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may 17, 2014 vol xlIX no 20 EPW Economic & Political Weekly
T Sabri nc ( is an
economist based in Geneva, Switzerland.
A Sovereign Debt Story
Republic of Argentina vs NML Capital
T Sabri nc
A series of events since the early
1980s have pushed developing
countries to restructure their
economies and integrate
themselves with global markets.
These policy shifts have made
them highly vulnerable to
external changes. One such story
is that of Argentina which from
the mid-1970s has gone from crisis
to crisis and is now facing legal
pressure from US holders of old
Argentine debt.

rgentina got a skeptical recep-
tion at the United States (US)
Supreme Court as the justices
considered whether two banks must
turn over details about the countrys
assets as part of a multibillion dollar
ght over defaulted government bonds,
reported Bloomberg on 21 April 2014. On
that day, the US Supreme Court justices
heard the arguments of Argentina and
owners of the defaulted bonds led by
NML Capital a Cayman Islands-based
unit of billionaire hedge fund manager
Paul Singers Elliott Management Cor-
poration. The justices are expected to
rule by late June or early July. This case
is one of the many cases before the US
Supreme Court in which Argentina is
one of the parties. It is regarding the
information NML is seeking from Bank
of America and Banco de la Nacion
Argentina about assets held by Argen-
tina and its ofcials worldwide.
Although this case is about the his-
toric Argentine default of 2001, the
beginning of the debt accumulation that
led to this default may be traced back to
the National Reorganization Process
(NRP) of the military dictatorship from
1976 to 1983. The NRP was the Argentine
version of the familiar reorganisations
of social life into a free market around
the globe since the early 1970s and is
similar in nature to the reorganisation of
Chile from 1973 to 1990 or Turkey from
1980 to 1983 by their respective military
The two important policy changes the
Argentine dictatorship made, in addition
to opening the economy to the inter-
national capital market, were: (a) dereg-
ulation of the nancial sector, and
(b) introduction of a crawling-peg of the
peso to the dollar to bring the then run-
away ination under control. While the
rst of these meant the introduction of a
market-determined interest rate among
other changes, the second required an
exchange rate guarantee by the govern-
ment. In addition, the government guar-
anteed the deposits at the banks, effec-
tively making much of the nancial sec-
tor liabilities of the central bank in the
event of a banking crisis.
The dictatorship borrowed heavily in
the international capital market
mainly variable interest rate bank loans
from the US and European banks that
were lending recklessly in search of high
yields to nance government and cur-
rent account decits. The private sector
external debt also increased rapidly dur-
ing this period. When record high inter-
est rates of the early 1980s (induced by
the US Federal Reserve to curb the oil-
based ination of the 1970s) brought
a global recession triggering the less
developed country (LDC) debt crisis,
Argentina was also hit.
Sovereign Debt, a History
First, a banking crisis developed, forcing
the government to back a large portion
of bank deposits. Second, a balance of
payment crisis ensued, leading to a
reversal of capital ows and severe cur-
rency devaluation. This devaluation,
coupled with an exchange rate guaran-
tee, led to a state takeover of private
debts, resulting in additional govern-
ment debt. Indeed, with the encourage-
ment of international banks in 1981-82,
the public sector assumed a considerable
portion of private sector foreign debt
and the private sectors share fell to
about 30% in 1982. Lastly, the skyrock-
eting interest rates in the US pulled up
the variable interest rates on foreign
bank loans, and the debt burden of the
government increased further.
This rst period ended when Mexi-
cos default on its external debt in
August 1982 triggered the LDC debt cri-
sis, and Argentina followed suit in a
matter of weeks. Argentinas default
lasted until an agreement with its cred-
itors under the Brady Plan in 1992,
envisioned rst in 1989 by the US Treas-
ury Secretary Nicholas F Brady. It
should be noted that there had been no
Economic & Political Weekly EPW may 17, 2014 vol xlIX no 20
debt relief on the defaulted debt in 1982
until 1992, when the Brady agreement
provided some relief. While in the
beginning of the period at the end of
1975 Argentinas external debt was
about $4 billion, it was about $44 billion
at the end of 1982.
The second period lasted from 1983,
when Argentina returned to electoral
democracy, and continued up to 1990.
As with the rest of Latin America, those
were painful years for Argentina. Wages
dropped, unemployment rose, capital
ed the country, economic growth
slowed, external debt remained unserv-
iceable, two hyperinations and several
balance of payments crises had occur-
red. And Argentinas access to the inter-
national debt market had been cut off
throughout the period. In spite of this,
however, the external debt of Argentina
continued to rise, albeit at a slower rate,
mostly through capitalisation of interest
on defaulted loans, and reached about
$63 billion by the end of 1990. In addi-
tion to nance government spending,
Argentina issued domestic bonds denom-
inated in US dollars because of a lack of
condence in the domestic currency.
Towards the end of this period, in June
1989, at the height of the hyperination
of 1989-1990, the Carlos Menem govern-
ment came to power.
The third period started in 1991 and
ended with the debt default in 2001. In
this period, the ongoing free market
reorganisation was taken to its natural
conclusion. In February 1991, the Har-
vard trained economist Domingo Cavallo
joined the Menem government as the
economy minister until August 1996
and, in cooperation with the Inter-
national Monetary Fund (IMF), started to
implement one of the most radical struc-
tural adjustment programmes in the
history of the IMF. His programme
included liberalisation of trade, liberali-
sation of the capital account, privatisa-
tion of state enterprises including oil,
natural gas, electricity, transportation,
and other public utilities, even water
and draconian cuts in government
spending, that is, austerity. Cavallos
reform programme allowed large foreign
ownership of banks, which led to a
seemingly more stable banking system,
but one which failed to lend to small and
medium enterprises.
At the heart of Cavallos reform pro-
gramme was pegging the peso to the
dollar one to one, which was encour-
aged by the IMF. Although the peg ended
the hyperination, after a period of rapid
growth, the economy slowed, partly
because rms could not get adequate
funding. And, although other policy fail-
ures occurred, the peg was the most
important policy mistake. With the rest
of the measures, it made the economy
open to external shocks that were caused
by the international nancial market
volatility. In Stiglitzs words, this was a
system doomed to failure, not because
of the mistakes made by Argentines, but
because of its vulnerability to external
shocks (Stiglitz 2002).
And the expected happened. First
came the global bond crash of 1994
induced by interest rate hikes by the US
Federal Reserve; then the 1995 Mexican
peso crisis; then the 1997-98 south-east
Asian and Russian crises; next the 1999
Brazilian crisis and last the 2000-01
global slowdown. Each event worsened
Argentinas situation in one way or
another, leading to a major economic
depression in the country from 1998 to
2002. The austerity measures encour-
aged by the IMF and implemented by
Cavallo after he was called by the then
President De la Rua in March 2001 to
lead the economy again increased the
economic pain, and then led to social
unrest and, eventually, to riots in
December 2001. Finally, on 5 December
2001, the IMF refused to disburse a
scheduled $1.3 billion loan because of
Argentinas budget decit and put a nail
in the cofn of the Argentine economy.
When the riots of 20 December 2001 left
several dead, the government fell, Cavallo
and De la Rua resigned, and De la Rua
ed the government building in a heli-
copter on the same day. Four days later,
the then President Adolfo Rodrguez Sa
halted payments on the $132 billion debt
the country owed. The rest is history.
Debt Restructuring
Since this default, Argentina attempted
to restructure its debt twice. First in
2005, and then again in 2010. In these
restructurings, nearly 93% of the old
debt was exchanged for new debt, leav-
ing 7% as holdouts. It is some of these
holdouts and others like NML Capital,
who purchased the defaulted debt from
other holdouts at a deep discount, who
demand full payment. Indeed, led by
NML Capital, they sued Argentina rst
at the Southern District of New York
District Court and won the case in Feb-
ruary 2012. Then, the case moved to
the Court of Appeals for the Second Cir-
cuit in New York and in August 2013,
Argentina lost again.
There are two reasons why holdouts
could sue Argentina in US courts. The
rst is that there has never been a global
authority for efcient and fair restruc-
turing of sovereign debts. There have
been talks of establishing one for many
years but, despite the obvious need,
there has been no progress. The second
is Argentinas mistake of restructuring
the defaulted debt in New York under US
law. Of course, it is anybodys guess
what percentage of the Argentine debt
could have been restructured, had it
been restructured in Buenos Aires under
Argentine law. Now, the case is with the
US Supreme Court and only time will tell
the outcome.
Now, the moral of the story: a country
needs to be very careful in reorganising
its economy into a free market and inte-
grating it with global nancial markets.
Stiglitz, Joseph E (2002): Argentinas Collapse
Incited the Largest Default in History, The
Straits Times, 10 January.
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