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Argentina just burned its bondholders - could we have done the same?

What makes our situation different from theirs?

FOR THE SECOND time in 13 years, Argentina defaulted on its debts this week, after the collapse of 11th hour talks with so-called holdout bondholders in New York.

“We’re not going to sign an agreement that jeopardizes the future of all Argentines,” said Finance Minister Axel Kicillof, after meeting on Wednesday with US hedge fund creditors he had dubbed “vultures.”

Argentina Debt Fightin' talk: Argentina's Finance Minister Axel Kicillof addresses the media after negotiations in New York this week. Source: Craig Rutle/AP/Press Association Images

The holdouts, who were led by US billionaire Paul Singer’s NML Capital, had spent the years since Argentina’s 2002 debt crisis pushing for full repayment of their bonds, with interest – amounting to roughly $1.5 billion.

The aggressive posture taken by Kicillof, and the spectre of “reputational damage” have conjured memories of our own crisis, and the decisions facing Irish politicians in that period.

So TheJournal.ie has enlisted the help of two experts to answer these questions:

Could we have burned the bondholders too? And what makes Argentina now different from Ireland then?

Default in Our Stars

“The first point to make is that this Argentinian case has to do with sovereign debt,” says Philip Lane, Professor of International Macroeconomics at Trinity College Dublin.

Whereas the debate in Ireland was largely over the debts of Anglo-Irish Bank.

And if the Irish banks had defaulted on their debts, that would have been one thing. The markets could have viewed this as just one or two institutions acting alone.

But once the government guaranteed the banks, it ensured the Irish government itself would be liable for any defaulted debt.

Argentina, by contrast, most definitely owned the debt they defaulted on this week, says Brian Lucey, Professor of Finance in the School of Business at TCD and editor of the book What if Ireland Defaults?

They were forced into defaulting. They wanted to reach a settlement, but they faced a negotiating brick wall, and were pushed towards repaying everything.

burnbondholders2011dail-samboal-photocall A protest outside the Dáil in September 2011. Source: Sam Boal/Photocall Ireland

A debt-defying leap?

Philip Lane, for one, is doubtful that Argentina’s decision this week should serve as an example for Ireland.

The message from this week is that a default is not a clean break. Argentina defaulted 13 years ago, and they’re still dealing with the consequences now.
What this case reflects is the ability of investors to keep pursuing a defaulting country. Defaulting isn’t as easy as you might think.

“When Argentina defaulted on its debts in 2002, they did it chaotically,” says Brian Lucey. “And there have been long-lasting, ongoing effects from that.”

But we have to be careful not to conflate the two cases. Nobody was ever talking about Ireland defaulting on our national debt.
What was suggested was that we revisit a bank debt that had been covered by the government.

90267367 Source: Photocall Ireland

…I’m part of the union

Another major distinction between the Argentinian and Irish cases is that, as Lucey points out, the South Americans are not part of any monetary union.

Not that being a member of the Eurozone should have automatically ruled out some sort of renegotiation of our debt.

The Eurozone is not a suicide pact. If we had, for example, decided we wanted to repay the Anglo debt over the course of 1,000 years, as opposed to 30, it wouldn’t have brought down the Euro.
The ECB [European Central Bank] wouldn’t have kicked us out of the Eurozone for it.

Read: Argentina burns bondholders for the second time in 13 years>

Motion to ‘burn the bondholders’ defeated in Dáil vote>

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About the author:

Dan MacGuill

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