Argentina: Default, fiscal responsibility and debt limits

by Gonzalo Macera

Argentina’s new government is in the process of debt negotiation and restructuring with the debt swap hold-outs to end a more than a decade long default conflict. However, controversy between different sectors of society still arises. On the one hand, there are those who express their strong disagreement with the current position of procuring to negotiate something that technically already has Courts’ ruling and, on the other hand, those who were supporters of the former government and its position of quasi repudiation of the non restructured debt. To negotiate an agreement to end this problem, which complicates Argentina’s situation in international financial markets, appears to be a midway center position between the most heated proposals of the extreme positions.

It cannot be ignored the fact that who acquired bonds with yields of around 14-16% annually in 2001 when risk-free assets hovered around 5%, knew there was a high risk and potential problems with these securities. Possibility of default was something to be accounted into the risk component (let’s remember that as country-risk soared, higher rates were requested by the market). A discussion about the way in which all this undesirable and incoherent process with debt swaps’ hold-outs was carried out could take place, but that does not mean that this was out of the realm of the possible in the first place. Any investor should take into consideration the risk attached to such yields, default and debt renegotiations were between the possible outcomes. It was not an impossible, however, by no means that makes it something good or right. Usually those who undertake high risk investments have diversification in their portfolios (both in quantity and types of investment) to have coverage against these situations. Even more, some funds even bought these titles after they were defaulted in the first place, looking forward to make a profit in the default restructuring.

Low risk in sovereign debt implies strong institutions, stable fiscal situations and consistency in the management of commitments. In high-risk debt cases problems regarding political instability in governments with supports changing sides and volatile contexts with chronic fiscal problems, characterize some of the potential risks. In this particular case, the unwillingness of the previous government to consistently solve and end this process of debt restructuring and having had to wait for a change of political sign to finally sit down at the negotiating table, reflect these problems.

Now that Argentina seems to be regaining sanity, a much needed discussion should be the one referring its fiscal balance and the conditions under which the government can take debt, the purposes for it can take debt or if it can actually take debt at all. Let’s not forget authors like Brennan and Buchanan proposed constitutional clauses on fiscal matters to avoid government’s lack of discipline about them.

There is no point in solving the debt issue now to end up in the same situation in the medium term. With a history of fiscal mishandling, failed stabilization plans, uncontrolled inflation and debt defaults, putting in order the fiscal discipline principles seems mandatory and would be necessary for the future to avoid recurring into the same problems. Argentina already had the luxury of having four economic crises in the last forty years. She certainly does not need a fifth one.