An Alternative Look at the Argentine Default

On the eve of Argentina’s eighth default, the HPR’s Ignacio Sabate published an article questioning whether history was repeating itself in Argentina. Sabate, like countless writers before him, observed that Argentina’s long history of financial troubles could be proof that the country still “has not learned its lesson.” This portrayal of Argentina appeals to our naïve belief in a just world. We can pretend that default and its consequences are a scourge reserved for countries that lack financial discipline. Unfortunately, we don’t live in a just world. We live in a world where the economic rules of the game are written in the developed world to facilitate the exploitation of developing countries. The most recent Argentine default is not the result of financial irresponsibility, but corporate American greed.
Far from ignoring its financial obligations, Argentina has spent the last decade putting its house in order. On exiting its last default, a penniless Argentina negotiated the restructuring of its bond, signing new agreements with 93 percent of its creditors over the course of the next decade. The currency controls that Sabate criticizes were instrumental in increasing the dollars held by the country’s Central Reserve Bank. In fact, Argentina’s public debt held in dollars fell from over 150 percent in 2002 to 8.3 percent by 2013. In 2005, Argentina paid off its debt to the International Monetary Fund, and earlier this year, the country negotiated a $10 billion deal with the Paris Club. Included in these agreements was a clause stating that Argentina could not make new, better arrangements with some creditors without offering them across the board. As Argentina experienced growth throughout the decade, these creditors saw strong returns, more than doubling their initial investments.
The one barrier remaining between Argentina and full fiscal redemption are a handful of creditors-—the so-called “holdouts”—who have refused all attempts at negotiation. This group, led by Paul Singer of the infamous Elliot Management Corporation, is largely made up of investors who bought Argentina’s debt second-hand at an 80 percent discount after the 2001 crisis in hopes of a big payday. Unwilling to accept the already high profits they would receive under a negotiated restructuring, Elliot and his colleagues are pushing for a 2,000 percent profit on money they never loaned.
With the help of a controversial ruling from New York judge Thomas Griesa, these funds have been able to bring Argentina’s decade of progress to a complete halt. Griesa’s ruling imposes an all-or-nothing rule on the country’s markets. Creditors who agreed to restructure cannot be paid until the holdouts are paid as well. Additionally, thanks to Argentina’s good-faith agreements with its creditors who agreed to restructure, a decision to pay the holdouts in full may require the country to offer full payments to other bondholders to the tune of up to $120 billion, wiping out the country’s reserves and requiring harsh cutbacks to government programs.
Faced with these options, it is unsurprising that the Argentine government chose default. Perhaps more surprising is the portrayal of this decision in the international press. Publications like The Wall Street Journal, and Business Insider have for the most part ignored the potentially dire consequences of full payment, instead making ominous illusions to the economic unrest of 2001.
Writing from Buenos Aires three days into the default, it is obvious that history has not repeated itself. There is no unrest in the streets. No looting, no rioting, no rush to convert pesos to dollars. This is because as a result of the last default, the Argentina of 2014 remains largely isolated from most international credit markets.  Credit-wise, the country has little left to lose.
Mainstream economic journalists who choose to ignore the facts, minimizing Argentina’s attempts to resolve its debt, distorting the dangers of the default, and ignoring the questionable motives of American creditors do so not out of concern for Argentina, but in the interest of a wealthy, Western audience eager for new investment frontiers. Full payment from Argentina would make it far more difficult for developing countries to get out from under their debts in the future. Creditors would enjoy low-risk loans with huge profits to be reaped over years of interest payments. A government cutback in Argentina would open the door to foreign investment, as the government would be forced to sell off public industries.
In this sense as well, history is not repeating itself. Argentina has already experimented with the unrestrained neoliberal economic policies that the mainstream press encourages, with disastrous results, and there is little public support for a return to such unfettered greed. Despite its many flaws, the current administration has made a conscious decision to choose a “third way” that is less dominated by Western interests. The question of Argentine debt is thus of crucial interest to all developing countries fighting similar battles in the global financial markets. Considering the options available to Argentina, its decision to default rather than submit to the vultures should be commended, not condemned.
 
Image Source: Patagonia Advent