Argentina. Defy the Creditors and Get Away with It

4 November 2010 by Walden Bello

The unexpected death a few days ago of Nestor Kirchner deprived not only Argentina of a remarkable, albeit controversial leader. It also took away an exemplary figure in the Global South when it came to dealing with international financial institutions.

Kirchner defied the creditors. More importantly, he got away with it.

The Collapse

The full significance of Kirchner’s moves must be seen in the context of the economy he inherited on his election as Argentine president in 2003. The country was bankrupt, having defaulted on $100 billion of its debt. The economy was in a depression, its gross domestic product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
having declined by over 16 percent that year. Unemployment stood at 21.5 percent of the work force, and 53 percent of Argentines had been pushed below the poverty line. What was once the richest country in Latin America in terms of per capita income plunged below Peru and parts of Central America.

Argentina’s crisis stemmed from its faithful adherence to the neoliberal model. The financial liberalization that served as the proximate cause of the collapse was part and parcel of a broader program of radical economic restructuring. Argentina had been the poster child of globalization, Latin-style. It brought down its trade barriers faster than most other countries in Latin America and liberalized its capital account more radically. It followed a comprehensive privatization program involving the sale of 400 state enterprises — including airlines, oil companies, steel, insurance companies, telecommunications, postal services, and petrochemicals – a complex responsible for about seven percent of the nation’s annual domestic product.

In the most touching gesture of neoliberal faith, Buenos Aires adopted a currency board and thereby voluntarily gave up any meaningful control over the domestic impact of a volatile global economy. This system tied the quantity of pesos in circulation to the quantity of in-coming dollars. This policy, as the Washington Post writer Paul Blustein observed, handed over control of Argentina’s monetary policy to Alan Greenspan, the U.S. Federal Reserve FED
Federal Reserve
Officially, Federal Reserve System, is the United States’ central bank created in 1913 by the ’Federal Reserve Act’, also called the ’Owen-Glass Act’, after a series of banking crises, particularly the ’Bank Panic’ of 1907.

FED – decentralized central bank :
chief who was on top of the world’s supply of dollars. This was, effectively, the dollarization of the country’s currency.

The U.S. Treasury Department and its surrogate, the International Monetary Fund IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.
(IMF), either urged or approved of all of these measures. In fact, even with financial liberalization called into question in the wake of the Asian financial crisis of 1997-98, then-Secretary of the Treasury Larry Summers extolled Argentina’s selling off of its banking sector as a model for the developing world: “Today, fully 50 percent of the banking sector, 70 percent of private banks, in Argentina are foreign-controlled, up from 30 percent in 1994. The result is a deeper, more efficient market, and external investors with a greater stake in staying put.”

As the dollar rose in value, so did the peso, making Argentine goods non-competitive both globally and locally. Raising tariff barriers against imports was not an option owing to the technocrats’ commitment to the neoliberal tenet of free trade. Instead, borrowing heavily to fund the dangerously widening trade gap, Argentina spiraled into debt. The more it borrowed, the higher the interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
rose as international creditors grew increasingly alarmed. Money began leaving the country. Foreign control of the banking system facilitated the outflow of much-needed capital by banks that became increasingly reluctant to lend, both to the government and to local businesses.

Backed by the IMF, the neoliberal government nevertheless continued to keep the country in the straitjacket that the peso-dollar currency board arrangement had become. As George Soros observed, Argentina “sacrificed practically everything on the altar of maintaining the currency board and meeting international obligations.”

The crisis unfolded with frightening speed in late 2001, forcing Argentina to go to the IMF for money to service its mounting debt. After earlier providing loans, the IMF refused its pupil this time, leading to the government’s $100 billion debt default. Businesses collapsed, people lost jobs, capital left the country, and riots and other forms citizen unrest toppled one government after another.

Kirchner’s Gamble

When Kirchner won the elections for the presidency in 2003, he inherited a devastated country. He saw the choice as debt or resurrection, putting the interests of the creditors first or prioritizing economic recovery. Kirchner offered to settle Argentina’s debts but at a steep discount. He would write off 70-75 percent, repaying only 25-30 cents to the dollar. The bondholders screamed and demanded that the IMF discipline Kirchner. Kirchner repeated his offer and warned the bondholders that this was a one-time offer that they had to accept or lose the rights to any repayment. He told the creditors that he would not tax poverty-ridden Argentines to pay off the debt and invited them to visit his country’s slums to “experience poverty first hand.” Faced with his determination, the IMF stood by helplessly and a majority of the bondholders angrily accepted his terms.

Indeed, Kirchner played hardball not only with the creditors but with the IMF. He told the Fund in early 2004 that Argentina would not repay a $3.3 billion installment due the IMF unless it approved a similar amount of lending to Buenos Aires. The IMF blinked and came up with the money. In December 2005, Kirchner paid off the country’s debt to the IMF in full and booted the Fund out of Argentina.

For over two decades, since the Third World debt crisis in the early 1980s, developing country governments had considered defying the creditors. There had been a few quiet defaults on payments, but Kirchner was the first to publicly threaten the lenders with a unilateral haircut and make good on that promise. Stratfor, the political risk analysis firm, pointed out the implications of his high-wire act: “If Argentina walks away from its private and multilateral debts successfully—meaning it doesn’t collapse economically when it is shut out of international markets after repudiating its debt—then other countries might soon take the same path. This could finish what little institutional and geopolitical relevance the IMF has left.”

And indeed, Kirchner’s act contributed to the erosion of the credibility and power of the Fund in the middle of this decade.


Argentina did not collapse. Instead, it grew by a remarkable 10 percent per year over the next four years. This was no mystery. A central cause of the high rate of growth was the financial resources that the government reinvested in the economy instead of sending outside as debt service Debt service The sum of the interests and the amortization of the capital borrowed. . Kirchner’s historic debt initiative was accompanied by other moves to throw off the shackles of neoliberalism: the adoption of a managed float for the Argentine peso, domestic price controls, export taxes, sharply increased public spending, and caps on utility rates.

Kirchner did not confine his reforms to the domestic sphere. He undertook high-profile initiatives with other progressive leaders in Latin America, such as the sinking of the Washington-sponsored Free Trade of the Americas and efforts to bring about greater economic and political cooperation. Emblematic of this alliance was Venezuela’s $2.4 billion purchase of Argentine bonds, which enabled Argentina to pay off all of the country’s debt to the IMF.

Along with Hugo Chavez of Venezuela, Lula of Brazil, Evo Morales of Bolivia, and Rafael Correa of Ecuador, Kirchner was one of several remarkable leaders that the crisis of neoliberalism produced in Latin America. Mark Weisbrot, who captured his continental significance, writes that Kirchner’s moves “have not generally won him much favor in Washington and in international business circles, but history will record him not only as a great president but also as an independence hero of Latin America.”

Walden Bello is a member of the House of Representatives of the Philippines, a senior analyst of Focus on the Global South, and a columnist for Foreign Policy In Focus. He can be reached at waldenbello at

Walden Bello

is senior analyst at the Bangkok-based Focus on the Global South and the International Adjunct Professor of Sociology at the State University of New York at Binghamton.



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