Argentina, one of the largest economies in Latin America, is set to default on its international debt before the end of this month. Unless the government can reach an agreement with its creditors to reduce or delay its payments, the default will be the country’s third in twenty years and by some counts its ninth overall.
If Argentina’s last two defaults are any indication to go by, this would result in economic turmoil and suffering equal to or worse than that endured by the United States during the Great Depression of the 1930s, with runaway inflation, massive unemployment, and dangerous political upheavals. As the world slides into the economic downturn that is currently unfolding propelled by the COVID-19 pandemic, this could prove catastrophic to the country and its recently elected center-left Peronist government, headed by President Alberto Fernandez.
Even before the pandemic and the government’s aggressive national shutdown, default was already on the cards. Finance Minister Martín Guzmán had begun negotiations to delay several different but overlapping sets of debt. These conversations reached a desperate point by April as it became apparent that effects of the pandemic combined with the existing inflation and investment crisis meant that the government would need to renegotiate their obligations. Now, several of these deadlines have already passed and the government is requesting extensions.
The next set of debts is due on May 22; failing to pay them could result in default While President Fernandez remains upbeat about it in the national and foreign press, Guzmán and the international negotiators are explicit about the real possibility of default. The nature of these negotiations changes daily as the Argentine government and its international creditors effectively play chicken with the country’s economy.
Reaching an agreement would mean a compromise: Argentina would agree to pay a percentage of what it owes through a process known as “restructuring” or a “haircut.” This would mean having its debts reduced but not eliminated, and would entail a neoliberal reforms and concessions. Creditors get less than what they’d hoped but are guaranteed something, and the Argentine government is spared the shame of a default while still needing to abandon some of its spending program. Without an agreement, the coming months and years become completely uncertain. Given how dire the economic outlook of the region already is, the effect that this would have on Argentine society would be profound.
Not So Sovereign Debt
Sovereign debt is a complicated phenomenon. Put simply, it’s the amount of money a national government has borrowed, and which it cannot repay because its spending is more than its earnings. These debts are issued as bonds or other financial instruments and could be held by private individuals, investment firms, or international organizations such as the International Monetary Fund (IMF).
Almost all governments have these debts, and use them in much the same way that individuals use their own debts — both to spend on things they want and to shore up economic confidence. Just like a credit card company will issue you more credit if you have more assets and make your payments on time, sovereign debt payments show economic actors that a country’s government is fiscally solvent, that their economy is robust and functional, and that their government buys into the international monetary system.
The fact that these debts are held by governments rather than individual people complicates things. Debt is held and traded in the form of currencies whose values and quantities are in part determined by their issuing countries. Unlike a private individual or corporation, a government could intentionally devalue its currency (for example, by printing more money) and thereby reduce the value of the debt it owes others.
Conversely, if a country owns a substantial amount of another country’s debt denominated in that foreign currency, it is in their interest to maintain the value of that foreign currency. For example, China and Japan each own about one trillion dollars in US government debt. Not only is it in their interest that the US economy stay afloat so that the debt can be repaid, it’s also in their interest for the dollar to remain valuable so that the original trillion dollars keeps its value. Repaying sovereign debt in a foreign currency carries its own risk, as it reduces a country’s international economic leverage.
Just like an individual or a corporation, a government can decide that it is unable to repay its obligations, that it is bankrupt. When a national government declares bankruptcy, it is called a default. The big difference between government debt and personal debt, of course, is that governments are sovereign. Generally there is no institution with the authority to compel them to repay their debts, with the primary exception of countries that have joined the eurozone. So what do countries and firms do when sovereign nations don’t, or can’t repay their debts? There are two options: military force and economic pressure.
There are several examples in history when military might was used to force countries to pay their debts. These examples of “gunboat diplomacy” have generally involved larger, northern powers sending their navies to threaten the ports and shipments from nations in the Global South. One prominent example occurred in Venezuela in 1902: when the government refused to pay its foreign debts, several European powers blockaded the country’s ports to threaten invasion, prompting the involvement of the United States to enforce the Monroe Doctrine. Other examples abound in the history of Latin America, particularly in the Caribbean and Central America.
By now, economic pressure has become the more common method to enforce debt repayments. Typically the IMF, the World Bank, or some other international body intervenes to buy or arrange the sale of unpayable debts in exchange for concessions on the part of the indebted country. Since the 1970s, these changes have typically been the enforcement of neoliberal monetary policies, reductions in government spending, and the reduction of labor rights. This has been the story of Argentina’s debt settlements: cuts in government wages and the privatization of nationally owned firms have been standard. As a consequence, for those on the Left, the IMF has become synonymous with financial imperialism. On the Right, it’s the government that’s vilified and seen as an obstacle to be overcome in the name of economic growth. It’s this idea that is at the heart of neoliberal ideology.
A Nation Indebted
This is precisely what happened in Argentina in the early 2000s. After a decade of growth that came with the return to democracy in the mid-1980s, the government still had to reconcile the massive increase in debt left by the military regime of 1976–83. Though the 1990s had seen economic growth in terms of GDP and exports, it had also ushered in privatization and a reduction of the welfare state. Then-president Menem and his finance minister, Domingo Cavallo, responded to slowing growth and looming debt deadlines by pegging the value of Argentina’s currency to the US dollar and implementing austerity, ending several government-support programs like utility subsidies and pensions.
Despite these measures, by the late 1990s, growth was down and debts had piled up. The 1999 presidential election of Fernando de la Rúa came as the country entered a prolonged recession, only worsened with concurrent recessions in Mexico, Russia, and then the United States.
The next two years saw mass political and economic upheaval in Argentina, with catastrophic inflation, riots, and protests. Successive cuts to pension payouts and civil-service wages, as well as imposed limits on cash withdrawals, and rapidly rising unemployment destroyed popular faith in the government, and even democracy itself. The situation was so bad by late 2001 that first the vice president, then the finance minister, and finally President de la Rúa resigned, escaping the Presidential Palace by helicopter just before the country defaulted on its international debt.
De la Rúa’s replacement resigned in little over a week. His successor, Eduardo Duhalde, called for early elections in May 2003 and was followed by the Peronist Néstor Kirchner. Under Kirchner, Argentina agreed to restructure its debt, and so entered negotiations with creditors and the IMF to reduce the amount owed to a payable sum. Some of this debt was bought, at a reduced price, by other creditors willing to take the risk, but there were several “holdout” firms that refused the terms offered. Several major court cases, both in New York (where the banks and finance firms holding much of Argentina’s debt are headquartered) and in the US Supreme Court, heard cases argued between debt holders and the Argentine government.
During the height of this previous crisis, unemployment soared, as did inflation; prices were rising not just daily but hourly in stores and currency exchange markets. Millions were impoverished and lost what stability they had eked out in the 1990s. Just as the country had begun to recover, this latest debt crisis has broken, and threatens to be even more calamitous than the last.
Instrument of Domination
Mainstream economics leaves the stories of human suffering out of its account of sovereign debt, but there is another intellectual tradition that reminds us of the real cost behind the economists’ graphs and equations. Marx addressed the question of national debt in Capital, Volume I most directly in a chapter on “primitive accumulation.” National debt, according to Marx, plays an important role in colonialism and primitive accumulation by financing these forms of domination, ultimately masking the exploitation of direct and indirect colonialism as nothing more than the enforcement of the laws of the market. It was national debt that funded the development of the mercantile empires of Venice and Genoa, whose banks and finance systems played an important role in the exploitation of the Americas by the Spanish Empire. Later, as the center of world finance shifted first to the Netherlands and later to England, national debt laid the foundation for the corporation — and the modern world of finance — as we understand it today.
Aside from masking colonial exploitation, national debt directly connects the state to the broader function of capital: it transforms otherwise idle riches into political power by investing in the future of a particular national government. National debt allows capitalists to directly participate in nation-making, producing and reproducing the circumstances that allow them to make money and wield power in society. Ultimately this finance capital becomes a type of money laundering, enabling capital to appear, in Marx’s words“without a certificate of birth” where it is lent, hiding its origin in the “blood” of the exploited.
Argentina’s first sovereign default took place in 1827, just ten years after Spain accepted its declaration of independence, and was followed by several more throughout the 1800s. Capital flowed into the country from the United States and the United Kingdom, and fled in times of economic difficulty. This is the capital that built Argentina as it is today, a relatively developed country with a relatively high standard of living. That capital came with a price, however: the continued participation in the international financial system and all of its norms and expectations, structurally organized to the greatest benefit of the residents of Europe and North America, plus the wealthiest members of other societies.
Given that Argentina’s pending default is due to intersect with the pandemic as well as a severe recession or depression throughout the global economy, there is a real risk it will have worse consequences than any experienced before. The prospects for a progressive outcome look all the more unlikely given Argentina’s poor economic and social indicators in recent decades. The relatively recent example of Greece’s default on international loan payments is a telling and worrying one — what appeared as a potential opening for the Left was abandoned due to international pressure and domestic compromise.
An international chorus is urging an agreement between Argentina and its creditors, but given the long half-life of the 2001 default, the years of international litigation, and the decades of political wrangling in the Argentine legislature and ballot box, relying on such a stroke of luck would be a mistake. Failing an agreement with creditors, the Argentine government will be faced with a difficult choice: either accept a default in a bid to continue spending on vital programs — all the more necessary during the pandemic — or cut spending now to make the debt repayments. Even the IMF is opposed to such cuts in such a dangerous and uncertain time. Meanwhile the headlines of the country’s major newspapers, both conservative and left-leaning, focus on the pandemic rather than the looming risk of default.
Defaulting at a time like this would put Argentina and its people in uncharted, dangerous waters, sacrificing the welfare of its residents in the interest of capital. If default cannot be avoided, it will take domestic organizing and massive international solidarity to overcome its disastrous effects on the Argentine people. Socialists and progressives everywhere should pay attention, as Argentina’s present may become their future.