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Lessons From Argentina

Wednesday, March 9, 2005; Page A20

ARGENTINA'S DEFAULT, the largest by any nation in history, has been a social catastrophe. It drove unemployment to nearly 25 percent, and millions have been forced into poverty. But the recent restructuring of the country's debt ought to be healthy for the international financial system.

More than three years after its default, Argentina has persuaded a majority of its creditors to accept a reduction of about two-thirds in the value of its debt, a cut roughly twice as aggressive as in past sovereign bankruptcies. Although this means that investors will take painful losses, this isn't a bad thing: It sends a signal that private lenders should consider the risks of emerging markets before pressing capital on them. If investors had treated Argentina more cautiously during the 1990s, the country would have borrowed less and its ensuing collapse would have been less painful to innocent people. If investors are capable of learning lessons, the Argentina signal could take some froth out of the current lending to emerging markets.

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With luck, this salutary lesson to investors won't be counteracted by a destructive lesson to borrowers: that it's better to borrow crazily and default than to run government finances responsibly. Having forced borrowers to forgive two-thirds of their debt, and having experienced growth of nearly 9 percent for the past two years, populists in Argentina and beyond may argue that stiffing international creditors is smart policy. But if they do make such claims, the facts ought to puncture them. Argentines have paid a huge price for their default: As The Post's Paul Blustein reported last week, more than two out of five citizens live below the poverty line, and salaried workers who have held on to their jobs have had to endure a 20 percent cut in incomes. The country's recent economic growth is only a partial recuperation of its earlier contraction. If you devalue your currency, cutting the dollar value of your economy by two-thirds, your new international competitiveness is bound to spur a rebound from the depths to which you've plunged. But it's weird to call that progress.

If international investors absorb the lesson that they should lend more carefully (admittedly a big if), and if borrowing countries don't make the mistake of embracing default as a policy option, capital flows to developing countries may become less crisis-prone. The advantages that they bring (faster growth in poor countries) won't be so frequently undone by the disadvantages (the risk that investors will yank their money out, bringing a country to a standstill). But although Argentina's debt deal sends a healthy signal, it still points to a problem in the way the international system works. The deal took too long to organize, unnecessarily hurting both lenders and Argentina.

This is why the world may eventually create something like a bankruptcy court for dealing with governments. If Argentina were a company, a bankruptcy judge would have taken control of the debt workout, cutting out the need for a three-year game of chicken between the country and its creditors. Once a proposed debt write-down had won the support of a majority of creditors, the minority would have been left with no option to reject the deal, whereas now creditors representing a quarter of Argentina's debt still refuse the offer. This delay and uncertainty serves nobody. Anne O. Krueger, the No. 2 official at the International Monetary Fund, put the idea of a sovereign bankruptcy mechanism on the table in 2001. She should return to the subject.

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