Argentina’s Debt Snarl

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from TIME Magazine,

Argentina’s debt snarl tells us how risky the global financial system still is.

In 2001, Argentina defaulted on $80 billion worth of sovereign debt, the bonds that a country issues to raise money. It had to restructure, just as Greece had to more recently, and over the years, some 93% of creditors went along with the cut-rate deals, taking “exchange” bonds that paid 30¢ on the dollar.

“Argentina isn’t a poor country. It’s a G-20 nation,” says Jay Newman, Elliott’s Argentina-portfolio manager. “It’s chosen for political reasons not to negotiate a fair settlement with us or more than 61,000 other bondholders.” Certainly no one would argue that the Argentine government is a paragon of best practices; Argentina, which had the same per capita GDP as Switzerland in the 1950s, has defaulted eight times.

The Argentine crisis says three important things about the global economy. First, the balance between creditors and debtors has shifted. As data from the McKinsey Global Institute (MGI) show, there’s more debt globally than there was before the 2008 financial crisis. But now, the largest portion of it consists of public-sector debt. With the rise in public debt comes a greater risk of sovereign defaults, which can wreak havoc on the global economy. (Remember the euro crisis?) Government debt is 103% of GDP of the world’s leading economies, up from 71% at the end of 2007.

Second, the global economy is becoming more fragmented. The fact that a federal court in New York City ruled in favor of the holdouts is a sign that the global economy is splitting along national and ideological lines.

Finally, the case shows how much work remains to be done in making our financial system more transparent. In addition to establishing a single standard for sovereign default, we desperately need to make complex security holdings more visible.

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