Don't Cry as Marxist Argentina Defaults
Argentina’s 42-year-old Minister of the Economy and former economics professor at the University of Buenos Aires, Axel Kicillof, is best known for his research papers that “reinterpreted Keynes from a Marxist perspective.” Having elected leaders with this type of intellectual toolkit, it should not be much of a surprise that the ultra-leftist government of Argentina is in mourning over a U.S. Supreme Court decision this week that requires the nation to actually repay their debts in full or default by June 30th.
As the “fiery red Marxist” of the ruling Peronist Party, Kicillof sought to wash away broad swaths of capitalism in Argentina. His biggest accomplishment was expropriating the 98% of YPF domestic oil company shares held by the Spanish energy giant Repsol in April of 2012. After a favorable arbitration in front of the International Center for Settlement of Investment Disputes, Kicillof agreed that Argentina would pay Repsol just $5 billion for the YPF shares that were valued by “Repsol at $7.5 billion.” Kicillof then leveraged the settlement in a deal with the Paris Club, an informal group of government creditors, in May that would have allowed Argentina to refinance its $100 billion debt and once again raise more money by selling “junk rated” bonds.
But on June 16th, the Supreme Court of the United States allowed NML Capital, a “vulture” fund that bought defaulted bonds for pennies on the dollar after a 2001 default, to start seizing any financial or physical assets in the U.S. owned by Argentina. In an added burden, the U.S. Supreme Court also ruled that creditors can seek information about Argentina’s hidden non-U.S. assets through subpoenas against Bank of America and Banco de la Nacion Argentina.
The day after the U.S. Supreme Court ruling and a 10% crash in the Argentine stock market, Economics Minister Axel Kicillof dismissed the options of full payment or outright default as “unthinkable.”
According to the Economist Magazine, Kicillof’s attitude is not unusual: “The city of Buenos Aires is big and sophisticated and like New York or San Francisco, it has socialist tendencies: the urban intelligentsia provides the ideas; the urban proletariat provides the votes; and farm exports provide the money.”
But since Argentina’s rural productive sector can never provide enough money to satisfy Buenos Aires’ urban intelligentsia, the Argentine government simply prints money to pay its bills and lies about the resulting inflation. With the money supply increasing at a rate of about 40% a year and inflation at over 25%, Kicillof’s Ministry of Economics has reported that consumer prices have only been rising by less than 10% a year.
With Argentina’s next interest payment on its exchanged bonds due on June 30th and not enough cash to satisfy a U.S. court order to pay, Argentina will have only a 30-day grace period before it enters into default and creditors can seize any of the nation’s assets they can find as collateral for repayment.
Early in the 20th century, Argentina was the 5th richest nation on earth in terms of per capita GDP. Then several generations of Argentine politicians and the military with a “mixture of statism and inflationism managed to squander so much capital with such unwavering regularity that Argentina eventually became the basket case it remains to this day.” Despite spectacular resources and some of the most fertile farmland on earth, Argentina is currently ranked 60th in per capita GDP.
With Argentina in a financial panic and about to default, it will be interesting to see if Economics Minister Kicillof can reinterpret bankruptcy from a Marxian perspective.
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