Stiglitz’s sympathy for Argentina is ill founded

IDON’T pretend to be much of a fan of Columbia University professor and former World Bank chief economist Joseph Stiglitz, whose syndicated column appears occasionally in this newspaper. In fact, I’m of the opinion that whatever the merits of his research, the Nobel committee’s decision to award him the economics prize in 2001 was regrettable because it lends an authority to his opinions that is not justified by the rationality of the arguments he makes.

The latest example is his spirited attack on US federal judge Thomas Griesa, who was responsible for the court ruling that caused Argentina to default on its sovereign debt at the end of last month for the second time in just 13 years. Stiglitz’s sympathy with Argentina’s position seems motivated more by ideology and antipathy towards the international economic status quo than logic; even a cursory examination of Argentinian President Cristina Kirchner’s governance record reveals that this is no innocent victim we are dealing with.

It is true that Argentina had deposited the $539m required to make semiannual payment on its restructured bonds with a New York Bank before the August 30 deadline, and the only reason the funds were not disbursed was Griesa’s order that bondholders could not be paid unless those who declined to accept a “haircut” after the 2001 default had been repaid.

But condemning the judge for “encouraging usurious behaviour, threatening the functioning of international financial markets, and defying a tenet of modern capitalism: insolvent debtors need a fresh start”, reveals a startling ignorance of how the law works — how it must work.

The judge’s job is to interpret the law, or in this case civil contracts. Even if Stiglitz is justified in condemning the “vulture” funds that refused to accept the 2001 restructuring and held out for full repayment of the bonds for their greed and heartlessness towards the suffering Argentinian population, it is not for the judge to make value judgments based on emotion.

It is meaningless for Stiglitz to say the restructuring negotiations that took place in 2005 and again in 2010 “worked out well for both Argentina and those who accepted the restructuring”. So what? Not everyone accepted the restructuring arrangement, as was their right. Accepting the loss of two-thirds of the value of their investment clearly didn’t seem such a great deal to everybody. It matters not a jot that speculators were involved — they bought the bonds at a substantial discount as the risk of not getting their money back was substantial, and still is.

It would cost Argentina $1.5bn to pay out the “vulture” funds in full, which would be painful but hardly economically devastating. It is not cast in stone that holders of the restructured bonds would have to be paid on the same terms, as Argentina could reasonably argue they had agreed to the haircut, and the vultures were being paid more only due to a court order.

The fact is that bad governance on the part of Argentina was both the original cause of the problem and the reason it has not been resolved in a way that does not threaten to cause further damage to the country. It is as ludicrous to blame Argentina’s inability to repay its debts on the “neoliberal Washington Consensus economic reforms” of the 1990s as it is to expect Griesa to ignore the rule of law for the sake of righting perceived global economic injustices.

The markets have seen the default for what it is — a setback that does not have to be a millstone around Argentina’s neck if it handles it properly — and interest rates on the country’s debt are relatively unchanged. Perhaps most importantly, the 2001 default and subsequent developments have prompted changes to the way sovereign bond contracts are structured to avoid this situation being repeated in future. All new contracts contain “collective action clauses” demanding the buyer agree upfront that in the event of a restructuring becoming necessary, if a set percentage of holders accept the deal, the rest have to go along with it.

This approach was applied in Greece when that country was on the brink of sovereign default not that long ago, and while not everyone was happy, that was what the contract said, so there was no use arguing the toss. Argentina — and Stiglitz — should take a leaf from that book.