Argentina has defaulted eight times in its 200-year history, the latest coming on Thursday after a bizarre legal saga that left Argentine sovereign debt in the hands of a Manhattan federal district judge.
Judge Thomas Griesa ruled that Argentina could not make its next payment on restructured debt from its 2001 default—money that is already sitting in the New York bank in charge of mediating the payments—until including another set of bondholders in that exchange. That second set of bondholders, representing only seven percent of Argentina’s creditors, consists of hedge funds represented by Elliott Management’s NML Capital. The funds bought Argentine bonds as the country’s economy spiraled downwards, and they rejected the restructuring, holding out for the bonds’ full original value.
The Supreme Court refused to review Griesa’s decision, while also permitting bondholders to issue subpoenas in order to locate Argentine assets abroad. Argentina refused to pay, as negotiations failed and the country defaulted on its debt last Thursday at midnight. Argentina’s standing in international debt markets, not to mention its domestic economy, is so bad that very little has actually happened as a consequence.
Since its 2001 default, Argentina has been experiencing inflation, recession, and exclusion from international capital markets. None of that has changed, though it is slightly accelerating. Argentines, many of whom lost their savings 13 years ago, have long turned to the U.S. dollar as the under-the-table currency of choice, as Argentina’s own peso is worth less and less every year. Last week’s default is practically a laughing matter in the Argentine papers, perennially full of bad economic news. The ever-opportunistic administration of President Cristina Fernández de Kirchner has railed against American injustice rather than making any attempt to minimize the harm.
The case’s international ramifications are even less dramatic, despite concerns over the future of creditors’ rights in debt markets. Peter Eavis and Alexandra Stevenson suggested that “the Argentine dispute will make it much harder for indebted countries to cut their obligations to manageable levels,” since investors now have a greater incentive to demand better deals from countries in crisis. But Hung Tran suggests such worries may be overblown due to the very limited and particular nature of this dispute. In fact, the likeliest outcome is mainly an international study session. After seeing such a small economic problem threatened to cause such a large one in Argentina, countries will likely look to clean up and clarify pari passu clauses, the legal mandate for “equal treatment” in debt repayments that caused the Argentine problem in the first place.
To that end, Nobel laureate Joseph Stiglitz called for a global system of debt restructuring. Calling the hedge funds “vultures”—as the Argentine press has—Stiglitz said that the investors had no interests in the country other than to profit from its demise, and that should have consequences.
The vultures have invoked the rule of law but we should be clear: This is about greed. By arguing for an interpretation of the legal principle that all investors be treated the same — totally at odds from that which is traditionally ascribed to it by both economists and market participants — they have undermined the rule of law, and made debt restructuring almost impossible.
Such restructurings are necessary for the market economy to work. But unfortunately, while we have a system to deal with private bankruptcy, we have no system for sovereign debt restructuring.
Whether the few billion dollars at stake here end up in the hands of Argentina or Elliott Management matters relatively little, either internationally or domestically. And more conscientious legislation will not kill aggressive speculation in sovereign debt. But Argentina’s cycle of defaults doesn’t have to continue repeating itself, and Stiglitz’s proposal could well be in the global interest. After all, it won’t always just be Argentina in the hot seat.