Argentina has defaulted on its sovereign debt again. And the government is currently going through difficult negotiations with its creditors. Joseph Stiglitz, Edmund Phelps, and Carmen Reinhart, along with many reputable economist co-signers, have asked creditors to negotiate in “good faith.” What they are really asking, however, is for creditors to accept the offer Argentina puts on the table.
To date, Argentina has refused to share any cost of the default and asked creditors to wait until the next government takes office for bond payments to resume. That is an unreasonable ask.
As Stiglitz makes clear elsewhere, this negotiation is not just about Argentina. It is the first in what will likely be a round of defaults, which might include Congo, Zambia, Brazil, and El Salvador, among others. And creditors, Stiglitz argues, are using Argentina to demonstrate the strength of their position. For this reason, he says, they are “short-sighted and inhumane.”
I disagree with Stiglitz. Creditors are entitled to repayment. A pragmatic approach will no doubt require creditors get far less than they were initially promised. But calls for “good-faith” negotiations should be realistic.
A realistic take on the Argentine debt crisis would start by looking at the reason why there is so much debt outstanding. Sovereign debt does not just fall from the sky. Sovereign debt is the result of fiscal deficits. And too much sovereign debt is the result of large fiscal deficits.
The source of Argentine debt is no secret. Except for a few years after the 2001 crisis, the government has consistently spent much more than it raised in revenues. In other words, Argentina’s fundamental problem is the ongoing attempt at maintaining unsustainable structural deficits. This coronavirus context is a proximate cause at best.
Curiously, Argentine structural deficits go unmentioned by Stiglitz. That is a glaring oversight, which leads to ignoring the most obvious solution. Instead of laying the burden on creditors, we should ask the Argentine government to negotiate in “good faith” by agreeing to reduce its annual expenditures to a sustainable level or increasing taxes to pay for them.
Being realistic also requires acknowledging Argentina’s past defaults. In the last 50 years, Argentina has defaulted four times. Three defaults (2001, 2014, and now 2020) have occurred in the last 20 years. According to data from Reinhart and Rogoff, Argentina has spent 36 years in default or under debt restructuring since WWII. That’s nearly 40 percent of the period! Even in Latin America, that’s extreme. Brazil was in a similar position for just 12 years over the period, Chile for 14 years, and Mexico for 9 years. Other countries, like Colombia, never found themselves in such a situation.
Stiglitz also points out the impact that a default would have on the low-income households of Argentina. That’s, admittedly, unfortunate. But one must also recognize what a default on Argentine debt means for the retirement and pension funds of individuals around the globe.
Argentina’s economic troubles are self-imposed. They are not the fault of its creditors, who just want to be repaid as promised. Any good-faith solution to Argentina’s problems must start by recognizing the real problem: large fiscal deficits.