Argentina: The Case for Debt Settlement

By Lisa Schaefer
July 25, 2011

Argentina needs to settle its debt to international creditors once and for all. Until outstanding debts are settled with the Paris Club of creditor nations and private bondholders, remnants of the 2001 default will continue to plague the nation. Deferring debt settlement in today’s uncertain economic climate further erodes confidence in Argentina’s monetary and fiscal future. Moreover, Argentine policymakers are straining to finance the country’s fiscal gap and are forced to insulate the economy from the international marketplace.

Provoked by the largest sovereign default in world history, the Argentine peso crisis left the country locked outside of global capital markets, requiring the state to self-finance all expenditures. In 2008, a desperate measure to finance the fiscal gap led policymakers to nationalize the private pension system, from which the government acquired nearly $30 billion. Other stop-gap measures included shifting domestic financial resources and selling bonds to Venezuela. But as domestic expenditures outpace revenue, Argentina’s strategy of scavenging for capital to finance the growing fiscal gap is proving unsustainable.

Argentina’s renegade reputation also constrains its ability to maintain a balance-of-payments equilibrium. Reduced capital inflows must be offset by a surplus in the current account, thus keeping the “balance.” Fortunately, since its massive devaluation in 2002, Argentina has maintained a continuous current account surplus, securing a robust supply of international reserves, a stockpile routinely tapped to repay debts. But as the trade surplus narrows and receipts from imported goods begin to outweigh the revenue gained from exports, Argentina’s ability to go-it-alone is severely hampered. Moving into a current account deficit would deteriorate reserves, erode confidence, and spur capital flight, reminding Argentines of the runoff of reserves that caused the crisis of 2001. Accordingly, in a desperate attempt to preserve the current-account surplus, Argentina implemented myriad new laws to curb imports. As a result of a controversial non-automatic import licenses (which stop all imports at customs), a “Buy Argentine” law, and a “one-for-one” policy (which requires Argentine companies to export the same amount they import), Argentina has been ranked the world’s most protectionist country by Global Trade Alert. The protectionist policies touted by Argentine officials may buy time before the dithering trade surplus becomes a deficit; however, domestic consumption is rising as a hedge against inflation, which fuels the demand for cheap imports and undermines import-substitution policies. Paradoxically, authorities at the Argentine Central Bank are unable to address rampant inflation as a result of their outstanding debts.

Argentine officials have maintained expansionary economic policy to enhance perceived economic prosperity in the run up to October presidential elections. As a result, the economy is overheating, with inflation rising to an estimated 20 to 25 percent. Instead of contracting monetary policy by raising interest rates, efforts to address inflation have been limited to censorship and price controls implemented at the firm level.

Acknowledging inflation rates upwards of 20 percent would increase interest due on Argentina’s inflation-indexed debt. Accordingly, government officials opt to mask inflation estimates , a move that saved an estimated $2.8 billion in 2010. An infamous anecdote illustrates Argentine officials’ desperation to conceal high inflation figures: McDonald’s restaurants in Argentina recently instituted a price ceiling on the Big Mac in response to pressure from government officials. The government directive targeted the world’s most popular burger as a means to insulate Argentina from criticism by The Economist’s Big Mac Index – an index used to compare purchasing power around the world – which ranked Argentina’s official inflation statistics the least accurate worldwide. Similarly, publishing inflation statistics in Argentina above the official inflation rate of 9.7 percent is subject to government retaliation, as reflected by fines levied against private economists of up to USD$120,000.

Argentina will invariably need to borrow in international capital markets in the medium-term. Continuous stop-gap measures meant to finance the fiscal gap are not economically viable. Unfortunately, economic isolationism is likely to increase in an effort to preserve Argentina’s dwindling trade surplus, and masking financial shortcomings with protectionism and censorship only slows down Argentina’s inevitable return to global markets for financial support. Argentina’s economic policymakers must settle with international creditors to begin to restore the country’s credibility and improve their financial outlook. In an era of economic uncertainty, future borrowing costs will increase for indebted nations; as illustrated by the rising yields in the international bond market. Therefore, deferring debt settlement in a tumultuous global economy will only lengthen the memory of international creditors and further increase Argentina’s future borrowing costs. It is time for Argentina to expand opportunities for financing beyond ad hoc measures in the short run by prioritizing debt repayment.

Lisa Schaefer is a masters candidate at the Elliott School of International Affairs at George Washington University.

Photo courtesy of J via Flickr


As someone who studied Argentine economics and has lived in the country for the past 4 years, I can see the every day effect of what Lisa described (postive and negative). Sometimes it feels like we (those working and living here) are spinning out of control; something that many Argentines expressed during my thesis research, but I couldn't appreciate it until I lived here. Thanks again for the article

Aa a scholar on matters of Argentine Debt, and professor of Latin American Economics at George Washington UniversityI want to congratulate Lisa Schaefer for her lucid andtotally correct note. I would have liked that she had taken my course before, so I would have given myself credit for it.This is much more valuable as it comes clearly from independent research and is right on the mark about the scandalous behavior of argentine authorities about economic policiesd and debt management, among others. Congratulations, and I hope she is interested in my course!
Claudio M. Loser

In contrast to the arguments of the Argentinian gouvernment that international "vulture fonds" were speculating against the country, a considerable portion of unpaid debts is held by private bondholders in Italy, Germany and Japan (and others) who invested in Argentine bonds as a supplementary security to their dwindling retirement benefits and who didn't accept the 70% "haircut" of the restructuring measures by Argentina.
These private "holdouts" did win numerous legal court titles against Argentina since her fraudulent default and will, like the Paris Club, be one of the main hurdles of Argentina's return to the international monetary market if not paid.
In case the Argentinian gouvernment will continue to ignore international laws and act as a criminal against the country's bona fide creditors it will be considered an outlaw by the international community. And rightly so.

It’s not a secret that Argentina’s default caused by a severe economic crisis, sparked social unrest and runs on banks. It actually presented creditors with an ultimate offer of 35 cents for a dollar. They considered this ridiculous: before, delinquent countries had typically paid 50 up to 60 cents. But the government stood firm and finally about 3/4 of the bondholders took part in a debt exchange in 2005. More joined 5 years later, bringing the total to 93 percents…..I am glad there is at least some hope for American future, as we also experience similar problems here.

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