Roosevelt Institute | Cornell University

Understanding the Argentinian Debt Crisis

By Julia PascalePublished October 24, 2014

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Argentina defaulted on its national debt this summer, but who was really to blame? How hedge funds made this happen.
By Julia Pascale, 10/24/14

This summer, crowds of incensed Argentinians were burning American flags in the streets of Buenos Aires. Protestors marched holding signs that said "Argentina or vulture funds?" What caused these expressions of rage?

Argentina chose to default on its debts this summer. During the roughly 20 years spent with their peso pegged to the US dollar, the peg worsened competition with cheap Brazilian and European exports. Argentina cut wages to compensate, and this caused high unemployment and low tax revenue. The country borrowed to make up for these two effects.

This year, the default happened because Argentina couldn't pay back those debts due to a clause (aka the "RUFO" clause) in the bond agreements stipulating that it couldn't pay back some of its lenders without paying all of them. A New York judge, Thomas P. Griesa, ruled in favor of the hedge funds who brought this case to court, and so even though many (between 70 and 93 percent) of Argentina's lenders agreed to accept a restructured amount of roughly 30 cents per dollar owed, the groups who did not accept the restructuring were able to stop Argentina from paying. 

It was Argentina's desire to keep the case out of American courts that led to the default rather than a negotiation. A valid motivator, but some have argued that this strategy will only worsen Argentina's status in international markets in the long run. It is also of note that there is more to the RUFO clause, and that it may not be so cut-and-dry. The reality is that from a U.S. foreign policy standpoint, this case is merely a symptom of a far more sinister disease — the unchecked power of Wall Street.

This issue isn't remarkable because Argentina failed to pay its debts — the nation has actually defaulted six times before. It's remarkable as a stunning example of power disparity, a reflection of the income disparity we have seen rapidly growing in the U.S. in recent years. As John Oliver pointed out "a dispute with a small group of powerful investors can drive a G-20 nation into default" — and that should be alarming to everyone. After this summer's media storm, Judge Griesa agreed to a temporary stay in this case, which bought some time and allowed Argentina to pay back some of the debt to bondholders, since the original ruling blocked all payments unless the debt could be paid back in full. But enough is enough. The U.S. has a responsibility to rein in its hedge funds, and so far it hasn't even tried. The government should ban investing in bonds that rely on a tax base to be repaid.