G20 needs to start by insisting that its own members -- such as Argentina -- must clean up their own irresponsible debts.
BY ROBERT SHAPIRO
AND NANCY SODERBERG
The upcoming Group of Twenty (G-20) Summit in Pittsburgh will allow member nations to discuss how best to right the world’s economic ship. As G-20 nations struggle to maintain prosperity and sensible financial management, the city of Pittsburgh has been rather prudent as it averted bankruptcy several years ago and now carries a surplus. While the world awaits the emergence of new regulations and a new communiqué establishing shared financial principles, the G-20 leaders have the opportunity to send a message and set a responsible example – and certain member nations could learn a thing or two from Pittsburgh’s recent record of bankruptcy avoidance.
A troubling trend has emerged of countries defaulting on their debts and thumbing their nose at their lenders and the international financial community. And it started with a G-20 member, Argentina, and Ecuador recently followed suit. A key step forward in Pittsburgh will be for the G20 members to insist its own members must clean up their own irresponsible debts.
Argentina’s case is very troubling both for the scale of its default and the subsequent and unprecedented repudiation of much of its debt. The default on $80 billion in obligations occurred in 2001; and four years later, without ever sitting down to discuss it with its lenders, Argentina offered a restructuring much less generous than any that preceded it. Moreover, when less than half of its foreign lenders accepted the low-ball offer, Buenos Aires responded with a fiat repudiating their debts. Today, its failure to repay nearly $30 billion in debt has effectively barred Argentina from borrowing in any foreign capital market, exacerbating Argentina’s many economic problems.
In the United States alone, there are 101 court judgments against Argentina totaling almost $7.8 billion for its refusal to honor its contracts with its lenders. There are similar judgments outstanding in Britain, France, Germany, Italy, Japan and every money market country. So long as these judgments are in place, Argentina cannot raise funds without risking their seizure to pay those rulings. These judgments actually protect not only the original lenders, but other developing nations as well: If Argentina’s illegal moves were to stand, the precedent would raise the risk of lending to all developing countries, which then would reduce the availability of loans.
Argentine President Cristina Fernández de Kirchner has tried to sidestep these consequences with a variety of unsound economic moves. Since taking office, Kirchner tried to raise funds with protectionist export tariffs on soybeans. After nationwide protests and a congressional rebuke, she was forced to maintain the trade barrier tariff at 35 percent.
In another effort to secure financing, Kirchner nationalized $30 billion of the AFJP, Argentina’s largest private pension fund. This followed an earlier attempt to nationalize Aerolineas Argentinas, Argentina’s largest airline, and a legislative proposal to nationalize defense contractor Lockheed Martin’s aircraft maintenance facility in Argentina. Moreover, in a benighted move to create the funds for Argentines to lend their government money it can no longer raise abroad, the Kirchner government also vastly expanded the nation’s money supply, triggering what is now the most serious inflation in Latin America.
Argentina’s June 28 midterm elections were a wake-up call for the Kirchner administration. Following a stunning defeat of the ruling Peronist party in the parliament and the subsequent resignation of former President Nestór Kirchner (the current president’s husband) as the Peronists’ leader, President Cristina Kirchner has shaken up her government. Moreover, the new Economy Minister has said the debt issue must be resolved. In the past, however, the Argentine government’s promises to clean up their act have usually gone unfulfilled.
We can only hope that this time will be different. If President Kirchner hopes to rescue her country’s economy, she will have to start by reintegrating it into global economic system. The first step, in accordance with its G-20 commitments, is to reopen negotiations with its foreign lenders, and keep on talking until those holding repudiated debt agree. And Argentina can still afford it, with some of $45 billion in foreign currency reserves.
G-20 leaders should take steps to encourage Argentina to follow this course. Only by honoring and repaying its debts can Argentina once again access international capital markets, and be on the road to economic stability.
Dr. Shapiro was under secretary of commerce during the Clinton administration. Ambassador Soderberg served on the National Security Council during the Clinton administration. They are the co-chairs of the American Task Force Argentina, a coalition of investors and citizen groups seeking a just resolution to Argentina's debt default.