Wednesday, August 6, 2014

Don't Cry for Argentina and Its Latest Default

I find myself in a sardonic enough of a mood to wonder if defaulting has become an Argentinian pastime. About a week ago, Argentina de facto defaulted on its bonds for the second time in thirteen years per a New York court ruling. If you need a good primer on Argentina's history on defaulting and how we arrived at this situation, the Washington Post has a good analysis on it. There are some speculations as to the effect this default will have both on the defaulting country and the global market. Default is typically rough on a country because it becomes nigh impossible to borrow money from other countries to help the defaulting country rebuild its economy. This is the eighth time in Argentinian history that it has defaulted, so maybe the eighth time is the charm. So who do we blame for Argentina's default?

Maybe Argentina was receiving bad advice from its lawyer. Maybe this is a sign we need to adjudicate sovereign-debt disputes in international courts because Argentina was not given enough leeway with being able to restructure its debt (although, in all fairness, the court ruling is too narrow to have broader implications). I'm actually going to put the vast majority of the blame on Argentina. While I was in graduate school, I wrote a policy paper for one of my classes outlining the fiscal irresponsibility and poor macroeconomic decisions that led to the 2001 default. It doesn't help that Argentina's economy is not in the greatest of shape (although it could be doing much, much worse), nor that its freedom of press has been in decline. And let's not forget its deteriorating economic freedom (see here and here). This is not a case of a victimized nation-state that has been bullied or coerced. It is about Argentina needing to make payments that it promised to makeSome kvetch how it's unfair to make Argentina payments on "vulture funds," but you know what is truly unfair? Reneging on debt payments you promised to pay. Refusing to keep to your word is something that should put any sensible creditor at ease.

Whether it's dealing with student loans, mortgages or sovereign debt payments, we should hold contracted parties accountable for their financial irresponsibility. That is why the court-induced default was a victory for the rule of law. Argentina chose to borrow money under New York jurisdiction, waived sovereign immunity, and agreed to no collective action clauses (Collective action clauses are more common in such debt restructuring now than it was when Argentina first took out the loans, which is another reason why this court ruling isn't going to have broader implications). Argentina lost fair and square because it preferred to borrow money at a lower interest rates and for a longer period of time than to borrow elsewhere. Either pay what you owe, which seems to be in Argentina's power, or default. Argentina has weathered worse economic conditions before, it hasn't had the same potential for the contagion effect that the last default had, and I think they will be able to make it through this default. There's no reason to cry for Argentina, so why waste your tears?


  1. Such a nasty column could have been written about a month ago, when most commentators were screaming "Pay up Argentina!" because of a shallow understanding of the issue at play.
    Since then there has been much information and debate about the role of the vulture funds, and the views about the Singer-Griesa-Argentina saga are more nuanced.
    As the writer does not seem to know, Paul Singer-Elliott, NML and fellow Aurelius specialize in buying debt from countries in distress for pennies on the dollar, and then litigating to have the courts:
    1) Take away any market risk and raise the bonds to full face value, that is 100 cents on the dollar.
    2) To force immediate payment plus interests.
    The vultures' strategy was successful in siphoning millions from Zambia, Liberia and Congo, which are among the most impoverished and heavily indebted countries in the world. Peru was also a victim. Mind you, all perfectly legal! However, in the case of Peru, a NY judge ruled according to the Champerty doctrine that one can't buy debt with the exclusive purpose of litigating. Paul Singer mobilized his Republican friends, and the ruling was quashed on appeal.
    However, Argentina has revealed a tough bone to chew. The Singer-Griesa team is facing a government determined not to bow to pressure, not to mortgage future generations' or pass the bucket to the next government.
    Griesa may face some problems as a result of an investigation requested by Argentina on the possibility of collusion to cause an Argentina default to allow the holdouts to collect about $1 billion in Credit Default Swaps. Watch out--it won't be pretty.

  2. Enrique,

    You talk to me about a nuanced view, but then put the blame squarely and primarily on the so-called "vultures." You mention that the Argentinian government is determined not to bow down to pressure, but I think you miss the point of what I was trying to see. Clearly, I need to elucidate a bit further as to why I am going to blame Argentina before I blame Singer or Griesa. I don't want to get into the fact that RUFO (Rights Upon Future Offers) clause made the ruling more legit, how we shouldn't create moral hazard by allowing for governments to rack up more debt, or how the Argentinian debt was restructured twice since the 2001 default: once in 2005 and once in 2010.

    Let's ask ourselves a simple question: how did these bonds get created in the first place? It's not as if "vulture bonds" are created ex nihilo. If you're going to see how this whole debacle was created, you have to look further back at Argentina's political history because even assuming your narrative is correct, there would be nothing to prey upon if Argentina didn't implement such reckless public policy in the first place.

    Argentina was the one that opted for a currency board in the early 1990s to avoid further hyperinflation, which ultimately put them in a monetary straitjacket by the late 1990s. The Argentinian government was the one who let provincial-level spending and deficits get out of hand via the Coparticipación Federal de Impuestos. Argentina also has well-renowned rigidity in its labor market, most notably with salaries and pension provisions. Poor tax policy leading up to the 2001 default killed whatever chances Argentina had for economic recovery. Looking at Argentinian policy after the 2001 default, there haven't been significant reforms. Tax revenues as a percentage of GDP increased, expansionary monetary policy contributed to double-digit inflation, and the government's spending as a percentage of GDP has only increased over time. I feel bad for the "everyday people" of Argentina because they will be the ones who will bear the brunt of their government's ineptness. Even so, being able to handle one's internal finances is a sign of responsibility that distinguishes the developed world from the developing world, and if Argentina has showed us anything, it's that they haven't grown up since the 2001 default.