The Argentine Debt Crisis and its Effects on Global Finance

By HENRY CUMMINGS

On June 26th, 2014, a US supreme court decision pushed Argentina into it’s second default of the decade, as the New York market held out on it’s hedge funds purchased by Argentina back in 2001. Argentinian president Cristina Kirchner furiously responded, demanding repayment at the face value of these bonds that they bought on the secondary market over ten years ago. However, the New York market refused to restructure their debt agreement and instead, litigated their bonds payable, rendering Argentina unable to benefit from any accumulated interest. New York is now under scrutiny of being a vulture fund- one who sells bonds at huge discounts and then backs out of debt agreements in order to avoid paying any necessary principle value, or interest value. To prevent any of these inhumane processes from reoccurring and to address the issue of vulture funds, Argentina called for a UN General Assembly meeting. This resulted in a approved resolution to change the conventions of sovereign debt restructuring. The change was nearly unanimously agreed upon, with Germany and the United States being the select few who did not support the switch.

Argentina has been globally revered for their initiative to fix the issues with fair issuance and restructuring of foreign debt. Regarding the proper harmony of global finance and human rights, China has also been recognized as a country with a history of providing interest-free loans and debt relief to developing countries. Not only has this created a dichotomy between the United states and other countries that are more trustworthy financial resources, but it is also likely to effect the role of the US dollar and New York as a hub of global sovereign financing. Currently, 70% of sovereign bonds issued by global governments are coming from New York. However, after the stance the United States took on the change to a more fair debt restructuring system, it is perceived that the world might begin to fear that any debt contracts made with the New York market may not become renegotiable. Argentina has experienced the litigation of their bond contract with the New York market first hand, and has began exploring additional sources of sovereign financing to help them out of their strained economic situation. In July, China made a multibillion-dollar investment in two of Argentina’s hydroelectric dams and a railway project. The two countries also executed a $11 billion swap between their central banks, which allowed Argentina to buy greater amounts of Chinese imports. Additionally, Russia is currently planning out a $1 billion investment to help Argentina develop it’s large shale gas reserves to the south.

Overall, Argentina is doing a great job of preventing their foreign currency reserves from running dry, yet their problems with the US dollar are growing deeper. The US dollar is circulating through the economy at the second highest per capita rate of any country in the world, equaling almost 40% of the countries GDP. Many of these dollars are also being exchanged outside the formal economy above their official market rate, stoking fears that this could potentially begin another devaluation of the Argentine peso- similar to the one that sent them into their 2001 economic recession. Recently, the Argentinian Kirchner administration has cracked down on these unofficial dollar exchanges, so hopefully the economy moves out of it’s volatile and uncertain state moving forward.

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