Argentina’s Debt and American Collateral Damage

By ordering Argentina to pay off hedge funds, U.S. courts may have sealed the dollar’s fate as the common currency of global trade.

At the end of the 19th century, Argentina was one of the 10 most prosperous countries in the world. However, its circumstances took a turn for the worse after World War I. During the early 1990s, the government tried to curb chronic inflation but failed, leading to the economic collapse of 2001.

Being on the edge of bankruptcy, Argentina was able to have its debt reduced by 70 percent; the remaining $90 billion it owed was restructured, and its payments were spread out over time. Buenos Aires has respected its commitments; it repaid its debt to the IMF, reached an agreement with the Paris Club, and was in the process of rebuilding its credit in several countries. However, the government stopped seeking funds in international capital markets, citing prohibitively high interest rates.

Argentina is now the victim of American vulture funds. In 2013, hedge funds that had bought $48.7 million of debt from other companies successfully convinced the New York Court of Appeals to rule that Argentina must pay the entire sum owed, which is $1.3 billion. A recent United States Supreme Court decision upheld this ruling. Organizations like Standard & Poor’s, which have already mortgaged their morals, took the opportunity to pile it on and downgraded Argentina’s debt rating. Reaction was swift. The country is refusing to reimburse the two American hedge funds; Argentina’s president, Cristina Fernández de Kirchner, addressed her 41 million fellow citizens to denounce what she considers to be extortion.

The U.S. Supreme Court decision has endangered the international financial system and has threatened future U.S. dollar-denominated public debt restructuring. It could be the United States, rather than Argentina, that suffers the most in the medium term because the decision weakens the dollar in the global financial system. Refusing to be extorted is not a sign of mismanagement or bad faith. The Argentine president promised that her country would honor its commitments to cooperative creditors. However, she will do so by avoiding the dollar and American financial organizations. The U.S. dollar, the world’s reserve currency, has received another blow.

The international use of the dollar is becoming increasingly problematic. The United States is suffocating under the weight of debt. The U.S. central bank’s recent strategy of printing $40 billion a month is rapidly devaluing other countries’ foreign exchange reserves. There is approximately $6 trillion in U.S. Treasury bonds circulating internationally.

China alone has reserves of $3 trillion, including $1.2 trillion in Treasury bonds, while Russia has about $100 billion worth. It is therefore unsurprising that the contract these two powers signed on May 21 was drawn up in Yuan. Moscow will provide 38 billion cubic meters of natural gas over three decades for the equivalent of 294 billion euros. The Central Bank of the Congo decreed that at the end of 2014, national trade in the Democratic Republic of the Congo will be conducted exclusively in CFA francs. As if that were not enough, during his trip to Indonesia, Turkish Prime Minister Recep Tayyip Erdogan announced that gold would be replacing the U.S. dollar in the short term.

There is currently a renewed interest in Asian currencies. Recent Western sanctions in Ukraine are driving Russian companies to abandon the U.S. dollar and use the yuan in their commercial transactions. Several have already opened accounts in Asia and want to renegotiate contracts that have already been signed. The decision ordering Argentina to pay American hedge funds could be the straw that breaks the camel’s back and pushes the BRIC countries to definitively drop the dollar.