Internationalized Argentina

Throughout the Argentine debt crisis, Cristina Kirchner has always played a risky game - so far, successfully. For a time, the problems left by the previous governments of Menem and de la Rua for her husband and then herself to deal with seemed to be smoothed out. After toughly negotiated debt restructuring in 2005 and 2010, Argentina seemed to be back on track for stabilization. The economy grew and Argentina paid its debts on time.

The small group of investors that refused to agree to the debt restructuring was at first persistently ignored - and then criminalized by Argentina's leaders. "Vulture funds" is the term Kirchner uses for the hedge funds. The investors took the matter to court, and won. This has pushed Argentina into technical insolvency, because the funds' debt claims are now blocking debt servicing for all other creditors.

This interpretation seems plausible upon first glance. It neatly nourishes the prejudice of capitalism rearing its ugly head. And yes, it is legitimate to ask how a small minority of creditors can torpedo a bigger solution and thereby risk an entire country's solvency - at the expense of all other creditors, and above all at the expense of the people of Argentina. Morally, the verdict has been made. That's what Cristina Kirchner is banking on.

Morality vs. justice?

It seems pretty clear that in addition to the Group of 77, the Organization of American States - with abstention from the US and possibly Colombia - will also call for an international arrangement and support Kirchner in her criticism of the hedge funds.

And it would indeed have devastating consequences if the funds were to push through their full demands. International financial systems may already have started playing under improved rules to some extent, but such a scenario would mean that other creditors would demand equal treatment - and not just in Argentina. It would send a message to creditors which could make debt restructuring worldwide much more complicated in the future.

And yet, from a legal perspective, the hedge funds' claims are entirely legitimate. In addition, those funds don't just represent clever money jugglers, but also small investors who bought Argentine government bonds with their savings. So normal people can be "vultures," too.

Many of them were people whose naivety led them to believe that government bonds were a safe bet, because they assumed that states respect international law and fulfill their promises. But the Kirchners' Argentina didn't.

And: The economic boom bought with the debt restructuring was neither used to launch a sound debt restructuring process, nor to develop infrastructure. The money was pumped into consumption, subsidies and social programs. This economic policy consisting of a mix of expropriation, price control, and a bizarre form of currency control that has pushed Argentina back toward crisis. Yet the government still insists that only the past debt is to blame.

Buying time

The "vulture funds" give the Kirchneristas yet one more excuse to blame others for their own failed policy, and possibly also an excuse to internationalize the costs.

Argentina is trying to buy time. Either the hedge funds forego a large share of their claims, succumbing to international pressure, or Argentina drifts into bankruptcy again with its eyes wide open and at the expense of its own population.

Under the first option, Argentina's insolvency would be averted before the end of July, i.e. within the fixed payment period. The government could wait for a clause stipulating equal treatment of all creditors to run out by the end of this year.

In any case, the question of guilt has long been answered and could be exploited further in the upcoming election campaign. And of course: another round of restructuring would reduce the remaining debt even further.