Argentina: Greed, Bonds, COVID and Your Cash

Of course, it had to happen — and it did. The Argentine government declared that it cannot pay its international private creditors.

In some ways, that is not a big surprise: No other country has such a long record of defaults.

But the fact that Argentina would default on its $66 billion of foreign debt to private creditors is a bigger story than just that.

It also symbolizes the greed and corruption that has captured the sovereign debt markets — and that, as I will explain, at the end of the day you and I shall pay for.

The Globalist told you so

The Globalist warned in 2018 and in 2019 that a crash would come in Argentina.

Now, it has arrived. The plea by the Argentine government for relief has a new twist — COVID 19.

Big IMF bail-outs

Across the developing and emerging market world now, as the related health and economic crises gather momentum, governments are turning to the world’s wealthiest nations (and their taxpayers) to bail them out.

For now, the very poorest nations are being given a total debt moratorium on their official foreign debt. That debt, I expect, will eventually be just forgiven.

More than 100 countries are now seeking emergency loans from the International Monetary Fund (IMF).

The Fund is on lockdown. As a result, its 3,000 staff are processing those loan requests from their homes, signing-off on what will amount to tens of billions of dollars — for Nigeria, Egypt, Panama and many more.

Argentina has already a record-high $57 billion IMF line of credit and its terms will be renegotiated to provide the country with maximum relief. The original terms were agreed in 2018 when the country was in a terrible economic mess.

Getting “Kirchner-ed“ again and again?

That mess eventually led to the ousting of the government in the 2019 elections and the return to office, now as Vice President, of former President Cristina Fernández de Kirchner.

As you may recall, she is the top Argentine politician directly responsible for the 14-year debt default stand-off with private creditors.

Desperate for foreign funds with a collapsing economy, and the strain of COVID 19, the government of President Alberto Ángel Fernández and VP Kirchner is now pulling the humanitarian card.

It hopes this will work in pleading with private foreign creditors to be merciful and agree to generous debt restructuring terms.

Mercy toward Argentina?

The key question is this: Will they be merciful?

To answer that question, we need to examine the interests and incentives of various key players in that equation.

Greedy investors

Perhaps they will be merciful. Their mercifulness is a matter of the degree of greed that prevails among these creditors.

They should never have invested in the Argentine bonds in the first place, given the corruption and the debt-default record of the country, but the lure of high-yields on the bonds just blinded them to the economic and political realities — and the inevitable crash.

That the humanitarian crisis demands exceptional actions justifies the immediate debt relief measures by official creditors, and the torrent of new loans from the IMF.

My sources leave no doubt that officials at the IMF and among the major Western central banks and finance ministries are acutely aware that the cash may be stolen.

Kleptocrats get cash

Even beyond Argentina, this is anything but a good country/bad country story.

Many of the countries receiving the massive emergency loans are governed by kleptocrats. If their past behavior serves as any indication of future behavior, they may well be tempted to pocket some of the IMF and other inflows of money.

Gaming the IMF?

What makes this situation even worse is that the emergency IMF loans go out in a single, basically non-conditional tranche.

Yes, there will be later audits of how central banks and finance ministries used the funds, but that will be well after the cash has been disbursed.

The IMF will strive to watch what the governments do with the cash and, if the organization sees abuse, then this will be a major factor in setting conditions for follow-up loans.

But the fact is that no mechanisms are in place to monitor how sovereign governments use the funds they raise on the international bond markets.

The key: Monitoring matters

An organization I am involved with (and whose board of directors I chair), is the Partnership for Transparency Fund.

It is now providing grants to civil society organizations (CSOs) in Uganda, Ghana, India and soon to some other countries.

The purpose is to enable these CSOs to work with local investigative journalists to monitor how emergency health loans, from such organizations as the World Bank, are being used.

I believe the aid agencies should be learning from these initial grant programs and work directly with CSOs.

Together, it is quite easy to scale-up the initiatives to ensure that those people most in need of health support now do indeed receive it.

Similarly, I believe the IMF should give small grants to CSOs and journalists in all the countries where it gives emergency relief to monitor how the funds are deployed.

The recipient governments may object — but it is primarily Western taxpayer cash — yes, your money – that is being used to bail-out corrupt regimes. This also applies to Argentina.

Conclusions

1. We clearly need to be prepared to save the lives of the poor in so many countries whose access to healthcare has always been bad, but now may be desperate.

2. If we spend our money, as we should, then at least we are entitled to deploying the full arsenal of transparency and accountability to these debt arrangements.

3. This certainly is not the time for these loans to be game to favor kleptocrats and the like. To combat them, we need to deploy smart enlightenment alliances, from the IMF to CSOs to investigative journalists.

4. Meanwhile, private investors in the international sovereign debt markets need to set aside their greed, recognize they were fools to have invested in countries like Argentina in the first place and accept the need for debt restructuring deals.