Argentina’s second default in only 13 years could have been prevented. Where to point the finger depends primarily on whether one blames the U.S. court system for forcing a sovereign country of 42 million people – and the third-largest economy in Latin America – into default, or whether one holds Argentine citizens responsible for the fiscal mismanagement of their leadership more than a decade ago. The U.S. government’s lack of action in its own court system, where this case is being handled, will have repercussions on its leadership over the international financial system. In order to stop the bleeding, Washington should intervene where it previously did not by urging the Supreme Court to hear an appeal on allowing Argentina to exit its default by continuing payments on restructured debt.
Legally, Argentina did give up jurisdiction over its sovereign debt case to U.S. courts as part of its terms with involved Wall Street investors. Analysts like Doug Bandow of the Cato Institute see the so-called “haircut,” which restructured debt repayments with the vast majority of creditors to 30 cents on the dollar, as an easy out after a failure to meet debt obligations. However, these deals allowed a resurgent Argentina to take advantage of growth and pay back investors, largely escaping from the condition of indebtedness that had shut it out of capital markets for the past 12 years.
The U.S. District Court’s decision in July to block Argentina’s payment on restructured debt, following the Supreme Court’s rejection of an appeal against the rule, essentially sentenced Buenos Aires to financial damnation. Argentina continues to seek workarounds in defiance of existing legal precedents, which keep the country in technical default since it cannot afford to pay both its restructured and non-restructured debt immediately,
Debt restructuring was not meant to give Argentina a free pass out of its immense, admittedly self-imposed fiscal problems. It helped save one of the continent’s most important economies and capitalize on an opportunity for recovery. Only three years before the first round of restructuring, just after default in 2002, millions of Argentines were roiling in financial hardship. Buenos Aires was besieged by political turmoil, with five presidents taking office in less than four years. Argentina’s recovery was remarkable because, despite an absence of foreign investment, it garnered the political will to turn a trade surplus into large payments on its debt. It paid off the International Monetary Fund at the start of 2006 and never missed a payment on its restructured debt until being forced to do so in July of this year.
Pressing the U.S. Supreme Court to overturn New York Judge Thomas Griesa’s ruling against Argentina would not amount to a bailout. Nor would it somehow promote the idea that defaulting on sovereign debt to seek restructuring is acceptable. Allowing Argentina to continue payments would simply maintain the status quo while permitting the country to continue its court battles with those few hedge funds notorious for preying on distressed sovereign debt.
As a result of the above decisions, U.S. political relations with Argentina are now abysmal. It is undoubtedly in Washington’s interest to distance itself from the wild rhetoric coming from President Cristina Fernández de Kirchner, which includes a threat to expel the U.S. Chargé d’Affaires and insinuations of a death threat emanating from the United States. Yet this escalation follows the U.S. slamming the door on Argentina by essentially standing by as it defaulted. By contrast, France and Germany supported the Argentines in American and European courts, respectively. Even the IMF, after a decade of acrimonious relations with Buenos Aires, seemed close to filing an amicus brief with the U.S. Supreme Court in 2013 before choosing not to at the behest of the United States.
The sharp decline in U.S.-Argentine relations has coincided with a sharper decline in Argentina’s economic standing. Naturally, the Argentine government and people are worried about the inevitable economic backlash of defaulting. They are perhaps more disturbed by the fact that a small minority of holdout companies have court approval to seek 1,300% in profits on the country’s heavily discounted sovereign debt. It is not the first time that hedge funds such as Elliott Management have been given the go-ahead to prey on the debt of floundering nations, and it probably will not be the last, given the precedent that is being upheld.
For the United States, the cost of avoiding the case is a global loss of confidence in the free-market system of debt restructuring guided by the IMF. Argentina’s boisterous and internationally popular support of a debt restructuring mechanism in the United Nations is opposed by the U.S., which ensures that Washington will lose key influence in the system if such a mechanism were implemented. Private lenders are likely to impose higher borrowing rates and they become war of investing if they lose control over restructuring negotiations to a U.N. body. The U.S. alternative proposes a revision of the existing system in which governments negotiate directly with their lenders. Washington backs the IMF Board’s recent proposal to strengthen the framework through which governments and lenders reach restructuring agreements.
Failure to keep Argentina out of default is a blow to the legitimacy of the IMF and a strategic loss for U.S. leadership in the existing international financial system. By changing course and urging the Supreme Court to take on and ultimately resolve Argentina’s debt payment case, the United States would take a credible step in preserving its global financial leadership.
Jesse A. Smith is a second-year Master’s candidate at the University of Pittsburgh’s Graduate School of Public and International Affairs, focusing on security in Latin America. He has previously published in the University of Pittsburgh Center for Latin American Studies’ Panoramas online journal, and the American Foreign Service Association’s Foreign Service Journal.
Photo by Gaston Cavanagh, VICE News.