract but also as a violation of the terms of the U.S.-Argentina bilateral investment. In that agreement, Argentina had very clearly promised to “maintain a stable investment environment” and to “observe any obligation it may have entered into with regard to investments.” As a result, the gas companies demanded hundreds of millions of dollars in compensation for lost profits. By the end of 2004, they were pretty confident they’d win.

Guglielmino’s team wasn’t so sure. To them, the gas companies’ claims seemed groundless. Breaking a contract was not the same as violating an international investment treaty, they argued. And even if it was, the Argentine government had acted well within its rights as a sovereign nation to protect its people and the security of its state during a period of extraordinary political tumult. Guglielmino argued that thousands of investment treaties worldwide, including the U.S.-Argentina agreement, were riddled with exceptions designed precisely for these kinds of scenarios—to allow governments to react to a crisis as they saw fit. If the tribunals decided against Argentina, those rulings would have huge implications for how nations all over the world, including the U.S. and the United Kingdom, might be able to react to crises of their own. The international community wouldn’t stand for that, Guglielmino reasoned.

To him, the situation seemed clear. The 2002 financial crisis had been horrible. Everyone had suffered losses, and none more so than the Argentine people. In the midst of that collapse, the government had acted to protect the interests of its constituents and the security of its state. The idea that Argentine taxpayers would now be responsible for compensating foreign companies for their lost profits seemed legally untenable, set up a problematic precedent for rich, Western nations, and was morally offensive. Surely, he thought, Argentina could not lose.