Argentina is spiraling into chaos. The culprit here is the short-sighted, politically charged, irresponsible economic policy of the government, forcing up inflation, drying up investment, and triggering capital flight with each successive bad idea. The situation deteriorates each day, but Argentina is not yet slave to gravity alone. If its government acts decisively, it can still arrest this descent before it becomes a death spiral.
Argentine President Cristina Fernández de Kirchner’s regime has borrowed repeatedly from socialist Venezuela’s playbook of economic misery over the years: first seizing Aerolineas, the nation’s largest airline, and then, in April 2012, snatching YPF, its largest oil company; then, announcing trade restrictions that require importers obtain a permit for every good brought into the country; and ordering supermarkets to freeze prices for two months.
Compounding the misery, the Kirchner trade restrictions triggered a round of complaints to the World Trade Organization by Mexico, the United States, the European Union, and Japan. Trade reprisals are expected by Mexico and Brazil.
February was a particularly bad month for the country. The World Bank labeled Argentina the “world’s most protectionist country.” And the International Monetary Fund censured Argentina for its dishonest reporting of its own inflation statistics.
And now the legal noose is tightening. A U.S. appeals court appears poised to give holdout bondholders total victory in their claim for payment on defaulted Argentine bonds. Argentina’s lawyer boldly asserted last month to the court that its government would choose to default on its restructured debt if ordered to pay certain investors the full $1.3 billion they are owed. When the words, “We would not voluntarily obey such an order” to repay the debt left his mouth, the cost of insuring Argentina’s government bonds skyrocketed.
Argentina does not have the luxury of choosing another default. If Argentina defaults on its debt, there will be hell to pay—and ordinary Argentinians will pay it. Let’s not forget the economic repercussions of Argentina’s 2001 default: Foreign investment fled the country, the peso devalued quickly (causing the cost of imports to rise and producing higher-than-average inflation), and Argentina was shut out of the international financial market for several years. Unemployment reached 25 percent, civil unrest ensued, and tens of thousands of Argentinians scavenged the streets for cardboard to sell to recycling plants. Argentine food and drug exports were rejected by some countries, for fear they might arrive damaged by the chaos.
Defaults can also generate a ripple effect on other countries near default, leading to a global recession. The default of tiny Iceland in 2009 has been credited with aggravating the global financial crisis.
The destruction wrought from default is much worse than the cost of battling hypothetical, follow-on lawsuits that Argentina argues could follow a court victory by the holdouts. It would be astonishing if Argentina, as part of its prior settlements with some creditors, did not condition its payment to the so-called “exchange bondholders” on their waiving rights to seek better terms in the event of a subsequent settlement with the holdouts. In sum, holding the exchange bondholders hostage to avoid paying the holdouts achieves nothing: It merely prolongs the country’s agony and further isolates Argentina from the rest of the world.
Argentina has ample resources to extinguish these debts. As of the end of 2012, the country had reserves of $45 billion, and its public debt as a percentage of GDP was 40 percent. In the context of Argentina’s cash reserves, the $1.3 billion owed to its holdout creditors is a manageable figure.
Argentina is perched at that critical juncture between survivable crisis, and certain, inexorable misery. It still has the power to choose the right path. Resolving the dispute with the holdouts would restore investors’ confidence in loaning money to Argentina, immediately open the door for more foreign direct investment, and reduce the country’s borrowing costs. Future lenders are watching.
To ensure long-term economic growth, Argentina should jettison its trade restrictions and price freezes, properly compensate investors for seized assets, and abide by IMF reporting rules. More immediately, and to avoid certain economic ruin, Argentina can begin with honoring its debts.
President Kirchner has used the holdouts as a foil to prop up her populist agenda, portraying them as foreign “vultures,” even though many are individual pensioners. She’s milked this line of argument long enough. Now is the time for her to act like a grown up and do the hard work of building the country.