Argentina: In defense of ‘vulture funds’. Risk-takers force corrupt nations to pay their debts

Washington Times ^ | 11/27/2012 | Richard Rahn

[SeekAndFind]

If you lend money at 5 percent interest for 10 years and then suddenly the borrower announces that he is only going to repay you at 30 cents on the dollar, would you think you have been cheated?

The Argentine government defaulted on its debt a little more than a decade ago, and some of the creditors are still in court trying to get paid. A New York court ruled against Argentina last week, which made headlines.

The story is important to everyone because even though the Argentine case is unique, the final resolution likely will have some effect on government bond prices for decades to come — and, in turn, on tax burdens and growth rates worldwide. If Argentina gets away with not paying the full amount it contracted to pay when it sold the original bonds, other countries will be encouraged also to default on their bonds, as several already have.

Argentina has had destructive economic interventionist and socialist policies for more than 80 years. The result is that Argentina has fallen from having the 10th-highest per capita income in the world early in the 20th century to just 68th today.

Sovereign countries that print their own currency normally “inflate” away much of the value of their debt by excessive money issuance when the debt is in their own currency. However, Argentina’s debt was U.S. dollar-denominated and subject to New York commercial law, which is why the court battle is in New York.

Argentina issued U.S. dollar-denominated bonds subject to U.S. law because most international bond buyers would not have been willing to buy Argentine currency bonds subject to the Argentine courts.

[SeekAndFind]

What has been particularly galling to those who have held Argentine bonds is that the country has many state-owned assets and considerable foreign exchange that it could have used to pay the bondholders but, for domestic political purposes, chose not to.

[Buckeye McFrog]

I suspect the next “cold war” is going to be between producer nations and debtor nations. The latter will eventually join together in a unified bloc to form a “debt cartel”.

[wiggen]

Don’t forget they confiscated companies from Spain. or their assets in Argentina.

[Moltke]

Well, was the nominal interest much higher than for other dollar-based bonds? There’s your risk/reward situation right there.

A typical case of wanting to eat the cake and have it too.

[GeronL]

France is rushing to become like Venezuela and Argentina and we are getting there, albeit a bit more slowly