The way out of Argentina’s debt crisis

Since the early 2000s, Argentina has been forced into a cycle of debt and austerity. Nick Dearden presents solutions to this coercive, financialized system.  

A pedestrian wearing a face mask, as a preventive measure against the coronavirus disease (COVID-19), walks past posters on the street that read "No to the payment of the debt. Break with the IMF", in Buenos Aires, Argentina May 27, 2020. REUTERS/Agustin Marcarian
A pedestrian walks past posters on the street that read 'No to the payment of the debt. Break with the IMF', in Buenos Aires, Argentina May 27, 2020. REUTERS/Agustin Marcarian

On Friday, Argentina went into default. Negotiations between Argentina and its creditors, led by multi-trillion dollar investment giant BlackRock, continue. But as economic crisis bites across the Global South, Argentina won’t be the last country to fall foul of the financial markets in the coronavirus crisis. In fact, Lebanon already defaulted on some of its debt earlier in the year. Zambia or Ecuador may well be next.

Coronavirus lays bare the iniquities in the international economy like never before, and will confront government after government with a choice: protect and defend your people, or bend to the will of the financial markets. For the rest of us, it should reawaken the passion that drove the jubilee movement, helping not just cancel the debt burdens that now weigh down dozens of countries across the world, but taking power back from a financial system which has captured global politics.       

A cycle of debt

Argentina’s debt history mirrors a situation found right across the Global South, as outlined by Jubilee Debt Campaign last week. From the 1970s, private banks and rich country governments lent big to Argentina’s military dictatorship.

Protect and defend your people, or bend to the will of the financial markets

To see just how reckless some of this lending was, look no further than British government loans to the dictatorship which allowed that regime to buy military hardware later used in the Falklands/Malvinas war. Despite an atrocious human rights record, $21 billion of loans rolled in from the banks and rich governments.   

Then, like many countries in the early 1980s, Argentina was hit by the rise in US interest rates which made these debts unpayable and triggered the ‘Third World debt crisis’. Argentina was loaned more money by the International Monetary Fund (IMF) and World Bank, to pay off its old debts, effectively bailing out the private banks of the Global North.

But the cost of this was paid by Argentina’s people. As Argentina returned to democracy, any chance of a sovereign economic policy was undermined by the IMF’s structural adjustment programmes which saw deep austerity and liberalisation dictated from Washington. This experiment in neoliberalism saw poverty skyrocket.

By 2002 the country was on its knees. A political crisis consumed Argentina, which went through five presidents in a couple of weeks and defaulted on its debt. The crisis continued for three months, but following a currency devaluation and the introduction of regulatory measures to limit the flow of foreign capital out of the country, things rapidly improved. The government was able to increase welfare spending and poverty was slashed.

While the financiers fumed and threatened the country with financial damnation, Argentina proved that putting your people before the demands of the market really can work.

The government renegotiated its debt, issuing new bonds with lower payments. But here they came across a problem. Because there’s no way of compelling all creditors to accept the write-down, some held out and refused to accept the restructured terms. These ‘investors’ hounded Argentina’s government in courts around the world trying to recoup full payment.

‘Vulture funds’ – private investment funds that buy debts likely to default at rock-bottom prices with the intention of squeezing interest – scoured the world trying to seize Argentinian assets, even impounding a naval ship in Ghana. 

Sadly, the vultures got their way. On the election of the rightwing government of President Mauricio Macri, they were repaid with more loans. The financiers made a killing, and the government went on another high-interest borrowing binge.

Ultimately change will only come when governments, under pressure from their citizens, decide that it is more important to meet the needs of their people than it is to cave into the demands of creditors

But this proved to be of little benefit to most Argentinians, and when the lending dried up once again, in mid-2018, the free market government allowed urgently needed loans from the IMF to flow straight back out of the country again and into the pockets of the financiers.

Hounded by vultures

The mess made by Macri’s government has landed on the shoulders of the centre-left administration of Alberto Fernández. His government has been negotiating with creditors, offering them a grace period and lower interest rates for several years, but promising to eventually repay most of the loans.

Joseph Stiglitz led a group of over 100 economists saying Argentina’s offer is more than reasonable, and creditors should accept it because the consequences of meeting the current debt repayments would be catastrophic in a country where urban poverty stands at 35.5 per cent and child poverty at 52 per cent.

In fact, Argentina’s offer is overly generous, devised as it was before coronavirus even hit the country. Stiglitz points out that the IMF is projecting a 5.7 per cent contraction in GDP in 2020.

Financiers who bought bonds were betting on a fairly high growth rate that never materialized. It didn’t pay off, they should take the hit. In fact, Jubilee campaigners in Argentina say the government shouldn’t be renegotiating debt at all until a proper audit has been carried out, looking at the legitimacy and long-term sustainability of payments.

Some of the lenders have indeed seen the light and accepted Argentina’s deal. But many have not, including some of the biggest investment firms in the world.

And 40 years after the original Third World debt crisis, there’s not a lot that can be done about this with the current financial system, created by and for investors. Argentina can agree to pay more than it’s really able to, at the cost of rising poverty, austerity and liberalization. Or it can continue down the path of default, but face years of being hounded by vulture funds all over again.

Across the Global South

This consequences of what happens next will be felt well beyond the borders of Argentina, because coronavirus has triggered debt crises in dozens of countries. Even before the pandemic, 31 counties were already in debt crisis, with another 82 at risk, according to Jubilee.

Then coronavirus hit. Nearly $100 billion of capital flowed out of the South – four times the damage inflicted in the early stages of the 2008 crash. The UN reports a 37 per cent fall in the value of commodities, which many southern countries still depend on to earn dollars to pay their debts. They predict an $800 billion collapse in export revenue.

The benefit of this relief will be entirely lost if it does no more than allow countries to repay the banks and hedge funds. This is no more than a public bailout of the richest corporations in the financial sector

What’s more, as the UN makes clear in its trade and development report, these debt burdens weren’t, by and large, the result of bad decisions by individual governments. They are the product of a massively under-regulated global financial system, which used the support given to the financial sector in the form of bailouts and quantitive easing to scour the world looking for better returns than they were able to achieve lending to desperate businesses in the Global North.

It’s an issue for northern countries too. In recent weeks, the G20 announced a debt relief package for more than 70 countries struggling to make repayments. It’s nowhere near sufficient, but it’s something. However, the benefit of this relief will be entirely lost if it does no more than allow countries to repay the banks and hedge funds. This is no more than a public bailout of the richest corporations in the financial sector.

Global reset

There are solutions. For a start, countries like Britain need to immediately pass ‘vulture fund’ legislation to prevent financiers suing developing countries for unpaid sovereign debt. Almost all foreign denominated bonds are issued under English or New York law.

Passing laws to prevent vulture activity in these two jurisdictions would remove an important weapon in the financiers’ armoury. Further financial reforms, including reforming the ratings agencies, which are currently exacerbating the crisis by declaring the economies of countries like South Africa as ‘junk’, are desperately needed too.

But ultimately we need a major reform of the debt system. Calls are growing again, including from the Secretary General of the UN, for an international debt workout mechanism. Such a system would remove the power to decide on debt write-downs from individual creditors and place the issue in an independent international body, which would have the power to compel debt cancellation. If designed properly, it would shift the balance of power between creditors and debtors and make future bouts of reckless lending less likely.

Coronavirus exposes the inequities of the financial sector all over again. While rich countries can borrow unlimited amounts for free, southern countries are forced into a cycle of debt crisis and austerity.

It’s vital in the months ahead that we give our solidarity to those countries who decide it is time to defy the rules of our ‘finance knows best’ global economy. Because ultimately change will only come when governments, under pressure from their citizens, decide that it is more important to meet the needs of their people than it is to cave into the demands of creditors.

At root, the case for debt cancellation today is no different to the one put forward in the 1980s, best summed up by the great champion of the anti-debt movement, president Thomas Sankara of Burkina Faso, who addressed a conference of African leaders in 1987:

‘The debt cannot be repaid, first of all, because, if we don’t pay, the lenders won’t die. Of that you can be sure. On the other hand, if we do pay, we are the ones who will die. Of that you can be equally sure. Those who led us into debt were gambling, as if they were in a casino. As long as they were winning, there was no problem. Now that they’re losing their bets, they demand repayment. There is talk of a crisis. No, Mr President. They gambled. They lost. Those are the rules of the game.’