A faltering economy. A plunging currency. Double-digit inflation. And now the second default on its national debt in little more than a decade.
Argentina is in a terrible state. You might think that the architect of this mess, President Cristina Fernandez de Kirchner, would be reluctant to show her face in public ― let alone hobnob with her fellow continental leaders.
Nope. Even though Kirchner reportedly is unable to fly her official presidential plane abroad for fear that creditors will impound it, she made a trip to Caracas, Venezuela, last week. There, various Latin American leaders rallied to her side. At a summit meeting of the Mercosur common market of South American countries, Kirchner took a bow for her, um, well, we’re not sure what for.
Apparently all it takes to bring on cheers in Caracas is a thumb of the nose to global financiers ― even when those financiers are in the right. Kirchner deserved a round of boos for the suspicions that financial markets now will apply not only to Argentina but to other debt-challenged Latin American nations.
Argentina’s latest crisis grew from its economic collapse of 2001-02. The country defaulted on nearly $100 billion in loans ― the biggest default ever by a sovereign nation at that time. Millions of Argentines were plunged into poverty. After years of wrangling, most of the country’s creditors agreed to a debt restructuring that paid them just 30 cents on the dollar.
Some creditors, though, didn’t play along. They had bought Argentina’s distressed debt at a deep discount and refused to accept the restructuring. U.S. courts sided with them, ordering Argentina to pay them back in full. The court rulings also blocked Argentina from paying new bondholders until it had paid the old, and threatened to impose sanctions on any banks that helped Argentina circumvent these rulings.
Argentina says it can’t afford to pay the stubborn creditors in full. It claims that the other creditors who had agreed to take less would then want full repayment as well. Kirchner has scored populist points by vilifying the holdout creditors as “vultures” and ― a label many Chicagoans wear with pride ― “speculators.”
The smart move would have been for Argentina to admit defeat and strike a deal with the so-called “vultures,” who say they were willing to negotiate. Instead, political gamesmanship and a sense of having nothing to lose led Argentina to default Wednesday when it failed to make a $539 million interest payment.
The people of Argentina in truth do have plenty to lose. A well-educated population living in a resource-rich country should be thriving, as are the citizens of neighboring Chile.
Instead, the future for this once-prosperous nation ― in area the world’s eighth-largest ― looks bleak. Global credit markets will continue to shun Argentina. Kirchner will keep printing money to finance unaffordable government spending. Consumer prices will shoot still higher even as the country sinks deeper into recession. Jobs will be scarce. U.S. dollars will be precious.
Isolated and vulnerable, the economy could collapse into a devastating depression that would hurt the country’s poorest citizens the most.
There is nothing here to cheer. Some pundits do say that Argentina’s reckless defiance could eventually lead to new rules that would make sovereign debt restructurings more fair and orderly. As is, no bankruptcy process exists for independent countries that can’t pay their debts. Instead, the International Monetary Fund has promoted so-called collective action clauses, techniques that are supposed to help debtor nations and investors.
But those take forever to negotiate and they can be overturned in court. Meanwhile, impoverished people suffer for their government’s foolishness.
In the absence of some breakthrough idea, how about this: Indebted nations playing the long game should support the rule of law and urge their neighbors to do the same. When their economic conditions improve, their reputations will be intact. That’s why several European countries with their own debt problems have endured austerity measures: They want the credibility that will allow them to borrow again in world markets.
Argentina, by contrast, won’t be able to make progress until it settles its legal dispute and begins to live down its image as one of the last places on Earth to which an outsider ever would want to lend money.
(Chicago Tribune)
(MCT Information Services)
