Argentina has violated the rules of trust
Every time it looks as though Argentina’s debt crisis is resolved - either by a judicial decision or by a government decision - its government decides to continue the fight and leave the dispute with the holders of its sovereign debt without a deal, writes Dr Joseph S. Tulchin.
Failure to resolve the dispute costs Argentina US$30 billion a year in lost necessary investment and in normal public spending, especially in the energy sector.
The Argentines should, in strict economic or financial terms, accept the judicial decisions to pay the holdouts who have refused to accept the restructured bonds. In doing so, it would regain access to the international credit market and save itself a huge amount of money. This would more than make up for whatever payment it makes to the holdouts.
It also would save its domestic private investors large amounts of money which they lose because uncertainty in the marketplace stops them making investments, especially when imports might be involved.
But this conflict involves more than cold, rational economic calculation of costs and benefits. It also involves politics. Argentina’s government has declared it will not negotiate with the holdouts, which they call ‘vultures’ and fears that to change its position now would cost political support it needs to maintain its economic policy and political power.
Argentine President Cristina Fernandez de Kirchner has bolstered her political base by printing money to pay for social programmes for several years and by altering official government statistics which track price movements and inflation. The value of the peso has deteriorated significantly.
Nobody, in Argentina or abroad, trusts the government’s numbers. And the country’s central bank continues to use hard currency reserves to cover deficits and shortfalls to maintain the fiction. Argentina’s dollar reserves have fallen below a perilous US$30 billion.
Economic activity has declined dramatically, unemployment is rising, and money has fled from productive activity to consumption and to non-monetary assets, such as property.
The holdouts continue to pursue their case, including attacks on Argentine assets held outside the country. Lawsuits proliferate in the major money markets in the US and Europe.
It appears the current government will succeed in stretching out the solution so that the new government, to be elected in October 2015, will have to deal with the problem. That means that President Kirchner can continue to trumpet her stout defence of Argentine nationalism against the forces of the vultures and international imperialism.
There are many ways under the existing system of avoiding a repetition of the Argentine case, but no system of international rules and regulations can guarantee that a government will not behave in an irresponsible and irrational manner similar to Argentina’s over the past few years.
The Argentine government has not just thumbed its sovereign nose at the international rules of the game. By distorting or falsifying its official data, it has violated the rules of trust which hold the Argentine social pact together. It is not the first time this has happened. It probably will not be the last.