Globalist Analysis

Argentina and the G-20

Eight years later, how is Argentina’s debt default affecting the country’s economy?

Cutting the credit card?

Takeaways


  • If the world community tacitly accepts Argentina's outlier behavior, dozens of other developing countries will pay the price.
  • The losses created by Argentina's default, restructuring and repudiation are all tax-deductible, which means the rest of us have to make up the shortfall.
  • No other country in modern times has taken the step of unilaterally repudiating its debts — including desperately poor, sub-Saharan countries that also have defaulted in recent times.

With the world recovering from the worst financial meltdown since the 1930s, the G-20 summit should be a potent time to discuss new rules of the road for international capital markets.

For decorum's sake, Argentinean President Christina Fernandez ought to keep a low profile, given that her government has been the world's preeminent scofflaw of international finance for nearly a half-decade.

But yesterday, news reports appeared claiming that her government had actually reached a deal to resolve about one-third of its outstanding debts — the first good news on this front since 2005.

That makes the summit a golden opportunity for the United States and others to reaffirm to President Fernandez why following through and extending the reported new deal is so important.

She needs to understand how her own government's debt management policies in recent years have posed a greater danger to developing countries than unsecured credit default swaps — and a bigger threat to Argentina's own development than competition from any of her neighbors.

This all began when Argentina defaulted on $81 billion in government bonds in late 2001, the largest sovereign debt default in history. Over the next several years, Nestor Kirchner's government — that's Christina Fernandez's husband and predecessor — refused to sit down with its major foreign creditors to discuss any terms for restructuring the defaulted debt.

Then in January 2005, Mr. Kirchner issued a new, take-it-or-leave plan offering new bonds worth about 27 cents for each dollar of old debt — compared to the international norm of 45-50 cents on the dollar.

Moreover, when about half of Argentina's foreign lenders (holding $19.4 billion in the defaulted paper) said no, Kirchner peremptorily repudiated their debts. No other country in modern times has taken the step of unilaterally repudiating its debts — including desperately poor, sub-Saharan countries that also have defaulted in recent times.

That's where things have stood for years, with far-reaching consequences. Argentina has faced legal judgments upholding their bondholders in every money market capital in the world. Those judgments prevent the Fernandez government from borrowing outside Argentina, since any proceeds could be seized to satisfy the judgments.

Furthermore, a leading Argentine economist, Martin Krausse, has found that, following the repudiation, the growth of foreign direct investments in his country slowed by nearly two-thirds. That's unsurprising, since a government that borrows tens of billions of dollars in international markets, and then repudiates it all, can hardly be relied upon to maintain a favorable business environment.

And with FDI slowing and access to foreign capital markets closed, the Argentine government has had to depend on domestic borrowing — and it has kept this activity going mainly by inflating the money supply.

All of this could go away if the Fernandez government, like the Kirchner one before it, will listen to its own economic advisors and settle its accounts with all of its foreign creditors.

The news reports say that yesterday, Buenos Aries finally reached an agreement with international creditors holding some $8 billion in repudiated debt. Now the Argentine government has to bring in those holding the remaining $12 billion in nullified paper.

The costs of not following through would go beyond Buenos Aires, which is what makes this issue an appropriate one for the upcoming G-20 meeting. Lending to developing countries always entails risk, and those risks will increase if Argentina, with its government's present stance, is somehow allowed to prevail.

If governments are allowed to default on their debts, offer their creditors half what they have long received in cases of defaults, and then repudiate the debts of those who balk, the likelihood of sovereign defaults would only increase. Also, the costs of those defaults to lenders would certainly go up.

The economics here are very basic: The greater the risk and the higher the potential cost of lending to the government of a nation, the less funds will be lent. If the world community tacitly accepts Argentina's outlier behavior, dozens of other developing countries, especially the poorer ones, will pay the price.

These issues may seem unconnected to the concerns of most Americans and Europeans. The truth is, everyone else has been paying a price for Argentina's like-it-or-lump-it approach to finance.

A recent analysis, for example, found that the default and restructuring have cost U.S. bondholders nearly $9.5 billion so far — and those bondholders include pension plans and mutual funds that represent many millions of Americans who have never heard of Nestor Kirchner and Christina Fernandez. (The costs to bondholders worldwide now total almost $89 billion.)

Every taxpayer also has been bearing a small cost, along with millions of shareholders in multinational companies. The losses created by Argentina's default, restructuring and repudiation are all tax-deductible, which means the rest of us have to make up the shortfall. The latest estimate is that these taxpayer costs come to $3.2 billion for U.S. taxpayers — and nearly $30 billion for taxpayers worldwide.

Finally, the default also triggered a massive devaluation of the Argentine peso, which in turn reduced the value of years of foreign direct investment in Argentina, mainly by U.S. and European companies. The new analysis estimates that U.S. companies and their shareholders lost $7.8 billion from these effects, and that these costs worldwide exceeded $39 billion.

Development economists have talked for decades about Argentina's potential to take off economically. The standard explanations for why it hasn't yet happened include the country's bouts of high inflation, political corruption and inadequate investment in education and infrastructure.

But Argentina can still get a jump on faster development, if it will respect the norms of international financial life, like everybody else.

Yesterday's report is very good news for Argentina and the rest of the world. Now it just has to take the final steps to honor the rest of its obligations.

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About Robert J. Shapiro

Robert J. Shapiro is co-founder and chairman of Sonecon, LLC, a private firm that advises U.S. and foreign businesses, governments and non-profit organizations.

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