Argentina's Default: Playing Politics With U.S. Courts And Wall Street
Until the advent of Peronism, Argentina was one of the shining stars in the firmament of freedom loving nations. Now it is a star of defaults. Argentina was not perfect, but it had climbed into the top 10 of richest nations. Europeans flocked to this promising South American country. Not so much anymore. What a change: Infatuated with state dominated nationalism and populism, Argentina has fallen in the world rankings during most of the last 75 years.
The nationalistic card played a big role in the decay of Argentina. It has been played extremely well by Peronists and would-be Peronists. Perhaps the best example is how the first election that brought Peron to power was characterized. Almost no one remembers the name of the presidential candidate running against Juán Domingo Perón in 1945. Everyone, however, remembers the slogan “Braden or Perón.” Spruille Braden was the U.S. Ambassador who openly criticized the surge of Peronism while it was still in its infancy. He was alarmed by the similarities and collaboration of Peronism with fascism. Portraying Braden as getting involved in the internal politics of a country at a time when nationalist movements were strong all over the world, and especially in Argentina, allowed the Peronists to use him as a symbol of imperialism. Not that Braden’s accusations were wrong. Argentina continued to collaborate not only with fascists but with National-Socialists. I was born in Argentina, and in my early years Joseph Mengele, the Nazi “angel of death,” lived three houses away from mine. He was protected by the Peronist intelligence machine.
Most politicians in power cherish the opportunity to blame a foreign nation for the ills of his country. The Argentine government excels at this. Just over a month ago, the U.S. Supreme Court let stand a ruling by New York District Court Judge Thomas Griesa requiring payment of the debt owed to bond holders who did not agree to the terms offered in previous partial settlements (the “holdouts”). The Argentine government saw the Supreme Court’s ruling as a political opportunity.
In a recent interview at Panampost.com, Ricardo López Murphy, president of the RELIAL think tank network, a noted economist who served as Minister of Defense of Argentina, stated that his country “has achieved two incredible feats: she has starred in the biggest default in history and the smallest default in history. In 2002, we had a massive default, and we had a more serious problem with the debt, with adverse external conditions. Now we have good conditions and a small debt.”
Argentina’s debt to GDP ratio is less than 50 percent and interest payments on the debt represent only 1 percent of GDP. It would be hard to find a government that decided to go through the hardships of default under such conditions. López Murphy continues: “I believe that the Argentinean government has underestimated this problem, and has resorted to cheap rhetoric. Targeted for local consumption, it does nothing to help solve the problem. I don’t think they perceive the default in the same manner as I do, with its immense costs for Argentina.”
The “local consumption” mentioned by López Murphy refers to political, not economic, markets. In his most recent column, Andrés Oppenheimer agrees with López Murphy that the Argentina government handled this issue with the “typical arrogance and incompetence” but then states that “the opinion of Griesa can have negative international consequences that will transcend this case.” How can it be, questions Oppenheimer, that a small portion of bond holders (7 percent in this case) can prevent a majority from reaching a settlement with a government? The devil is really in the details and to give a learned opinion a minimum requirement should be to consult the ruling and several amicus briefs. López Murphy says “no one should talk without a lawyer next to him.”
But what seems like a negative consequence for Oppenheimer is really a negative impact on governments that squander resources and want to repudiate their contracts. The rulings by Judge Griesa and the U.S. Supreme Court were based on current laws. For them the case was clear, Argentina has to pay. They could and should not judge by the rules of political manipulators and government agents accustomed to being able to pressure the courts.
In a previous column I forecasted that this case should lead to an improvement of the legal framework that governs debt of governments with private investors. Most agree on this. What is becoming apparent is that what is coloring and guiding the Argentine government position is not the economics but the politics. They care little about the international implications, they care about the local political outcome: votes and power. If they can frame the current discussions as a new “Braden or Perón,” and the narrative into “Argentine government defends its interests and sovereignty against judges who are pawns of Wall Street” they are convinced they have a political winner. The population is not accustomed to independent judges, so it will be easy for them to buy into the argument trumpeted day and night by government propaganda.
Yet as the Argentine opposition does not have a leader, or even a national party that can be identified with Judge Griesa, an “Argentina versus Griesa” or “Argentina versus Vultures” media campaign will likely have a temporary effect and not have such a dramatic impact as the “Braden or Perón” banners. It might lift the popularity of President Cristina Fernández de Kirchner and her would-be successors, but only until the economic impact of the default kicks in.
Playing and winning political games is very different than working towards helping build modern prosperous economies. Argentina has squandered many cards in the past and its current government seems determined to waste even more time and resources in order to prolong its stay in power. This time, no one cries for Argentina.