On July 31, Argentina defaulted on its sovereign debt. This was the second time in 13 years that Argentina has defaulted and the eighth time in the nation’s history.
In 2005 and 2010, Argentina restructured the majority of its 2001 defaulted debt. The restructured bonds were issued in U.S. dollars and under U.S. law with U.S. courts having jurisdiction.
Two “vulture funds” bought defaulted bonds at rock-bottom prices and sued Argentina for full payment. Despite Argentina’s efforts to pay the restructured bonds’ coupons (the semi-annual payments on the bonds’ principal investment), U.S. District Court Judge Thomas Griesa ruled in favor of the vulture funds, preventing Argentina from paying the restructured bondholders until the vulture funds are paid. Argentina’s legal recourse ended when the U.S. Supreme Court refused to hear its appeal.
As indicated by the annual Index of Economic Freedom, co-published by The Heritage Foundation and The Wall Street Journal, Argentina’s fiscal freedom score has declined from a high of 80.7 in 1995 to a low of 63.5 in 2014. This erosion of economic freedom—including increased presidential powers and nationalizations—laid the groundwork for the possibility of a default.
President Cristina Fernandez de Kirchner refuses to recognize that Argentina has defaulted. While she blames others, the Argentine economy could be thrown into recession. In the wake of “Griefault” (a combination of Griesa and default), prices on the Buenos Aires stock exchange have fallen, as has the “dolar blue” (black market) rate. Strong currency controls may temper capital flight, but the government may be forced to devalue the peso from its artificially high exchange rate, increasing inflation. Thus, for the foreseeable future, Argentina will continue to be excluded from international credit markets.
None of this bodes well for the Argentine people, who, due to Kirchner’s over-expanded government and corruption, are not doing well to begin with economically.
George Margulies is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please click here.
