It’s not often that sovereign nations effectively find themselves in debtors’ court. Over the past year, however, Cristina Fernández de Kirchner’s Argentina has been bouncing around the U.S. court system as it wrestles with bondholders who want to be paid what they’re owed. The case, NML Capital, Ltd. v. Republic of Argentina, has been making its way through the court system, with Argentina continuing to find court after court rejecting its arguments concerning why it shouldn’t be required to make payments on defaulted government bonds.
As we all know, bonds contain guarantees that the holder has a legitimate claim to the full value of the interest and the principal that’s due. Moreover, under New York state law, sovereign bond issues usually contain a clause that guarantees that the issuing government will pay these sums on time, and without any changes in the terms of the bond unless all the bondholders agree otherwise. That clause exists in order to prevent governments who might want to “trim” their payments from playing off bondholders against each other.
Just recently the U.S. Supreme Court let stand a 2012 U.S. Appeals Court decision that prevents Argentina from making payments on $24 billion in restructured debt unless it also pays $1.33 billion to the owners of the earlier repudiated bonds. Unless it can make the restructured-debt payments, Argentina claims, it will find itself having to pay over $15 billion to cover defaulted debt and penalties. That, it avows, would be a fiscal catastrophe. By contrast, the creditors insist – and the courts thus far agree — that, as the Second U.S. Circuit Court of Appeals put it in August, such assertions were “speculative, hyperbolic and almost entirely of the republic’s own making.”
That’s rather strong language. But Argentina has been playing games with many holders of the nation’s defaulted bonds ever since 2001, when the country defaulted on a record $95 billion debt. Under Presidents Eduardo Duhalde, the late Néstor Kirchner, and now his widow Cristina, successive Argentine governments have been going back and forth trying to settle with (or string along, depending on your perspective) holders of repudiated bonds.
Back in 2003, for instance, the government offered to pay 25 cents on the dollar. This was instantly rejected by bondholders who observed that the real offer was more like 10 cents, given unpaid interest. Keep in mind that the bondholders at the time included not just large funds but also hundreds of thousands of ordinary investors in America and Europe who lost a great deal in 2001.
It would be nice if there was something like an international bankruptcy court along the lines proposed by former World Bank chief economist and acting IMF managing director Anne Krueger in 2001 to settle sovereign-debt issues. Alas, there isn’t. So, eventually, American courts will determine who gets what in Argentina’s ongoing battle with its various creditors. But all along a key part of the Argentine government’s position has been that it cannot pay what it owes without endangering Argentina’s economic well-being: a claim that, as noted, has been rejected by the courts. Yet the truth is that Argentina’s governments have a long history of being the primary culprits in endangering their country’s economic well-being, starting with the fact that the country has defaulted no less than five times since the 1820s.
The 2001 debt crisis, for example, flowed from many factors. This included Wall Street analysts issuing excessively rosy pictures of Argentina’s debt situation as well as an IMF that couldn’t quite bring itself to tell Argentina in the 1990s that it needed to get its fiscal house in order. As a 2003 IMF paper retrospectively put it: “The Fund clearly took too accommodating a position with regard to Argentina’s fiscal targets during the [1990s].”
Nevertheless, decisions by Argentina itself during the same period played a major role in facilitating its debt problems. This included governments understating the size of Argentina’s deficit, their failure to engage in substantive labor-market reforms, the reluctance to recognize that the convertibility of the peso and the dollar had become counterproductive, their unwillingness to implement disciplined budgets in the boom years of 1996–98, and their choice not to engage in consequential restructuring of Argentina’s debt until it was far, far too late.
Then there is the simple fact that the Argentine government freely chose to raise money on the bond market. It was not coerced to do so. And one of the reasons it borrowed so much money was to pay for fiscally-imprudent policies, instead of undertaking the more difficult and politically-unpopular task of reining in excessive spending.
The big losers from Argentina’s efforts to evade some of its bondholders are, of course, the Argentine people. Their government’s latest endeavors in the U.S. court system only add to the sense that fiscal responsibility and accountability are not among the country’s strong-points. And that has negative consequences for foreign investment, not to mention the ability of future Argentine governments to raise loans in the future.
Above all, the Argentine state’s behavior on this matter mirrors a pattern of authoritarian populist policies pursued at the domestic level. Under the Kirchners, the government has nationalized major private industries (including the biggest oil and airline companies), taken over private pension funds, stacked its supreme court, presided over some of the worst corruption in Latin America, and come close to establishing a near-monopoly over the press. It suits the government to present itself as valiantly defending ordinary Argentines against foreign investors. In truth, however, it’s the denial of fiscal reality by much of Argentina’s political class that really endangers Argentina’s future, not foreign bondholders.