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Sovereign Debt at Square One

CAMBRIDGE – Argentina and its bankers have been barred from making payments to fulfill debt-restructuring agreements reached with the country’s creditors, unless the 7% of creditors who rejected the agreements are paid in full – a judgment that is likely to stick, now that the US Supreme Court has upheld it. Though it is hard to cry for Argentina, the ruling in favor of the holdouts is bad news for the global financial system and sets back the evolution of the international regime for restructuring sovereign debt.

Why is it so hard to feel sympathy for a developing country that can’t pay its debts? For starters, in 2001, Argentina unilaterally defaulted on its entire $100 billion debt, an unusual step, rather than negotiating new terms with its creditors. When, in 2005, the government finally got around to negotiating a debt swap, it could almost dictate the terms – a 70% “haircut.”

In the intervening decade, President Cristina Fernández de Kirchner and her late husband and predecessor, Néstor Kirchner, have pursued a variety of spectacularly bad economic policies. The independence of the central bank and the statistical agency have been severely compromised, with Fernández forcing the adoption, for example, of a consumer price index that grossly understates the inflation rate. Contracts have been violated and foreign-owned companies have been nationalized. And when soaring global prices for Argentina’s leading agricultural commodities provided a golden opportunity to boost output and raise chronically insufficient foreign-currency earnings, Fernández imposed heavy tariffs and quotas on exports of soy, wheat, and beef.

Some might counter that the holdout hedge funds that sued Argentina deserve no sympathy, either. Many are called “vulture funds” because they bought the debt at a steep discount from the original creditors, hoping to profit subsequently through court decisions.