A morality tale in Argentina’s debt epiphany

A newly elected president is near a deal to end Argentina’s long debt woes. The country’s 15-year saga provides a lesson for a world awash in red ink. 

Argentina's President Mauricio Macri takes part in a carnival celebration in the northern town of Purmamarca, Feb. 6. International investors that day praised the speed with which Macri made a cash offer to holders of defaulted bonds aimed at ending a long and bitter dispute that has strangled government finances. A financial markets pariah since defaulting on a record $100 billion, Argentina proposed a $6.5 billion payment to settle the legal battle and said two of the leading six "holdouts" in the case had already accepted the discounted terms.

One of the world’s longest sagas over a debt default may soon be coming to end. Argentina is nearing a final deal with foreign creditors – almost 15 years after it first defaulted on nearly $100 billion that it owed. A successful conclusion to the extended legal battle could offer a morality tale for a world awash in red ink.

What is the tale? It is that Argentines decided last year to elect a new president, Mauricio Macri, who, like a returned prodigal son, has quickly begun to shed many of the country’s profligate habits and plans to abide by the obligations of global financial rules.

“We have to be a predictable and trustworthy country,” he said. “Argentina wants to have a good relationship with the whole world.”

Largely cut off from world capital markets and foreign investments, Argentina’s economy has stagnated. Mr. Macri’s election was a turning point for the resource-rich South American nation, whose wealth per capita was once on par with Canada’s. While Argentina’s 43 million people have practical economic reasons to make good on the nation’s sovereign debts, the legal drama has also helped. Many of the creditors were able to convince a United States federal judge, Thomas Griesa, to impose tough restrictions on Argentina’s assets around the world.

It also helped that Judge Griesa labeled Argentina’s actions as “immoral.” In fact, Argentina’s snub of its creditors pushed the International Monetary Fund, which helps rescue countries in financial trouble, to stiffen its rules. “No More Argentinas” become a mantra at the IMF.

The issue of morality is often woven into today’s international struggles over debt collection or debt leniency. Since the 2008 financial crisis, the European Union has pushed Greece to curb its overspending and its lapsed tax collection before receiving loan bailouts. Greece is not alone in the EU. Many European banks remain saddled with nonperforming loans, which may total more than $1 trillion. And the official debts of Italy and Portugal are still at dangerous levels.

China could be dealing with the biggest case of moral hazard in financial obligations. The debt of its corporations, most of which are state-controlled, has risen to an estimated 140 percent of China’s gross domestic product. That is about double the debt-to-GDP ratio for US corporations. The possibility of massive debt defaults in China is a major reason for the global economic slowdown.

Argentina’s final solution to its debt may be unique but the uniqueness only shows that the legal and moral rules for debt resolution are not yet set in stone. The IMF has changed its rules in recent years as each financial crisis demands specific solutions. The IMF, for example, bent its rules to help Ukraine solve its debt woes despite the country’s apparent inability to pay. The action reflected the West’s concerns about Ukraine falling under Russian control. 

This month, the IMF announced it had again reassessed its debt-rescue rules. This time the agency hoped to be able to send the proper signal to any country tempted to renege on debt obligations.

Debt is a necessary tool for individuals and countries to support each other. But it also is tied to virtues such as honor and respect. “There is a moral as well as a purely economic case for the global marketplace,” says Steven Weisman , author of a new book, “The Great Tradeoff: Confronting Moral Conflicts in the Era of Globalization.” To set rules for global commerce, he adds, requires the morality of global cooperation.

As Argentina returns to the fold of international credit markets, its story should elevate the search for the best legal – and moral – standards to honor debt obligation. It shouldn’t take a country some 15 years to figure out the right course.

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