By James K Glassman
As the global economy continues its sputtering recovery, policymakers have an opportunity to take a strong stand on principles that may help mitigate further long-term damage. In particular, as regards Argentina, a relatively small country with a potentially large impact on the international financial system.
For a decade, responsible nations have watched impassively as Argentina has refused to abide by court decisions and flouted global financial norms.
Now, with Argentina facing critical deadlines, some of those nations are acting – but not forcefully enough. The reason there’s been any response at all is a concern that other indebted nations – perhaps Greece or another weak southern European economy – may follow Argentina’s dangerous example.
I spent last week in London, Paris, and Berlin talking to officials and journalists. Not one disagreed that Argentina had been acting as a rogue financial state. The question was what to do about it. It’s as though these great nations are frozen in indecision, or even fear.
Here’s a brief summary of Argentina’s behavior:
1. Debt. In 2001, Argentina defaulted on $100bn in bonds, the largest sovereign debt failure in history. Default itself is no crime but Argentina’s subsequent behavior has been far out of bounds. After a take-it-or-leave-it offer, most creditors settled, but many – including governments, financial institutions and thousands of retail investors, mainly in Germany, Italy, and Switzerland – did not. Since then, Argentina has ignored more than 100 court decisions to make good on its debt and has refused to acknowledge even awards by the World Bank arbitrator.
In addition, Argentina is in default on $8.9bn in loans to foreign governments, including Germany, Japan, the US, the Netherlands, and Italy. The Paris Club has been trying to settle these debts unsuccessfully for 11 years. Separately, 116 proceedings involving debts to private investors are currently pending in Frankfurt courts. But while Argentina has the ability to pay, it keeps refusing. Recently, an exasperated US judge said Argentina must pay all its creditors by December 15, a deadline that an appeals court extended to February.
2. Statistics. In September, Christine Lagarde, managing director of the International Monetary Fund, told Argentina that if it did not start providing accurate economic data by December 17, especially on inflation, it would face a “red card,” becoming the first developed country ever to be expelled from the 188-nation organization. Argentina claims inflation of 10 per cent but private sources, according to The Economist magazine, place the figure at 27 per cent.
3. Expropriation. Earlier this year, Argentina shocked European businesses and governments by seizing shares of the Spanish firm Repsol that were held in the Argentine energy company YPF.
For all this, however, Argentina has barely suffered. The impunity itself is the great risk in Argentina’s flouting of global norms. For all its intransigence and irresponsibility, Argentina has not been held accountable. Instead of being punished, it’s been rewarded with membership in the prestigious Group of 20 and with continuing loans from the World Bank and the Inter-American Development Bank.
In May, an article in the Guardian newspaper in Britain carried the headline: “Greece should follow Argentina’s lead: As Argentina’s experience after 2002 shows, when an economic crisis hits, it is often best to go it alone.” Greece, or other nations, may consider the Argentine strategy of flouting international standards a profitable or desirable course. This would be a disaster for global economic stability.
Some governments are now recognizing the danger. In September 2011, the Obama Administration stated that it would henceforth oppose loans to Argentina (except in humanitarian cases) from the World Bank and IADB. Then in August, Spain and Germany also voted “no” to a $60m IADB loan. The following month, other European countries, including France and Denmark, did the same.
This, however, continues to look like what it is: a piecemeal, ad hoc approach. The way to apply pressure to Argentina would be through coordinated, clear, public statements from European governments that they will join together to vote “no” until Argentina starts acting responsibly.
Another antidote would be ending Argentina’s membership of the G-20. In June, with economist Alex Brill, I produced a study that advocated transparent, objective criteria for G-20 admission in three categories. Argentina fell far short of qualifying. The cutoff for G-20 membership was an index of 40; Germany scored 83, France 76, Argentina 18.
Incentives count. The government of an indebted nation watching Argentina’s misbehavior will undoubtedly be encouraged to follow its example. And in a world in which economies are so systemically linked, the actions of one country, even a relatively small one, can affect finances globally.
It is past time for responsible nations to ratchet up the pressure. Raising the future of Argentina’s membership in the G-20 would help, as would clear declarations, especially from European nations, that they will no longer devote their taxpayers’ money to further loans until Argentina settles its debt, stops fudging its statistics, and ends the seizure of property owned by others.
James K. Glassman was formerly US Under Secretary of State for Public Diplomacy and Public Affairs