A World without Credit

New York District Judge Thomas Griesa’s recent ruling upheld both law and common sense: debts, freely entered into, must be paid. The Argentine government, after the biggest payment reductions in human history, agreed with, and in fact almost forced, certain bondholders to exchange old bolds for new, less valuable ones. But bondholders that didn’t agree with the government’s actions took the case to New York, demanding full payment. Griesa ruled in their favor in a decision that, for now, has been appealed and suspended.

In its decision, the court stated that “the Argentine government should back away from these ill-advised threats to defy the current court rulings, and that any defiance of the rulings of the courts would not only be illegal but would represent the worst kind of irresponsibility in dealing with the judiciary.” Most of Argentina’s leaders expressed displeasure with the ruling without providing substantial reasons, relying instead on the politically correct stance of statism. What is certain is that disrespect of judicial power is part of Argentine national culture.

Hidden beneath the surface is the fact that, due to poor economic performance, nations like Argentina do not have the money to pay their debts. Instead they must liquidate assets, which will actually prove beneficial because doing so will slim down the huge, tax-funded state apparatus. Governments should stop implementing absurdities that destroy the market, like Spain’s tax increase of around $11 billion in 2013, or the rescue of the Spanish bank Bankia that probably consumed more than $30 billion, while the Spanish government dedicates, annually, $4 billion to education and $3 billion to health.

Hopefully the U.S. justice system will reaffirm the Griesa ruling in the end. The alternative would set a bizarre, unimaginable precedent: a world without credit, in which one can choose not to repay a loan. Or perhaps some credit would remain but, given the risk, at a rate which would exceed the cost of the unpaid debt. So, contrary to popular belief, Argentina benefits from the Griesa ruling, or will benefit if the ruling is upheld.

If the Griesa ruling is not picked up again, Argentine statism will ensure that the economy goes astray in the long run. In 1978, Argentina’s GNP exceeded that of Brazil; today it is a quarter of Brazil’s. In 1991, the Buenos Aires Stock Exchange had a market cap equal to 58 percent of its Brazilian equivalent; in 2012 it is at 3 percent. In sum, this is nothing more than another chapter in the Argentine debacle.