There are two points worthy of comment in Argentina’s current debt crisis. The first has to do with its domestic politics and the second with the international financial system, writes Dr Joseph S. Tulchin.
Argentina’s government defaulted on its sovereign debt in 2002. The government renegotiated the majority of its debt in 2005 and 2010. The holdouts, now including several hedge funds, sued the Argentine government, claiming, pari passu, that they should be paid for their bonds in the same manner as those who accepted the new bonds. The US court held in favour of the holdouts.
Argentina’s President Cristina Fernandez de Kirchner has used the dispute to declare her defence of Argentine sovereignty and to brag repeatedly that her strong stance against the hedge funds, which she calls ‘vultures’, shows her patriotism and the validity of her attacks on the evils of capitalism and imperialism.
Her stance has won her support at home just as her economic policies have brought Argentina to the brink of crisis with the economy nearing recession. There is a parallel exchange market which offers nearly twice the official rate for dollars. Meanwhile, cities, provinces, and large state-owned companies, especially the national oil company YPF, pay more than twice the going rate on normal borrowing. Foreign investment has slowed.
Exclusion from international capital markets costs the Argentine government more than US$15 billion per year. The central bank’s reserves are nearly exhausted. The government desperately wants to avoid negotiating with the holdouts until the president leaves office at the end of 2015.
Argentina has a long tradition of using short-term domestic political goals as reasons to flaunt the rules of the international community. In the current case, the Argentine government has called publicly for a reform of the international system and an end to the New York money market’s role in the system.
In this she has allies on her side. Other governments have chafed at the tight control of the New York money market. The so-called rules of the game established by the Bretton Woods institutions are somewhat arbitrary.
The BRICS countries, of so-called emerging economies including Brazil, Russia, India, China and South Africa, have announced creating a development bank free from control by the current big international players. No country which has suffered a debt crisis in the past decade would argue against reform of the current system.
Who decides when the rules of the game are broken? There is no international organisation which determines the rules of sovereign bankruptcy. More broadly, there is no international institution which has the authority or power to enforce the rules and set the penalty or price for bad behaviour.
Power in the global community has become so fluid that it is difficult to build consensus among nation states on matters of geopolitical significance. In the case of the Argentine debt dispute, the rules of the game are made through the actions of thousands of actors. The international financial markets cannot function without some measure of predictability. The US courts, in defending legal contracts, represent that measure of stability for the moment and the Argentines are paying the price for violating the rules of the game.