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Argentinian Nightmare
De Telegraaf
January 23, 2010

By Joshua Livestro

In December 2001 the Argentinian state was finally served the bill for decades of economic populism. In a dramatic gesture, the Argentinian government decided to default on a debt of no less than 100 billion dollar - the largest debt default in international monetary history.

Under President Cristina Fernandez it seems that, like the Bourbons, the country has learned nothing and forgotten nothing. She opted for the same populist approach that had previously brought the country to the edge of bankruptcy: prices were frozen, export discouraged and whole branches of industry placed under government control. Programmes of redistribution were financed through enormous tax increases. Once Fernandez had succeeded in turning Argentina's budget surplus into a rapidly growing deficit, she decided to turn to the international capital markets for help.

In order to gain access to the financial markets, she needed something to satisfy the creditors disadvantaged in 2001, who refused to accept any deal which would result in the writing-off of a significant part of the money lent under the pre-2001 arrangement. Through a range of worldwide lawsuits, they continued to block Argentinian access to the capital market. Fernandez thought she'd found a solution in the form of a $6 billion loan from the fund of the Argentinian Central Bank. She allegedly intended to use the money to pay off part of the $20 billion in unpaid debts. She'd failed, however, to clear the deal with bank director Martin Redrado, who refused to give her the money and explained that the Fernandez government should first look within existing spending programmes for savings that might help to bring the budget back into surplus. An institutional conflict turned into a farce when Fernandez tried to fire Redrado. The central banker turned to the courts to get his dismissal overturned - successfully.

Meanwhile, international investors who lost significant sums in 2001 still have no way of knowing whether they'll ever get their money back. The Argentinian Central Bank guards its capital in the same way against the equitable claims of foreign creditors as it does against the wrongful claims of its own government. As early as 2002, the bank secretly began transferring large parts of her remaining capital to the Basel-based Bank for international Settlements (BIS). Today, the BIS holds almost 80 per cent of Argentina's total credit reserves. Although the Argentinian Central Bank is only of the 57 members of BIS, Argentinian capital forms more than 10 percent of all the capital held at the Swiss bank . The reason why the Argentinians chose the BIS is that credit held there cannot be accessed through the courts by any third parties looking to recoup their losses from the 2001 default disaster. It's somewhat disappointing, to say the least, that the BIS, which has always championed transparency in the field of the monetary reserve policy of central banks, allows itself to be used for such cheap monetary disappearance acts.

All in all, it's no surprise capital markets continue to use Argentina as a yardstick by which to measure the seriousness of the debt problems in other countries ("Will Greece follow the path of Argentina?"). As long as the political and financial elites of the country rather spend their time fighting each other than tackling the underlying systemic problems, I don't think there's much chance of that ever changing.

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