How Argentina Became A Bad Debtor

Tyler Durden's picture

Following this evening's lengthy finger-pointing lecture from Argentina's Kicillof, Argentina formally defaulted. Shortly thereafter the hoped-for private bank bailout deal also failed leaving the default process likely to take a while. So how has Argentina defaulted three times in the last 28 years?

Submitted by Nicolas Cachanosky via the Ludwig von Mises Institute,

This is a complex case that has produced different, if not opposite, interpretations by analysts and policy makers. Some of these interpretations, however, are not well-founded.

How Argentina Became a Bad Debtor

An understanding of the Argentine situation requires historical context.

At the beginning of the 1990s, Argentina implemented the Convertibility Law as a measure to restrain the central bank and put an end to the hyperinflation that took place in the late 1980s. This law set the exchange rate at one peso per US dollar and stated that the central bank could only issue pesos in fixed relation to the amount of US dollars that entered the country. The Convertibility Law was, then, more than just a fixed-exchange rate scheme. It was legislation that made the central bank a currency board where pesos were convertible to dollars at a “one to one” ratio. However, because the central bank had some flexibility to issue pesos with respect to the inflow of US dollars, it is better described as a “heterodox” rather than “orthodox,” currency board.

Still, under this scheme, Argentina could not monetize its deficit as it did in the 1980s under the government of Ricardo Alfonsín. It was the monetization of debt that produced the high inflation that ended in hyperinflation. Due to the Convertibility Law during the 1990s, Carlos Menem’s government could not finance the fiscal deficit with newly created money. So, rather than reduce the deficit, Menem changed the way it was financed from a money-issuance scheme to a foreign-debt scheme. The foreign debt was in US dollars and this allowed the central bank to issue the corresponding pesos.

The debt issued during the 1990s took place in an Argentina that had already defaulted on its debt six times since its independence from Spain in 1816 (arguably, one-third of Argentine history has taken place in a state of default), while Argentina also exhibited questionable institutional protection of contracts and property rights. With domestic savings destroyed after years of high inflation in the 1980s (and previous decades), Argentina had to turn to international funds to finance its deficit. And because of the lack of creditworthiness, Argentina had to “import” legal credibility by issuing its bonds under New York jurisdiction. Should there be a dispute with creditors, Argentina stated it would accept the ruling of New York courts.

Many opponents of the ruling today claim that Argentina’s creditors have conspired to take away Argentine sovereignty, but the responsibility lies with the Argentine government itself, which has established a long record of unreliability in paying its debts.


The Road to the Latest Default

These New York-issued bonds of the 1990s had two other important features besides being issued under New York legal jurisdiction. The incorporation of the paripassu clause and the absence of the collective action clause. The paripassu clause holds that Argentina agrees to treat all creditors on equal terms (especially regarding payments of coupons and capital). The collective action clause states that in the case of a debt restructuring, if a certain percentage of creditors accept the debt swap, then creditors who turn down the offer (the “holdouts”) automatically must accept the new bonds. However, when Argentina defaulted on its bonds at the end of 2001, it did so with bonds that included the paripassu clause but which did not require collective action by creditors.

Under the contract that Argentina itself offered to its creditors, which did not include the collective action clause, any creditor is entitled to receive 100 percent of the bonus even if 99.9 percent of the creditors decided to enter a debt swap. And this is precisely what happened with the 2001 default. When Argentina offered new bonds to its creditors following the default, the “holdouts” let Argentina know that under the contract of Argentine bonds, they still have the right to receive 100 percent of the bonds under “equality of conditions” (paripassu) with those who accepted the restructuring. That is, Argentina cannot pay the “holdins” without paying the “holdouts” according to the terms of the debt.

The governments of Nestor Kirchner and Cristina Kirchner, however, in another sign of their contempt for institutions, decided to ignore the holdouts to the point of erasing them as creditors in their official reports (one of the reasons for which the level of debt on GDP looks lower in official statistics than is truly the case).

It could be said that Judge Griesa had to do little more than read the contract that Argentina offered its creditors. In spite of this, much has been said in Argentina (and abroad) about how Judge Griesa’s ruling damages the legal security of sovereign bonds and debt restructuring.

The problem is not Judge Griesa’s ruling. The problem is that Argentina had decided to once again prefer deficits and unrestrained government spending to paying its obligations. Griesa’s ruling suggests that a default cannot be used as a political tool to ignore contracts at politician’s convenience. In fact, countries with emerging economies should thank Judge Griesa’s ruling since this allows them to borrow at lower rates given that many of these countries are either unable or unwilling to offer credible legal protection to their own creditors. A ruling favorable to Argentina’s government would have allowed a government to violate its own contracts, making it even harder for poor countries to access capital.

We can simplify the case to an analogy on a smaller scale.

Try to explain to your bank that since it was you who squandered your earnings for more than a decade,you have the right to not pay the mortgage with which you purchased your home.


When the bank takes you to court for not paying your mortgage, explain to the judge that you are a poor victim of evil money vultures and that you have the right to ignore creditors because you couldn’t be bothered with changing your unsustainable spending habits.


When the judge rules against you, try to explain to the world in international newspapers how the decision of the judge is an injustice that endangers the international banking market (as the Argentine government has been doing recently).

Try now to justify the position of the Argentine government.

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Al Huxley's picture

And here I thought it was by borrowing more than they collected, without access to a printing press and adequate propaganda apparatus.  Maybe I need more historical context.

Almost Solvent's picture

Too fuckin bad you lent money to a deadbeat debtor. 


Too fuckin bad you bought bonds at .02$ on the dollar with a 20 year NY judgment enforcement statute.


Too fuckin bad you write judgments not worth the paper (paid for by NY taxpayers) that it's written on. 


Too fuckin bad you let crooks and hooks take over.


Too fuckin bad you spend other people's labor.


Too fuckin bad. 

remain calm's picture

I say we just hire Rumsfeld and have him explain unknowns and knows to them. And if they don't get it after that, then lets just bomb the fuck out of them, kill that dumb bitch president and start over. That should work out well.

economics9698's picture

That 93 IQ thing is really a bitch.  This is what attracts the tribe so much to unlimited immigration, stupid people to fuck over as needed.

neuronius's picture

good ole' Rummy!  I want to call him Grampy!  And then I want to kick him in the balls.

strannick's picture

Argentina choose government debt to paying its creditors? What is unique about that?

BlindMonkey's picture

"I say we just hire Rumsfeld and have him explain unknowns and knows to them. And if they don't get it after that, then lets just bomb the fuck out of them, kill that dumb bitch president and start over. That should work out well."

Who is Goldman's on-deck guy to run the next insolvent country? One catch, he has to have a Spanish name.

EBT excepted's picture

bombing starts in five minutes...


This whole situation with Argentina is getting Messi. 

max2205's picture

Change the rules then break the rules....hummmm sounds like, Barry

espirit's picture

Fuck the moneylenders in the ass.

They'll be back for moar when there is a buck to be made.

DoChenRollingBearing's picture

Right, yes.  The lenders have never showed any discipline to Argentina after, say, five years after a default.  They loan money to an wildly irrepsonsible government, they take the consequences.

Argentina is another one of those places I would never invest in.  No gracias!

kliguy38's picture

they're after their assets.... they know they can't get any money....they want their "blood"

Coke and Hookers's picture

"The governments of Nestor Kirchner and Cristina Kirchner, however, in another sign of their contempt for institutions, decided to ignore the holdouts..."

What institutions is the autor referring to? Some court in NY? Why would anyone show a US court anything but contempt?

In my opinion countries should AS A RULE never pay debt that has been sold. They should always selectively default on it. A lender, by selling the debt, is transferring his responsibility away, and lack of responsibility from lenders is the last thing we need. Vulture funds are the scum of the earth and need to be eradicated. Fuck Elliott, fuck US courts (who seem to think they have global jurisdiction) and fuck hedge funds in general. And fuck Mises for letting this be posted in their name.

BigJim's picture

If the Argentine government were saying they were defaulting on the debt because no government has the right to borrow money, and then demand that the citizens within that polity - regardless of whether they voted for that government - are obliged to pay for it (or face getting thrown into a cage with real criminals)... then yes, fair enough. Let the sovereign debt market collapse, and governments raise money honestly through taxation.

But as the Argentine government will no doubt be trying to raise more money on the international market for its deficit spending, then it has to play by the rules of that market... and it didn't.

taraxias's picture


The sovereign makes the rules, not the other way around.

Fuck Slinger, fuck the vulture funds, fuck the NY cangoroo courts.

About time someone says "fuck it" to this usury madness, and it came from an unlikely source. Good on you girl.

Ghordius's picture

taraxias, while your argument is usually valid, the case around those Argentine bonds that were put on the market 10 years ago is slightly more complex

they made hundreds of "vehicles", in all kinds of currencies, and under all kinds of jurisdictions. a bit like they were thinking about providing a lot of income to all kinds of advisors and legal counsels in the future. and that future... is now

"Fuck" is, I believe, the correct word, here

samcontrol's picture

Do hen...

Actually it is a VERY GOOD TIME to be buying land and properties.
buy low sell high kind of shit.

Elliptico's picture

Tishman Speyer defaulted on billions, too. They still get credit, and so will Argentina.

Al Huxley's picture

Hey, where else you gonna get a decent coupon?

NoDebt's picture

Balance sheet always looks better immediately after a debt write-off.  Agreed, they will be back in the market again in no time.

DoChenRollingBearing's picture

+ 1

Three years max.  History shows this.

darkpool2's picture

China will be ready and waiting with DIP financing. This is just a skirmish in the war over the USD and the ROW

Gaius Frakkin' Baltar's picture

Those poor, poor creditors... they were forced to lend to Argentina.

I think it should be called the Ludwig von Misses Institute

putaipan's picture

ha. i got the most 'reddys' i ever got the other day with an  anti-austerity rant. was reading through this article and thread picking up on the vibe, but not having  noticed its' source. hehe. i can't wait to see the anti-free shit army hit the streets banging on their pots and pans.

Platypus's picture

Every time you lend money there is risk!! If I was Argentina's president I would give this pleople the finger too. Just for fun :)

alfred b.'s picture


     GO ARGENTINA!! ....oh wait, is the World Cup over?     Ok, so what?     GO ARGENTINA!!



Cognitive Dissonance's picture

Neither a lender nor a borrower be?

strannick's picture

Neither a lender or a borrower be,

And you have no central bank or fractional reserve economy.

shinobi-7's picture

Certainly a good personal motto but it doesn't make sense for a company. Clients WILL pay you late and insist that you provide services on time. This automatically makes you both a borrower and a lender. You cannot run a business without a credit line unless you have plenty of cash available which few companies do. Once you're listed this option disappear as shareholders will not allow you to have cash "sleeping" on your bank account.

Matt's picture

Prepaid. payment first, then recieve the goods or services. Would only work if everyone did it.

Karaio's picture

Durden, better think more. 


I am Brazilian and I know that Argentina has 4 nuclear power plants (Brazil has two), the best beef in the world, does not depend on oil (exports), is self-sufficient in food, has a well-established industry. 

Received open arms many Germans after IIWW (hehe) 

Ah, is part of Mercosur (per table, BRICS). 

Putin been there recently. 

If Argentina solve show ring finger may believe they are supported and, at worst, no one (the people) will difficulty.

Wahooo's picture

Here you go, I fed it through the translator three times, English to Spanish to English to Spanish to English: 

If Argentina resolves Show ring finger may believe they are compatible and in the worst case, nobody (the people) will make it difficult.


Kirk2NCC1701's picture

Your last sentence makes no sense.  Sounds like Word Salad.  Please re-phrase.

samcontrol's picture

It is WAYYYYYY more than self sufficient in food.

Brasil decime lo que se siente .......

Karaio's picture

Durden, better think more. 


I am Brazilian and I know that Argentina has 4 nuclear power plants (Brazil has two), the best beef in the world, does not depend on oil (exports), is self-sufficient in food, has a well-established industry. 

Received open arms many Germans after IIWW (hehe) 

Ah, is part of Mercosur (per table, BRICS). 

Putin been there recently. 

If Argentina solve show ring finger may believe they are supported and, at worst, no one (the people) will difficulty.

Dien Bien Poo's picture

This article is utter bollocks. Argentina is solvent; it is formaly defaulting to prevent a legal precedent that might (will) cost it billions more than it has negotiated. It is doing the sensible thing. Bugger the HF community. They will soon forget and play the +ve carry game again, sooner than you think. How do I know? Because HF's are like drunk gamblers; they simply cant help themselves. 

Jack Burton's picture

The IMF is shoveling money into Ukraine, now how does that look set to work out? 

BlindMonkey's picture

IMF can't do that. They can't support a country at war since any money given will be siphoned for other purposes.

BlindMonkey's picture

Am I the only one around here that gives a shit about the rules!!!

shinobi-7's picture

The legal case is cristal clear. Paripassu exist for a reason and it is no suprise that almost all bond issues have it. Otherwise all new debt would contain better terms than old to make it more attractive.

What makes this case interesting is that if you focus on the long term then clearly Argentina is wrong as the article argues. But if you focus on the short term, then the vulture funds are just mis-using a clause to make a killing: asking dollars of return for cents.

There are no good guys here! Bankrupt country with dishonnest government battling vulture funds. Whoever wins doesn't matter but for the sparks it sends on the over-dry financial system.

nodhannum's picture

"Yes, asking dollars of return for cents".  Why the hell didn't Argentina (read the free shit army) just buy up the debt for cents on the dollar and be done with it.  Ever loan a cocaine head money who says they will pay you back next week.  The Argentines thought they could just fuck over the hold-outs on those bonds.  Just wait until they try not paying the Chinese and/or Ruskis!

NoWayJose's picture

It is the judge that caused this by letting the holdouts block the settlement. The settlement is the result of free market negotiations of bond holders who were stupid enough to lend money to Argentina. The result is a haircut for the bond holders. The judge's ruling does NOT lower borrowing costs because it emboldens more speculators to dive in cheap - then hold out - this will be RAISING the chance of future defaults (since there can be no settlements or haircut negotiations)!

BlindMonkey's picture

I have no idea who down votes that. Whatever. Great reasoning.

Edit: Ahhh. Everybody got a red on the thread. Some jokester trolled by and shit all over the place. Cleanup isle 12!!!

Wahooo's picture

I think her name is Kirchner.

AurorusBorealus's picture

You are more-or-less correct.  However, the one thing that you haven´t considered, nor has Captain von Mises, is the role of Credit Default Swaps in the negotiations.  We will probably never be sure (since ZH is the only place that reports on such things and they apparently hold some of Elliot´s bonds, given their reporting on Argentina), but I am willing to bet Elliot and some of the other funds had CDS on either their debt or on the debt that had already been negotiated.  Thus, they most likely had a vested interest in default (did they tell you about this.... Tyler?).  The reality is... in the "new" Wall-Street normal of CDS´s, rehypothecations, and shadow-banking, there is always someone betting on and trying to encourage default... sometimes even the debt holders themselves.  Since, everyone can just expect a bailout if the company on the hook for the CDSs is "too-big-to-fail," the capacity for perverse incentives is everywhere.  Probably nothing... in any of this... is at it seems.

nodhannum's picture

Pay your f__king bills is the solution.  You sound like one of those union pension guys at GM when they fucked over the senior bond holders for the fuhrer rein and don't borrow more than you one can handle and yes that should apply to US.

Bangin7GramRocks's picture

Boo Frickitty Hoo! Earn a living like a real man you parasitic lowlife! Fuck em' in the other ear Argentina!