Argentinian Debt and American Hypocrisy

Argentinian President Cristina Fernandez de Kirchner declared Thursday that her country would not pay back its $1.5 billion debt to American Paul Singer’s NML Capital Ltd., after the U.S. Supreme Court ruled Argentina must pay back its loans. The ruling was meant to finally put an end to a decade-long dispute concerning loans Argentina received during its 2001 economic crash. While it is easy for the U.S. courts to simply demand full repayment, plus interest, this decision could prove disastrous for Argentina.

Argentina’s government has made it very clear that being forced to pay off these old debts in one fell swoop could land them in a second economic crisis. Argentina had originally defaulted on nearly $100 billion and has $24 billion remaining unpaid. Therefore, with the precedent set in this case, its debt holders may be much more inclined to sue for the full repayment and interest of those debts. Unfortunately, that amount of money accounts for almost all of the Argentinean Central Bank’s foreign reserves, which would leave the country penniless. Even worse, the Supreme Court’s decision specified that Argentina would not be permitted to continue paying current “restructured” debts until these old ones were taken care of.

Argentina is already seeing the negative ramifications of this ruling. The anticipation of Fernandez de Kirchner’s non-compliance alone caused a swift economic drop in Argentina’s top three stocks: Merval, Yacimientos Petrolíferos Fiscales, and Edenor Clientes. Given that those three companies have seen some of the few economic wins since the 2001 crash, such losses could hit pretty hard. If Argentina does pay, the money used would be taken from a pool of national subsidies that have helped encourage economic independence since 2001. Argentina would therefore not only lose foreign financial support, but also bankrupt its domestic coffers and ruin the morale of its people — something a country in crisis can never afford.

The final aspect of the Supreme Court’s ruling leaves Argentina especially vulnerable. It ruled that the American debt holders are able to force Argentina to disclose other property around the world, leaving the country with basically no alternate resources. This option makes it even easier for the holders to aggressively pursue what they’re owed. Even more importantly, the debt holders could reveal critical assets, like military resources, that could limit Argentina’s ability to protect itself and its allies.

After over a decade of waiting to be repaid for their debts, the U.S. holders may seem justified in such a harsh and unyielding proposal. Even with genuine promises from President Fernandez de Kirchner to comply with negotiations, this course might still be justified.

But here’s where the hypocrisy comes in.

This ruling is coming from the U.S. perspective, a view that sees all debts as impossible to default on, and one that Argentina is definitely not privy to. While this could just be another symptom of America’s excessive culture, there is actually some truth behind the statement. According to economist Alan Greenspan, “The United States can pay any debt it has because we can always print money to do that.” So, because America’s leaders accrued debt only in U.S. dollars, it is technically impossible to default on any loans. The keyword there being technically.

Anyone can see that this is neither a very sound defense nor a good economic plan. And for those who don’t, history can be very enlightening. Germany followed this logic in the early 20th century and ended up with such high inflation that its paper money was more valuable as kindling than currency. A nation in $5.6 trillion of debt and abiding by this blind logic is maybe not the best judge for other countries in debt. Perhaps America should step back and consider the fact that it owes China and Japan a combined $2.4 trillion, and would definitely appreciate some leniency if it were in Argentina’s position.

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Erika Bethmann (@EBethmann) is a New Jersey native and a Washingtonian in the making. She is passionate about travel and international policy, and is expanding her knowledge of the world at George Washington University’s Elliot School of International Affairs. Contact Erika at staff@LawStreetMedia.com.

Featured image courtesy of [Ken Teegarden/Seniorliving.org via Flickr]

Erika Bethmann

Erika Bethmann is a New Jersey native and a Washingtonian in the making. She is passionate about travel and international policy, and is expanding her knowledge of the world at George Washington University’s Elliot School of International Affairs. Contact Erika at staff@LawStreetMedia.com.