Soft Currencies, Hard Landings
Edited by Gerald A. Epstein
Chapter 10: Changing rules of the game of global finance: Glimpses from Argentina’s sovereign debt restructuring
One key distinction between private and sovereign debt as posited by the theoretical literature on sovereign debt is that, unlike private debt, sovereign debt is not enforceable. This implies that creditors only have limited means to recover their dues from a sovereign borrower in the sense that the sovereign debtor cannot be dragged to a court of law in order to extract repayments. Due to the lack of the availability of an exogenous enforcement mechanism, there exists substantial credit rationing in the sovereign debt market since the creditors are not sure whether they would get back the money that they have lent and also the sovereign debtors do not want to incur substantial risks. In such a situation, sovereign lending works by endogenous enforcement mechanisms like reputation of the borrower, trade embargoes and military interventions. The idea here is that if an exogenous enforcement mechanism was available, developing country borrowers would be able to make productive use of finance as envisaged by Schumpeter. However, a study of the recently concluded Argentinian debt restructuring in the first part of the chapter conveys a gloomy message. The government of Argentina succumbed to the whims of the hedge funds when they tried to enforce Argentina’s debt commitments in a court of law in the USA. Creeping exogenous enforcement of sovereign debt has brought with it higher instability contrary to what was expected. Given the fact that debt restructuring exercises are going on in other developing countries too, the Argentina story does not set a good precedent if at all sovereign debt were to become exogenously enforceable in the future. The second part of the chapter looks at two separate episodes from Argentina’s history. The first episode relates to the sovereign debt restructuring in Argentina after the Barings’ crisis of 1890s when Britain was the centre of international finance. The attempt is to compare sovereign debt restructuring in Argentina in the first wave of globalization with the recently concluded debt restructuring in the country in 2016. The idea is to see if history has some lessons to offer for an orderly debt workout. The second episode is from the inter-war period when Argentina was a loyal debtor and honoured its payment commitments. Although Argentina built up a “good reputation” for itself by honouring the payment commitments during the inter-war period, it performed worse in attracting capital inflows after World War II (when the international lending exercise had picked up) compared to countries in its neighbourhood that were serial defaulters in the inter-war period.
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