When we hear the word ‘default’ we naturally think of the euro. But to many people across the world, ‘default’ is associated with Argentina.
In 2001, Argentina committed the greatest default in history and declined to repay $81,000,000,000 that had been lent to it in good faith. Even now, it has not come to terms with all its creditors from that time. It still owes $360m to the USA, £3.79 billion to the Paris Club of creditor states and a staggering £9.55 billion to private lenders.
Now in 2012 Argentina has $46bn in its reserves, more than enough to pay off its outstanding debts in full. But despite that, it still holds out against a settlement and has sheltered most of its foreign currency reserves in Switzerland, out of reach of international law. Recently a report came out that described Argentina as a financial rogue state, “a worrying case of an outlaw state attempting to rewrite the rules on international finance in a way which leaves both other governments and private sector lenders significantly worse off”. And on Monday the report’s author came to speak at a meeting I chaired in the House of Commons.
Graham Mather told the All Party Group on Economics, Money and Banking that Argentina has refused to allow the IMF to review of its public accounts since 2006, the only G20 nation not to undergo annual reviews. And it has been assigned to the grey list of countries with strategic deficiencies in their anti-money laundering and anti-terrorist financing systems.
Its refusal to pay the Paris Club has triggered automatic sanctions by the US, preventing US institutions from lending to Argentina. (The Paris Club was originally set up in 1956 to manage a previous Argentine financial crisis). The US Government has now begun voting against World Bank loans to the country.
Perversely the World Bank currently lends Argentina £4.78 billion despite Argentina refusing to honour rulings of the World Bank’s arbitration arm, the International Centre for the Settlement of Investment Disputes (ICSID). Argentina has incurred more claims in the ICSID than any country apart from Venezuela, which is in the grip of Hugo Chavez. In breach of the ICSID Treaty, Argentina has refused to pay awards unless submitted for recognition by its own courts.
Britain is estimated to be the sixth largest investor in Argentina, investing over $2bn in the last three years. Graham Mather argued that supporting more loans to Argentine Government projects at a time when Argentina is refusing to pay her international debts would reward Argentina for breaking her treaty commitments. It might also risk sending conflicting signals at a time when Britain again has to stick up for the Falkland Islanders against Argentine imperialism.
His case was that Britain should oppose further World Bank loans to Argentina; encourage measures to repay debts owed to official and private creditors of Argentina at international financial institutions; and urge Argentina to comply with dispute settlement proceedings under the ICSID and also the recommendations of the Financial Action Task Force on anti-money laundering and anti-terrorist financing measures. These requirements are no more than what the UK would require of other countries.
There were some very well informed people at the meeting. Someone said that President Kirchner basically does not understand economics and neither do her advisers – the only two that understood international finance were Central Bank governors that she sacked!
There was a difference of opinion between those who claimed Argentina set an example of bad behaviour that other countries in economic trouble might follow; and those who felt Argentina was too insignificant economically and politically for their behaviour to matter much. The argument that told with me was that Argentina certainly seems to have been a bad example to itself: having got away lightly with the 2001 default, it has since been playing fast-and-loose with other international commitments such as those to the IMF, ICSID and the Financial Action Task Force.
One person remarked that the people who would really suffer in the long run would be the Argentine people because their country will be seen as a hostile place in which to invest. The Kirchner Government has just nationalised the Spanish energy firm YPF without compensation, so this made sense to me. This is a tragedy.
A hundred years ago Argentina was the 10th wealthiest country in the world per capita. Now it is 57th. The most prosperous time in Argentine history was in the late C19th when the country was flooded with international investment, principally British. But with five sovereign debt defaults/restructurings in the last 61 years and a C21st record of expropriating foreign investors, Argentina is digging itself into a hole. Why invest in a country that will steal your company and give you nothing? Why lend to a country that has stolen the money of previous creditors 5 times in living memory?