GHEI: New reasons to cry, Argentina

South American nation failed to deal with fiscal crisis

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The United States isn’t the only country facing a “fiscal cliff.” Argentina is headed for a tumble of its own, as its political leaders have failed to act responsibly in the face of repeated fiscal crises. Last week, Fitch Ratings downgraded its assessment of the South American nation’s ability to pay long-term debt. That leaves Argentina with a C rating, meaning its bonds — already rated as junk — dropped to one step above default. The once-wealthy country’s fall toward economic depression teaches an important lesson.

When Argentina defaulted 11 years ago, all but a handful of creditors took a deal that gave them 30 cents on the dollar of what the government owed them. Shedding the national debt load helped the country emerge from the crisis, but the good times didn’t last long.

Argentina has refused to make any payments to bondholders who rejected the haircuts as part of the restructuring. About $1 billion in bonds that weren’t part of the agreement are owned by hedge-fund billionaire Peter Singer, who sued in New York federal court, in keeping with contractual provisions, to get his money back. In October, the holdouts impounded the Argentine Navy’s training ship ARA Libertad as partial payment. On Nov. 21, the New York district court ruled that Argentina had to pay Mr. Singer and the other plaintiffs by Dec. 15, the date the payments for the restructured debt are due. Refusing to comply would have pushed Argentina into technical default, but an appellate court intervened, delaying the case well into next year. This gives Argentina some breathing room but leaves the underlying problems unresolved.

At the turn of the 20th century, Argentina was among the world’s 10 wealthiest nations. Eight decades of poorly conceived big-government, protectionist policies replaced prosperity with debt, inflation and increased poverty. The current government, lead by President Cristina Fernandez, is reliving the failed ideas of the past.

After imposing a complex mix of caps, taxes and subsidies on the energy sector, the Argentine government nationalized its leading oil company, YPF, in May. Far from solving economic woes, borrowing costs skyrocketed and Argentina’s inflation rate soared beyond 10 percent — one of the worst in the developed world. Ms. Fernandez’s government is also engaged in a battle with the country’s largest media company, Clarin, which faces being broken up if it fails to comply with new rules. Interest rates also are on the rise following the court order and the downgrade by Fitch.

As bad as things are for the Argentine people, the success of Mr. Singer’s litigation might pay off for taxpayers in the rest of the world. Brazil, which had been headed down a similar path, is worried about the impact of litigation on sovereign debt restructuring in the future. It could push nations to live within their means instead of stiffing bondholders and taxpayers. As Argentina has shown, the day of reckoning eventually comes.

Nita Ghei is a contributing Opinion writer for The Washington Times.

 

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