Cristina Fernández de Kirchner refuses to pay Argentina's massive debts -- and that's why she has to go.
- By James K. GlassmanJames K. Glassman served as undersecretary of state for public diplomacy and public affairs and as chairman of the Broadcasting Board of Governors in U.S. President George W. Bush's administration. He is now executive director of the Bush Institute.
The fun may soon be over for Cristina Fernández de Kirchner, the president of Argentina with a reputation for reckless populism. Among other antics, she flamboyantly fired the head of the country’s Central Bank and expropriated a majority interest in YPF, Argentina’s largest oil company. Since 2003, Argentina has dropped from 68th to 158th (behind Burundi and Belarus) in the Index of Economic Freedom, compiled annually by the Heritage Foundation and the Wall Street Journal. Worst of all, Kirchner has spent five years flouting international financial norms — and getting away with it.
But perhaps not for long. Christine Lagarde, managing director of the International Monetary Fund (IMF), said on Sept. 24 in Washington that if Argentina does not start providing acceptable and accurate economic data, it will face a "red card" — the signal from a referee that a soccer player is expelled.
A week earlier, the IMF had issued an official warning to Argentina — in effect, a yellow card — that if it doesn’t shape up by Dec. 17, it will become the first developed country ever to be kicked out of the 188-member organization. The IMF monitors the world economy, makes loans to members in trouble, and provides technical assistance.
"My country is not a soccer team," responded Kirchner at the U.N. General Assembly last week. "It is a sovereign country and, as such, is not going to accept a threat."
We’ll see. Clearly, she has a problem. Argentina is the only country out of 42 for which the Economist magazine won’t list an inflation figure in its weekly data section. The reason, says a footnote: "Official number not reliable." But the magazine estimates the rate at 25 percent, notes that price controls and the YPF expropriation have discouraged investment, and says that growth, "even by the questionable official numbers," has plunged in a year by 6 percentage points to the lowest rate in Latin America.
Poor policies and phony statistics, however, are nothing new in the world of economics, and certainly not in Argentina, whose citizens have long had to deal with the consequences. The real problem, however, is contagion. Argentina has ignored its debt obligations, and until recently, the rest of the world has reacted blithely to this challenge to the global financial system. Argentina has set a dangerous example for other countries to follow. So far, the mimics have merely been Ecuador, which defaulted in 2008, and little Belize, which, while engaging Argentina’s U.S.-based law firm, threatened to pay just 20 cents on the dollar to bondholders (but now seems to be relenting). The danger is that substantial European countries will see the Argentine Way as a model for them too.
Argentina defaulted on about $100 billion in bonds in 2001 — the largest failure to repay sovereign debt in history — and gave creditors a take-it-or-leave-it offer of 35 cents on the dollar (traditional settlements are usually in the range of 50 to 60 percent).
While many creditors took its unilateral offer in 2001, others, including several large institutions and 60,000 Italian pensioners, stood fast. In the ensuing years, Argentina has ignored more than 100 court decisions in favor of the creditors. Despite a clear ability to pay its debts, Argentina has also thumbed its nose at awards by the International Center for Settlement of Investment Disputes, the World Bank’s arbitration mechanism.
The consequences of this behavior? Not much. Argentina has been shut out of private credit markets, but it’s still allowed to borrow billions of dollars from the World Bank and the Inter-American Development Bank (IDB). Even more remarkably, Argentina remains one of only 19 countries honored with inclusion in the G-20, the organization charged since 2008 with addressing the global financial crisis.
The risk is that other countries see how Argentina has acted with impunity and decide to do the same. An article in May by the Guardian‘s longtime economics editor carried the headline "Greece should follow Argentina’s lead" and the subhead "when an economic crisis hits it is often best to go it alone."
There is a simple way, however, to nip contagion in the bud: expel Argentina from the G-20 and the IMF and end the flood of loans coming from international institutions. The United States took the first step along this path in September 2011, when a Treasury Department official announced that "the U.S. will oppose lending to Argentina" at the World Bank and the IDB.
Until recently, the United States was alone, but on Aug. 31, Germany and Spain joined in voting no on a $60 million IDB loan for a development project in Argentina’s San Juan province. Spain’s opposition was not surprising, given Kirchner’s seizure of the shares that the Spanish company Repsol held in YPF. But Germany’s vote was a real blow, and it produced a weird, wounded response from the Argentine president: "Still in this world, which has fallen and collapsed, in a world that was shown as ideal, they insist on punishing us because we are the bad example of a country that can build and stand up with no outside tutelage."
Based on discussions with public officials in Europe this summer, I wasn’t shocked at all by Germany’s action. Germany and the Netherlands, especially, are worried about the threat to Europe posed by broader adoption of the Argentine model, and sources told me off the record that they were ready to do something about it. The fear is that Italy, for example, might simply tell its creditors that it’s adding another 20 years to the maturity of the bonds they hold and cutting interest rates to a few percentage points; that could lead international banks into cascading failures.
Opposing small loans is one thing, but a far greater impact would come from kicking Argentina out of the G-20. And, to be clear about it, Argentina really has no business being in this esteemed group of states. With my colleague Alex Brill, a research fellow at the American Enterprise Institute, I recently produced a study, supported by the National Taxpayers Union, that advocated objective criteria for G-20 admission. Under practically any set of metrics — size, rule of law, interconnectedness of financial institutions — Argentina falls far, far short of membership.
Up until recently, developed countries have been willing to ignore Argentina’s antics, but as the global slowdown continues — and, in some areas, intensifies — the irresponsibility and downright clownishness can’t be tolerated much longer. In the wake of Germany’s no vote, Kirchner put on a brave face. This is "not a step back for Argentina from any of the conquests achieved," she claimed. But it’s hard to see what those conquests are; as for steps back, they now seem inevitable.