World Policy Journal is proud to share our revived weekly podcast, World Policy On Air, featuring former Newsweek On Air host David Alpern and Eurasia Group President Ian Bremmer's latest commentary on global "Winners & Losers." Click here to subscribe on iTunes!
By Anna Edgerton
Argentina knows crises. In December of 2001 the doors of the banks were shuttered, 26 people were killed in violent protests across the country, and President De la Rua was evacuated from the presidential palace in a helicopter. A few months later the country defaulted, and the $93 billion it couldn’t afford to pay was the biggest default in history.
Now the United States is poised to break that record. It owes $14 trillion and has to borrow more to pay the bills that come due starting August 2nd. If the debt ceiling—an arbitrary number set by congress limiting how much the country can borrow—is not raised in less than a week, the size of U.S. default and the ensuing effect on the world’s finances will dwarf Argentina’s example.
That the most powerful nation in the world should find itself in this predicament is baffling to those who survived the implosion of the Argentine economy 10 years ago. From the outside, the United States seems like “the monster that controls everything,” says Horacio Rovelli, Argentina’s national director of macroeconomic policy. He points out that the United States has an enormous economy, the world’s reserve currency, and the headquarters of the IMF and the World Bank in Washington DC, all of which gives the North American “monster” a privileged position in the global economy. The current U.S. debt crisis for an Argentine looks absurd and unnecessary.
The financial crisis of 2008 shook the foundations of the U.S. economy, but it still has some “relative advantages over the rest of the world,” says Daniel Szpigiel, a professor of economics at University of La Matanza in Buenos Aires. The U.S. business culture is efficient and responsible, enforced by a judicial system that is widely trusted. Bureaucracy at all levels is straightforward and largely free of overt corruption. The government is unlikely to be overthrown by a dictator or a populist coup. Until recently, there was ample capital for entrepreneurs to enact ideas that for a long time made the United States the world’s capital of innovation.
Argentina on the other hand was just seventeen years in after a military dictatorship when the annual inflation in March of 1990 was 20,262 percent, a period of the most soaring hyperinflation. Pegging the peso to the dollar enabled Argentina to curb inflation. Without the ability to manipulate its own currency, however, Argentina had one less tool to maintain economic equilibrium and competitiveness in foreign markets. It wound up borrowing more from the IMF, twice in the first half of 2001, and found itself paying an unsustainable 88.3 percent of GDP in interest on its debt.
A default was all but necessary, and painful. When President Nestor Kirchner, the deceased husband of the current president, Cristina Kirchner, restructured Argentina’s debt in March 2005, the country’s creditors (besides the IMF, who was paid in full) had to accept 35 cents on the dollar. This move marginally raised Argentina’s standing on the international economic stage, but its sovereign credit rating had been wrecked by political turmoil and default. “They won’t see you with good eyes,” said Rovelli of potential investors, “they’ll remember what your conduct was like before.”
It is difficult to directly apply lessons from Argentina’s default to the ongoing crisis in the United States. Argentina’s economy has been growing by seven to nine percent for the past seven years, although the strength of their recovery should be attributed more to high commodity prices and China’s demand for soy—of which Argentina is the world´s third largest producer—than to debt restructuring. Moreover, Argentina has never had a strong culture of banks lending to individuals or small businesses. In the United States, these sectors of the economy would be the first ones to be affected by a default, because a downgrading of its sovereign credit rating would result in higher interest rates. In some ways, the U.S. economy has more to lose and less immediate recourse for recovery.
The U.S. government somewhat resembles Homer Simpson, suggested Rovelli, “He has his wife and his house and everything, but he’s completely useless.” That the United States—the all-powerful monster—is being likened to a beer-guzzling cartoon character changes the dynamics of the global economic game, challenging the United States’ position of authority.
Alberto José Francomano, an Argentine economist and fiscal analyst says despite the force the U.S. exerts on the world, especially through military and economic means, it doesn’t even have “the most basic political coordination.” The rest of the world is watching, not just out of curiosity over how the United States will solve its internal issues, but also because of the adverse effects the actions of a few intransigent American politicians might have on the wealth of the world.
The headlines in Argentina ask "What would happen to us if the U.S. defaults?” The global economy is still reeling from a crisis that began with U.S. economic ills. An unnecessary default would indicate that U.S. political realm is sick as well.
Anna Edgerton a former editorial assistant at World Policy Journal, is an independent journalist currently based in Buenos Aires. This fall she will return to New York to finish her masters degree at the School of International Affairs at Columbia University.
[Photo courtesy of Flickr user Infrogmation]
The Millennium Project:
A global collective intelligence system analyzing the future of the world—and you can participate!