Don't Mention Argentina and Greece In the Same Breath!

Global renegades

By James K. Glassman

Judging from conversations I had in Europe a few weeks ago with journalists, academics, and policymakers (including at least one foreign minister), I’d say there’s growing worry about two countries being used in the same breath: Argentina and Greece.

These Europeans are deeply concerned that Greece – not to mention Spain and Italy — will follow Argentina’s example in renouncing debts, flouting international norms, and getting rewarded for its irresponsibility.

Argentina holds the record for the largest sovereign debt default in history. In 2001, the nation presented creditors with “a take-it-or-leave-it offer of 35 cents on the dollar,” as The Economist magazine put it, on about $80 billion in loans. Creditors “considered this derisory: previously, delinquent countries had typically paid 50-60 cents.”

Still, Argentine lenders had no choice, and many foreigners accepted. Others, however, refused. According to Graham Mather, president of the European Financial Forum in London, Argentina still owes $15 billion to private individuals – including tens of thousands of Italian pensioners and several institutional investors — and over $6 billion to the Paris Club of government creditors.

Worse, Argentina has ignored more than 100 court decisions around the world. Thomas Griesa, a U.S. District Court judge who handled many of the cases, has called Argentina’s stiffing of its creditors “immoral.” Argentina has also thumbed its nose at awards to creditors by the International Centre for Settlement of Investment Disputes (ICSID), the World Bank’s arbitration mechanism.

Now turn to Greece. It is one of several European countries that face an economic crisis that could be as dire as Argentina’s — or worse. When Argentina defaulted, its deficit was only 3.2 percent of Gross Domestic Product, but Greece’s deficit is 7.8 percent of GDP. The New York Times reported, “As a percentage of GDP, Greece’s debt of 150 percent is far worse than Argentina had when it defaulted.”

What’s troubling to European policy experts is that Greece – or, if it comes to that, Spain and who knows what other countries – will look at the Argentine experience and say, “That’s a good solution for us!”

The reason is that Argentina has not been punished by international financial organizations for its irresponsible behavior. To the contrary. The World Bank has loaned Argentina about $8 billion and the Inter-American Development Bank (IADB) several billion more, including, ironically, $36 million on July 6 for “productive institutional strengthening and fiscal management.”

Beyond the loans, Argentina has actually been honored. It is currently one of the exalted members of the G20, the organization of large economies charged with “restoring global growth, strengthening the international financial system, and reforming international financial institutions” in the wake of the 2008-09 global crisis.

And this is what worries those Europeans I talked to.

What Greece can legitimately see in Argentina is a nation that has made irresponsibility and lack of international cooperation pay off. Larry Elliott, economics editor of The Guardian in Britain, summed up the case in an article with the headline, “Greece should follow Argentina’s lead,” and a subhead that concluded, “when an economic crisis hits, it is often best to go it alone.”

Some nations, however, are taking action against Argentina. In September, a Treasury Department official announced that “the U.S. will oppose lending to Argentina” at the World Bank and the IADB. The U.S. took the first step by voting against $232 million in loans at the IADB last Sept. 14.

A Treasury spokeswoman said, “Argentina has failed to honor its commitments as a member of the Group of 20 and its obligations to the IMF, the Paris Club and [ICSID]. We have consistently told the Argentine authorities that they must rectify these policies.”

The distinct impression I got from the Europeans – none of whom wanted to speak on the record for now – was that at least some of their countries would follow the United States in opposing further loans.

The G20 issue may be even more pressing. Sen. Richard Lugar, the centrist Republican who formerly chaired the Foreign Relations Committee, introduced a resolution in May calling for Argentina’s suspension from the G20.

“Unlike countries facing genuine challenges,” said Lugar, “Argentina has a productive economy and over $45 billion in reserves.  It could easily live by the rules and pay its bills—but the current government chooses otherwise.”

In a tough editorial in April, the Wall Street Journal called for expelling Argentina form the G20, citing President Cristina Kirchner’s decision to nationalize the oil company YPF by seizing shares owned by a Spanish firm. The Washington Post similarly editorialized that “one way to send a wake-up call would be to remove Argentina from the Group of 20, the supposedly elite club of nations that gathers to weigh world economic problems.”

The case against Argentina is powerful. Last month, Alex Brill, a research fellow at the American Enterprise Institute, and I produced a study, sponsored by the National Taxpayers Union, that advocated objective criteria for admission to the G20, which, we argued, is in jeopardy of losing legitimacy for the arbitrary nature of its membership decisions.

We developed a scoring system based on seven metrics developed by the World Bank and International Monetary Fund and then applied these standards – which included GDP, trade volume, global connections of domestic financial institutions, and rule of law — to current members and about two dozen other countries.

We found two members clearly did not belong in the G20: Argentina and Indonesia. Argentina was by far the worst. It scored 18.1 on our scale – below such countries as Egypt (23.6), Thailand (32.1), and, yes, Greece (37.3). Argentina is currently the smallest of the G20 by GDP; it also ranks lowest by far for financial interconnectedness and second-to-last (a bit better than Russia) for rule of law and control of corruption.

In addition, Argentina ranked last in compliance with the priority commitments that G20 members made at their 2010 summit in Seoul. Argentina met just 46 percent of the commitments, compared to a member average of 76 percent. In short, by any objective standard, the country had no business ever being in the G20. The Washington Post suggested that Argentina be replaced by Chile. Perhaps, but Chile is one of twenty current non-members of the G20 that rank ahead of Argentina.

Argentina has been frozen out of the private credit markets now for a decade, and, despite the claims of Larry Elliott and others, there have indeed been serious consequences. The New York Times quoted a business consultant in Rosario, a city north of Buenos Aires, as saying, “Argentina is no longer considered a serious country.”

Argentine officials are currently stonewalling and dissembling, making erroneous claims, like Argentina “recognized its debt and duly paid it.” But Argentina has a choice. Its government can pay what it owes, comply with the courts and the ICSID, rejoin the international community, and, through these actions, probably retain its seat at the G20. Or it can remain a global renegade and inevitably lose both its World Bank loans and its G20 status.

The big worry is not that Argentina self-destructs but that its current standing as a G20 member provides an example for other nations that ignore and disparage international financial standards. That’s what worries responsible Europeans, who fear that Greece and other debtors in distress will follow the Argentine model. Let’s hope not.