Who is to blame for Argentina’s default? – Quartz
You can’t have a default without a good character story, and Argentina is no exception. But who is the bad guy?
You haven’t lived if you haven’t heard Argentinian finance minister Axel Kicillof attack “los fondos buitres”, the investors who burst in after Argentina defaulted on its debt in 2001 , buying back its bonds for as little as 20 cents on the dollar. They have spent the past 13 years fighting to be paid in full even as 92.4% of bondholders accepted losses ranging from 40% to 70% during Argentina’s restructuring. The funds, brought to court by NML Capital, a subsidiary of Paul Singer’s Elliott Management, say they just wanted to negotiate a fair deal, but the Argentine government would not tell them until the day before the default. Although the tactic has been criticized as unsportsmanlike and likely to make future sovereign restructuring more difficult, the funds are following the letter of the law. So that means the real bad guy has to be …
The whole system of international finance from Bretton Woods
The sole reason for Argentina’s default in 2001 was the series of currency crises in Asia and South America in the 1990s, with the IMF and other international financial leaders spoiling their responses to a series of issues in the 1990s. developing economies. Between the specter of contagion, local corruption and a reckless attempt to peg Argentina’s currency to the dollar, foreign investment poured in from Argentina and the economy collapsed. Social unrest escalated and, amid a volatile mix of political chaos, bank run and high unemployment, Argentina defaulted on $ 100 billion in debt, rising from a poster for the Washington consensus to its biggest victim.
The country was able to restructure most of its debt and managed to rebound thanks to high global commodity prices which have led to lucrative trade with China, proving that international finance is not so bad. Argentina isn’t the only country to default and restructure, so perhaps the biggest problem is how this process works. There is no bankruptcy court where countries can find a fair solution, so in the absence of cooperation with the international community, in Greece, borrowers and creditors have to go to the court where the obligations were issued – in the case of Argentina, New York. So maybe the real bad guy is …
Judge Thomas Griesa and American justice
The challenge for the recalcitrant was always to collect their debt; through various sovereign immunity laws, the best creditors could do was to attempt to seize the occasional argentinian warship. Until last year, that is, when US judge Thomas Griesa interpreted a clause in the obligations to mean that unless Argentina pays both the recalcitrant and its holders of restructured bonds, she couldn’t pay either. This fateful decision ignited the fuse for the fault. There have been no shortage of reviews of Griesa’s management of the question — at one point he did not understand which links were which. Before the Supreme Court rejected Argentina’s appeal in this case, the countries of Brazil, France and Mexico, as well as Nobel laureate in economics Joseph Stiglitz weighed in to urge the High Court to find a better solution. Even the IMF would have wanted a different result to avoid complicating future sovereign restructuring.
Now, because the courts haven’t provided a path to a settlement, some say New York’s status as a center of international finance may weaken. But why did Argentina issue its bonds in New York in the first place? In large part because wealthy people trusted American law more than Argentina’s, thanks to the country’s history of erratic economic policies. This suggests that the real villain is …
Argentina’s political leadership since 1930
Since a deposed military coup democratically elected president during the Great Depression, Argentina’s politics have been volatile and often detrimental to foreign investors. It is not just the occasional nationalization of foreign companies; Argentina has also struggled to control inflation, which is a no-no for anyone looking to borrow money in their own currency. For this reason, the country had to borrow abroad, in foreign currencies and under foreign jurisdiction. Even in times of expansion after Argentina’s default, when President Cristina Kirchner’s government struggled to regain international confidence by repaying international aid loans and quickly servicing its restructured debt , there was no effort to negotiate with the recalcitrant when such a settlement would have been reached. cheaper than today. While Kirchner’s stubbornness may have bolstered his political capital in his country, the economic policies induced by his inability to borrow in foreign markets are now dragging the country into a recession. Argentina can still avoid paying the holdouts, but it seems clear that such a victory would be Pyrrhic at best.
There are good cases to blame for each side: If vulture funds had traded their bonds earlier, they would have made a decent profit and saved us all this mess, but no law says they had to. If global finance had not integrated global economies, Argentina would not have suffered from capital flight, but it would not have had access to capital to begin with without this system. If Judge Griesa had not made his controversial order, retention contracts would be unenforceable, but it will be more difficult for any ruler to borrow money if lenders fear they will not be able to collect. And if the various Argentine regimes had not made mistakes in economic policy or had simply been more pragmatic, this whole situation might never have arisen, but it is their citizens, and probably not the rulers themselves. , which will pay the highest price. Maybe there isn’t a lot of morality in this story after all.