Another year, and the ever-entertaining country of Argentina finds itself back in the U.S. Supreme Court, trying to get the court to hear its appeal of injunctions that would force it to pay its debts. A couple of days ago a group of friendly countries came in to support Argentina's position with amicus briefs. These countries address the critically important question of the day: how many reasons can we think of why a country that gets tired of paying its debts should be able to walk away? Call these countries the "Coalition of Weasels." So far it's Brazil, Mexico (!) and France (!!!).
OK, I shouldn't be so surprised about France. They are well on the way to adopting the official Latin American model of economic success. Government spending is well over 50% of GDP. A socialist government pretends that infinite spending can be paid for by the tooth fairy. Last year they lost their AAA rating. Moody's rates them Aa1 "with negative outlook." Yes, even France has reason to prepare the ground for the day it wants to default.
The overriding theme of the three briefs is how terribly important it is for a country in crisis to be able to walk away from debt. Mexico: "The injunctions will inevitably have a negative impact on future sovereign debt restructurings and risk destabilizing the international monetary system." I like that one about "risks destabilizing the international monetary system." How would that work, exactly? Nobody knows, but it sounds really scary. Then here we have France:
If upheld, the injunctive remedy affirmed by the Court of Appeals on the basis of this ill-founded interpretation threatens significant global harm to various public and private interests. It also would disrupt the established practice of orderly sovereign debt restructurings, in which France has acquired extensive experience as an active participant in the Paris Club. In particular, the injunctive remedy threatens to upset the complex balance of interests between sovereign debtors and their creditors, sovereign lenders, bank lenders and bondholders that is generally achieved in a voluntary and orderly restructuring.
Never mentioned is that the "crisis" in Argentina actually consists of nothing more than that the politicians would rather spend money on various forms of vote buying than on paying their debts. They don't have to pay for any wars. (The Falklands war was way back in 1982.) They haven't had any natural disasters to speak of. Whatever crisis they have is completely of their own making, born of incompetent economic policy and waste. Argentina is famous for an economy dominated by crony capitalism and subsidies. Inflation is rampant -- they admit to 10.9% for 2013, but everybody knows that's fake. The real number is more like at least 50%, according to a February article in The Economist here. That gives a great opportunity for the old official exchange rate game, where you let your friends buy or sell dollars at a fake rate, hiding massive payoffs. And then you hand out subsidies for everything. How about energy subsidies for everyone! Argentina has been deep into that one, although just in the last few days it has had to start cutting the subsidies because it is running out of foreign exchange to buy the stuff. But don't worry, the Economy Minister promises that they will continue with the destructive economic policies:
Economy Minister Axel Kicillof says the populist government is sticking with its model of transferring wealth to help the poor and stimulate the economy.
Of course, in an official exchange rate regime, the actual primary wealth transfer is not to the poor at all, but rather to the well-connected friends of the government. But if they say often enough that they are "helping the poor," maybe someone will believe it.
What's remarkable is that the countries that actually bite the bullet and pay their debts are the ones that are successful. The United States literally got its start by figuring out how to pay off the defaulted Revolutionary War debt at par, even though much of it had been bought up cheaply by speculators. Alexander Hamilton's First Report on the Public Credit of 1790 - proposing to pay the debt at par - was his first big act as Treasury Secretary. From Wikipedia's description:
Monied speculators, alerted that Congress, under the new Constitution, might provide for payment at face value for certificates, sought to buy up devalued securities for profit and investment.Concerns arose over the fact that many certificates – almost three-quarters of them - had been exchanged for well below par during periods of inflation, some as low as 10 cents on the dollar, but selling at 20-25% at the time the Report was debated.
Funny thing was, somehow paying off that debt didn't "destabilize the international monetary system." Nor did it keep the United States economy from taking off. In fact, if debt payments squeeze out the possibility of massive payments for crony capitalism, energy subsidies, and the like, they may be the best thing that can happen to an economy. Don't tell Brazil, Mexico and France.
UPDATE March 28, 2014: Many thanks to Instapundit for the link!
I should mention that the single worst thing about being a partner of a large international law firm is having to pay income taxes, not small in amount, to the government of France. Sacre bleu!